Nov 9, 2017
Executives
Jody Cain - IR-LHA John Nicols - President & CEO Gordon Sangster - CFO
Analysts
Charlie Eidson - Craig Hallum Brandon Couillard - Jefferies Swayampakula Ramakanth - H.C. Wainwright & Co.
Steve Schwartz - First Analysis
Operator
Good day, ladies and gentlemen, and welcome to the Q3 2017 Codexis' Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded.
I would now like to introduce your host for today's conference Ms. Jody Cain.
Ma'am you may begin.
Jody Cain
This is Jody Cain with LHA. Thank you for participating in today's call to discuss Codexis' 2017 third quarter financial results and the company's business progress.
Joining me from Codexis are John Nicols, President and Chief Executive Officer; and Gordon Sangster, the Company's Chief Financial Officer. During this call, management will be making a number of forward-looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
To the extent of statements made by management are not descriptions of historical facts regarding Codexis they are forward-looking statements reflecting the current beliefs and expectations of management as of November 9, 2017. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond the Company's control and that could materially affect actual results.
For details about risks, please see the earnings release that accompanies this call and the Company's SEC filings. Codexis expressly disclaims any intent or obligation to update forward-looking statements, except as required by law.
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.
This is a very exciting time at Codexis, especially given the announcement last month of our latest major strategic collaboration, this time with Nestlé Health Science a business unit of Nestlé. It is incredibly gratifying to add Nestlé to our growing list of great companies that agree with us regards the power of proteins.
Proteins that only CodeEvolver can discover and engineer. Nestlé Health Science follows our recent history of major partnerships with GSK, Merck and Tate & Lyle.
Partnership deals like these are core to continuing to deliver growth in our financials and you should expect more great companies to be added to this list over time. We've only just started to tap into the vast potential of engineered proteins as new value creating materials.
The new partnership with Nestlé also highlights Codexis' creativity and flexibility in structuring major partnerships to fit the needs and strategies of different globally leading companies. The partnerships with GSK and Merck centered around providing those pharmaceutical industry leaders with the ability to run our CodeEvolver protein engineering platform technology on their own.
In doing so our protein engineering capacity replicates, discovering more protein as cost saving catalyst could ever do by ourselves. Now JFK and Merck are using their own resources to create a stacking stream of novel proteins from which Codexis will derive sustained growing back-end revenues.
These back-end revenues are beginning to unfold noting that we expect seven-digit revenues from the back end of these deals to start in 2018. We expect more major partnering deals of this platform license type going forward.
Evidence our recent CodeEvolver user forum that we held. I'm excited to say that representatives from nine of the top 20 global pharmaceutical companies participated in this successful event.
The forum featured the growing use of protein catalysts and pharmaceutical manufacturing and represents a solid pipeline on platform license prospects for Codexis. The partnership model with Tate & Lyle is different but in no way less significant.
In this partnering model, we collaborate on a specific breakthrough project basis. These projects aim to transform a targeted food ingredient product that Tate & Lyle envisions will enable accelerated growth in their downstream food and beverage markets.
If successful as we have already demonstrated with Tate & Lyle, our partner gets control over the CodeEvolver enabled low cost process technology for their very cost competitive markets. And Codexis patents profitable protein products that can commercialize rapidly with above average peak revenue prospects.
We commenced development of our first commercialize product for Tate & Lyle only three years ago and that product is now our second highest selling product in 2017. Following that success, the second project with Tate & Lyle announced in March this year is progressing above expectations.
So, this product could be a significantly larger revenue producer then our first successful product with potential for eight-digit product sales at peak. Year-on-year revenue growth in 2018 with Tate & Lyle is secure.
We expect more major partnering deals of this specific breakthrough project type going forward both as follow-ons with Tate & Lyle and with other great companies in a potentially widening variety of industrial verticals. And now our Nestlé Health Science collaboration secured yet another mode of strategic partnering.
The core of these collaborations displays enthusiasm for Codexis' independently discovered biotherapeutic pipeline and also add strategic access to our CodeEvolver platform for discovering proteins that are new to both Nestlé and Codexis. We'll spend some extra time detailing this new partnership arrangement, highlighting as many features that make it exceptionally exciting for Codexis.
Key to the collaboration is Nestlé's global licensing option for biotherapeutic asset the proprietary orally deliverable enzyme CDX-6114 for the management of the metabolic disorder phenylketonuria or PKU. We are particularly proud of this agreement because it is our first revenue event for a Codexis developed biotherapeutic.
And even more important, we now have the strength of Nestlé Health Science to credibly validate that our CodeEvolver platform is a drug discovery [ph]. If CDX-6114 is successful the deal has potential for total payments to Codexis of up to $357 million plus appeared royalty of low double-digit percentages on future products sales.
We are scheduled to receive a $14 million upfront payment from Nestlé in this fourth quarter which more than covers the investments we've made in CDX-6114's discovery and preclinical activities to date. We remain on target to initiate a phase one clinical trial in healthy volunteers early next year which will trigger an additional $4 million milestone payment from Nestlé.
Following that trials completion which is expected around the end of 2018 Nestlé will have 60 days to exercise its exclusive license option. A favorable decision will trigger a payment of $3 million to Codexis.
Nestlé takes responsibility for all expenses related to future development and commercialization activities for CDX-6114. Thereafter Codexis can earn additional pre-clinical milestone payments through regulatory approvals that add up to $86 million.
If CDX-6114 hits the market Codexis is then eligible to earn both sales based milestone payments that add up to $250 million as well as tiered royalties on sales up to low double-digit percentages. The combined economic deal terms are remarkable for a preclinical therapeutic asset and show that a healthy percentage of the economic value from a successful CDX-6114 have been negotiated with Codexis.
With this excellent result from our first by biotherapeutic discovery endeavor our focus now is on following that up with other biotherapeutic asset in our drug discovery pipeline. Today that gets four rare disease conditions that we believe our CodyEvolver protein engineering can address.
In addition to the option for PKU, the Nestlé deal gives you a look into the quality of that remaining biotherapeutic pipe pipeline. Allow me to explain.
Of our four pipelines, disease programs several target inborn error of amino acid metabolism like PKU when metabolism of phenylalanine is the central challenge. The earlier state pipeline programs address other amino acid metabolism deficiencies.
Nestlé Health Science is one of the leaders in providing nutritional products for patients with such diseases through their wholly owned subsidiary Vitaflo. They know the patients, the specialist clinician and the key opinion leaders in this category of rare disease.
While we have yet to publicly share specifics of our drug discovery programs it is noteworthy that Nestlé saw our amino acid metabolism discovery programs confidentially which drove their decision to establish a right of first negotiation as part of our partnership deal. In other words, they validated that we are on the right track with our drug discovery pipeline beyond PKU.
The third and final element of the partnership with Nestlé Health Science puts our CodeEvolver R&D capacity to work to discover novel proteins targeting performance attributes for Nestlé's portfolio that no currently available proteins can achieve. Here the partnership aims to discover enzymes for Nestlé Health Science's established consumer care and medical nutrition businesses.
Codexis receives separate R&D fees for these discovery projects with R&D revenue generation already beginning in this fourth quarter. Before switching over to financials, I'd like to conclude the strategic update section by sharing our continued enthusiasm for our efforts launching new proprietary enzymes into the world's molecular diagnostics industry.
Our first product a DNA ligase engineered by CodeEvolver for rapid and efficient conversions at ultralow DNA concentrations like what is needed in liquid biopsy is receiving excellent market reception as we have moved through 2017. In addition, engineered a molecular biology enzyme which has the promise to have a significant impact on the cost and efficacy of manufacturing for messenger RNA therapeutic products.
Our DNA ligase technology will be featured in a poster presented by our scientist Dr. Matt Miller at the Association for Molecular Pathology or AMP meeting on November 17 in Salt Lake City.
The abstract will also be published thereafter in the November issue of the journal of Molecular Diagnostics. AMP is a leading organization in the field of molecular diagnostics making an ideal case for our technology.
We also enjoyed a very favorable reception at the fifth Messenger RNA Health Conference held in Berlin on November 1 and 2 in 2017. Beyond these two products, we are now using the CodeEvolver technology to develop a third enzyme for use in molecular diagnostics.
We are confident in generating meaning meaningful market penetration and revenue from these high performing novel enzymes in 2018. Before I hand off to Gordon to go deeper, I'd like to highlight a few elements from our solid third quarter financial performance.
Once again, the star goes to growing product sales which were up 71% for the quarter and up 73% for the nine months year-to-date. In addition, those products sales continued to be delivered with improving gross margin percentages.
43% for the quarter and 44% for the 9 months year-to-date both well ahead of the 36% gross margin delivered in 2016. We are also reporting a solid quarter for R&D revenues.
Excluding the technology transfer revenues recognized with Merck in last year's third quarter, R&D revenues for this year's third quarter were up 68% year-over-year. Now let me turn the call over the Gordon to provide more details on the financials.
Gordon?
Gordon Sangster
Thanks John. I'll share some highlights of our financial results starting with the third quarter.
Total revenues for the third quarter of 2017 were $10 million this compares with $14.9 million for the third quarter of 2016, which included the recognition of $8.6 million in revenues from R&D milestones and related deferred revenues. As John stated, product sales for the 2017 third quarter increased by 71% in the prior year to $6.9 million which reflected an increase in demand for our enzymes across a broad customer base.
R&D revenues for the quarter were $2.9 million this compared with $10.4 million for the prior year which included the recognition of an $8 million milestone payment for the completion of our CodeEvolver technology transfer to Merck and $600,000 in deferred revenue related to the transfer. As John mentioned, excluding the recognition of these items in the year ago quarter R&D revenues increased by 68%.
Revenue from our revenue-sharing arrangement for the argatroban injectable drug with Exela was $107,000 in the third quarter of 2017 down from $445,000 in the third quarter of 2016. Gross margin on product sales for the third quarter of 2017 was 43% up from 32% for the period with the improvements due to product mix.
Turning to operating expenses, R&D expenses were $8.1 million for the third quarter of 2017 up from $5.5 million in the prior year. The increase was primarily due to higher outside services related to CDX-6114 and increased costs associated with higher headcounts.
SG&A expenses for the third quarter of 2017 were $8 million compared with $5.2 million for the prior year this increase was primarily due to higher legal fees and costs associated with our headcount. The net loss for the third quarter of 2017 was $10.2 million or $0.21 per share this compares with net income from the third quarter of 2016 of $1.4 million or $0.03 per diluted share which again reflected the recognition of $8.6 million in milestone payments from our revenue.
On a non-GAAP basis, adjusted net loss for the third quarter of 2017 was $8.2 million or $0.17 per share versus adjusted net income for the third quarter of 2016 were $4 million or $0.09 per diluted share. Turning to our year-to-date financial results, total revenues for the first nine months in 2017 were $28.3 million this compares to $38.9 million for the first nine months of 2016, which included the recognition of $20.4 million from Merck and GSK related to R&D milestone payments and deferred revenue.
Excluding these milestone payments and deferred revenue in the prior period revenues for the first nine months of 2017 increased by 53%. Revenues for the nine months ended September 30, 2017 included $19.1 million in product sales $8.3 million in R&D revenues and $0.8 million from the revenue-sharing arrangement with Axela.
Gross margin on product revenues was 44% for the first nine months of 2017 and R&D expenses for the first nine months of 2017 were $20.2 million and SG&A expenses were $21.1 million. We reported net loss for the first nine months of 2017 of $24 million or $0.53 per share and this compares with the net loss for the prior year nine months period of $3 million or $0.08 per share.
On a non-GAAP basis, adjusted net loss for the first nine months of 2017 was $18 million or $0.39 per share versus adjusted net income of $4.5 million or $0.11 per diluted share in the prior year. Cash and cash equivalents as of September 30, 2017 were $23.8 million versus $19.2 million as of December 31, 2016.
Let me now turn to our financial guidance for 2017. We are forming our expectations for total revenues for the year to be between $50 million and $53 million.
This guidance assumes significant revenue from our Nestlé collaboration in the fourth quarter. We also are reaffirming our outlook for 2017 product sales to range from $27 million to $27 million, which represents an increase of 63% to 76% over 2016.
As I mentioned earlier, product sales for the first nine months 2017 were more than $19 million. We are also reaffirming our expectation for 2017 margin on product sale to be between 40% and 43%.
As discussed on last quarters call, we indicated an increase in operating expenses in the second half as compared to the first half of 2017. For the fourth quarter 2017 operating expenses, which is a combined total of R&D and SG&A, we expect approximately $16 million.
This reflects the additional costs for the accelerated development of the PKU drug candidate to move this asset more rapidly toward the phase one trial and additional legal expenses. And finally, we plan to introduce guidance for 2018 revenues in January.
We'll provide 2018 financial guidance on additional metrics with our fourth quarter conference call in early March 2018. With that I'd like to turn the call back to John.
John Nicols
Thanks for that financial review Gordon. We are nearing completion of a highly productive year for Codexis.
Our fourth quarter is set up to be the highest revenue generator for the year enabling us to reaffirm our 2017 revenue guidance of $50 million or above. Delivering on that 2017 revenue guidance will be an exceptional accomplishment by the Codexis team especially given that over $20 million of last year's revenues were non-recurring relating to the completion of both of GSK and Merck platform license technology transfers.
I'm proud to say that we are offsetting those substantial headwinds with multiple new sustaining revenue sources this year. To-date we entered into two new major partnership deals with Nestlé and Tate & Lyle.
We continue to broaden the high value markets we are reaching with our leading edge CodeEvolver platform technology and we're translating our growing pipeline into step change growth in product sales. It's equally exciting to report that our revenue sources show momentum as we continue into 2018.
Year-on-year growth is expected from both of the Nestlé and Tate & Lyle partnerships and we have ability to low single-digit million revenues from the back-end of the GSK/Merck platform license deals. Add to that prospects for continued growth and product and R&D revenues from our pipelines momentum, new sales of high performing enzymes into molecular diagnostics and the probability of executing a fifth major partnership deal.
We are confident in returning to double-digit revenue growth in 2018. The strength of our progress on these multiple fronts further positions Codexis as a dynamic thriving company with leverage to help us achieve and sustain profitability.
These are exciting times here at Codexis with more to continue to accelerate unlocking the power of protein. With these comments, I'd like to open up the call for questions.
Operator?
Operator
Thank you.
Gordon Sangster
While we're waiting for our first question, I'd like to alert you that we will be presenting at Craig-Hallum Alpha Select Conference and at the Furey Research Partners 2017 Hidden Gems Conference. Both conferences are being held in New York City on November 6.
A webcast of our presentation Craig-Hallum Alpha Select Conference will be posted to the Investor Section of www.codexis.com. For those of you heading to San Francisco for the Annual JP Morgan Healthcare Conference, we'll be holding one-on-one meetings across the street from the conference hotel.
Dates are January 8 through 10 and please give LHA a call if you want to schedule a meeting. Okay operator, we're ready for the first question.
Operator
And our first question comes from Matthew Hewitt from Craig-Hallum. Your line is open.
Charlie Eidson
Hi guys this is Charlie on for Matt. Thanks for taking my questions.
Gordon Sangster
Hi Charlie.
John Nicols
Hi Charlie.
Charlie Eidson
First, I mean can you talk about the length of the sales cycles for these partnerships. How long do they typically take to put in place and are you seeing that timeline shorten at all as you continue to grow the business?
John Nicols
Well, it takes a good bit of time to establish the partnerships of these magnitude like with GSK, Merck, Nestlé, and Tate & Lyle. Certainly, it can take as much as - to establish partnership relationships of that magnitude.
During those periods of time, we often will work on smaller projects maybe for specific drugs in the case of major pharmaceutical companies and that helps to establish or growing rapport between us and these large companies and helps to build an understanding of the power of CodeEvolver within these great companies and also gives us time to really explore all the variety of different application that our technology --. So, I just see these partnerships affect many different potential parts of these great company.
So, it takes time for us to work with them, but during that period of time we are generating revenue, building relationship and being closer and closer to partnership models like I highlighted on it.
Charlie Eidson
Sure. No, that makes sense.
Now that the Nestlé deal has happened and you've partnered your first Codexis generated biotherapeutic are you having different conversations in the marketplace?
John Nicols
Yes. Right now, we're really focused on executing the Nestlé deal of course.
There is still significant economics right in front of us for continuation on that deal and we're just a bit more internally and biotherapeutic discovery area really just advancing those early stage biotherapeutic projects that I gave you some color for on the call. We'll look into advance those to a point where they are marketable assets like PKU obviously has become and that's going to take more internal work for us to reach the stage against those four follow-on biotherapeutic targets beyond PKU.
So, not a lot of external conversation on those programs at this point.
Charlie Eidson
Okay. Well, thanks for the color and congrats on getting the deal done.
John Nicols
Thank you, Charlie.
Operator
Thank you. Our next question comes from Brandon Couillard from Jeffries.
Your line is open.
Brandon Couillard
Thanks. Good afternoon.
John Nicols
Hi Brandon.
Brandon Couillard
John on Nestlé curious if you could inform us why now was the right time to do this deal before moving into phase one studies? And when do you think you will be in a position to discuss more broadly the types of assets that are in the pipeline and what are the sort of your timeline in terms I guess progression for those projects?
John Nicols
Okay, great. So, two questions there.
So why now? First, we've been moving closer with Nestlé on a variety of potential topics and so why now with Nestlé is because we're able to put this much broader relationship in place.
Of course, it's centered around the PKU therapeutic assets, but it also included other multiple elements some interest in that pipeline, which is your second question which I'll get to. And it also enabled us to put a platform access element in place to start working on some new proteins.
Finally, I've generated very significant economic deal terms from the PKU asset in this preclinical stage. I believe that we wouldn't have generated significantly more economics had we brought the asset into phase one and generated positive safety data.
I feel like we're very close to the economics of that kind of value inflection point even before having reached it. So, we're extremely pleased with the economics that we were able to negotiate for the preclinical asset and so those are some of the best reasons why now.
So, your second question other pipeline assets. I gave you a little bit of a feel probably for a measure of any detail of what are the programs we are targeting in our pipeline, beyond PKU.
And so, you heard that a few of the targets are also inborn error of amino acid deficiencies like PKU. So, that's a measure of color.
We're going to be careful about public disclosures about these programs, certainly we want to get our patent situation very tight and be cleared before we provide publicity. And second, we don't want to provide publicity until we start to see real positive data in pre-clinical trials.
Real efficacy in living organisms, living animals. So those are kind of the two key milestones for when we'd be comfortable to start disclosing the details of the other biotherapeutic assets.
I'm hopeful that as we move into 2018, maybe as early as the second half of next year or early in 2019 that you'll start to see what those - and we'll start to be able to share our excitement around specific programs like we've already done in the PKU. So hopefully, those give you some nice answers to your two question Brandon.
Any comments?
Brandon Couillard
That's very helpful. And then one for you Gordon, sticking with the Nestlé deal.
There seems to be two elements of in terms of like the near-term revenue impact both from the PKU upfront and the milestone as well as the R&D program. Just to make sure the $14 million upfront that'll be amortized kind of over the next 12 months and then secondly in terms of the R&D revenues that you alluded to coming in the fourth quarter.
Any chance you could break that out in terms of relative size for us?
Gordon Sangster
The collaboration revenues the R&D fees that they are paying us are about $150,000 a month. So, its $1.82 million a year and then the revenue recognition for the $14 million is much more complicated but that's something that we've been working on over the last month or so.
So that's something that we'll be able to talk more about once we release year-end result in March.
Brandon Couillard
Thanks. Then John on the GSK and Merck backends that you pointed to in 2018, I think you've talked about each of them having or working on I think five projects for each of them.
Curious as to how many are those you are banking on being contributors to the backend next year?
John Nicols
Yes, so our understanding of Merck and GSK is protein engineering - teams that each of them enable in the range of five seems high, but certainly three of four maybe more parallel protein engineering teams and that compares to here at Codexis we have about 15 parallel protein engineering teams. To give you some color on that detail.
As we start to see revenues generated from the back-end. It'll be very few of the projects that have been worked on by GSK and Merck that start to contribute revenues as quickly as 2018.
Most of the projects won't start show backend revenues until years later. So, it's one, maybe two products that will contribute to the low-single digit million-dollar backend expectations starting next year.
Brandon Couillard
Thanks. And last one Gordon.
Do you still expect to book product revenues in the fourth quarter from the second Tate shipment or is that being pushed out at all?
Gordon Sangster
No, no. We still expect to be able to ship that in the fourth quarter and recognize the revenue.
Brandon Couillard
Very good. Thank you.
John Nicols
Great. Thanks Brandon.
Operator
Thank you. And our next question comes from RK from H.C.
Wainwright. Your line is open.
Swayampakula Ramakanth
Thank you and good afternoon John and Gordon. Few questions from me.
But the first one, in your initial commentary, you said expect increasing agreements with wider verticals. These were the comments you made when you're talking about the Tate & Lyle agreement.
So, could you provide some color as to what these potential verticals could be and what sort of conversations you are having within the food industry?
Gordon Sangster
Sure. So yes, I think I alluded to potentially starting to talk about other industries besides pharmaceutical and food several quarters ago and we continue to have really good progress to penetrate into other market arenas with other great potential clients.
They would come in either of two different types. First as you know CodeEvolver is very competent and creating catalyst, protein based catalysts that can enable low cost manufacturing.
That's been our core business for the whole history of the company for pharmaceuticals and has been a key part of how we're generating value for Tate & Lyle. So, catalysis is fundamental to all chemical manufacturing.
So, another industry could come from another great chemical industry verticals. And that could come from flavored fragrances or specialty chemicals or other varieties of chemical industries.
So that would be one type of extension into -- of our technology into other industry verticals. The other type, we operate within, we create enzymes with CodeEvolver and there is a significant multibillion dollar industrial enzyme industry dominated by very large competitors like Novozymes and DuPont and they provide enzymes to a wide range of the industries [ph] can impart performance benefits for products that are needed in those industries.
These are industry sectors for example enzymes are used in detergents, they are used in pulp and paper and they are used in animal feeds, they are used in a whole variety of different industries. So Codexis with our world leading protein engineering capability has been talking to customers in this variety of industrial enzymes sectors basically trying to see what kind of new enzyme performance needs those markets and those customers are looking for and that could be a second category where we bring an improve enzyme into one of those industrial enzyme verticals.
There are two different types of approaches. We are working on both of them.
We are having some successes in both of them. So, I'm hopeful that in the not too distant future, we're showing you material deals with great companies like those.
Swayampakula Ramakanth
Fantastic. Actually, with all these various verticals which have been doing well and which have also come to life especially in the recent few quarters.
We're talking about pharma, food, biotech, enzymes and now recently the proprietary enzymes which we just did a deal with Nestlé. So, with all this good success going on are you facing any resource issues on one side and then on the other side does this success mean you and the board have to sit down and figure out where do you want to take this whole CodeEvolver thing and so that you can focus and also maintain a sustained growth in the long term?
John Nicols
Yes, that's a really great question RK and of course we work these issues constantly. So first and comforting is in the R&D arena, like I said earlier, we have around 15 different parallel protein engineering teams that are working on 15 new proteins at any given point in time.
So, to work one of those teams in one area versus another protein for another team in another area, the R&D teams are incredibly fungible. And so, the need to focus in R&D arena is mitigated as a result.
So really, it comes down to the commercial choices. And here the main constraint is our ability to access and build relationships with great huge complex companies like the companies I highlighted we have major partnerships with.
And so yes, there are definitely some limitations in reading smartly headcount both in R&D and to enable more project work and in our business development teams. But the need to focus on one at the exclusion of other is also mitigated because essentially each of the projects we work on generate return on investments.
So, at another R&D team and we had another good idea to create a protein we're usually getting R&D fees covered by the partnership. So Codexis itself is not digging an investment hole and then if it works we're generating backend where we have often patent that protect our position.
So, we're really looking at expanding the applicability as opposed to picking one over another. So, hopefully that gives you some feel on your question.
Swayampakula Ramakanth
No, no that's good. Just a last question from me.
Obviously, the success in generating this agreement with Nestlé is really I'm sure it's very encouraging for you and the team. And I know, I do understand that you can really relate too much of what is there in the pipeline at this point.
But how much of an effort is it to maintain a pipeline of a constant stream of such products? And do you need to go out of your comfort zone to do these kinds of preclinical studies or at least the phase one studies before you give it off to somebody else to shepherd the additional development that those molecules require?
John Nicols
Yes, so really good question again. So, our biotechnology pipeline, I referenced in commentary about four projects, couple of them are these inborn errors of acid metabolism.
So, we gave some color today very limited I know, until we develop our patents and efficacy data. That requires roughly three maybe four of our protein engineering teams.
So, several times I've referenced we have about 15 teams. So roughly, health minority or 20% or 25% of our R&D capacity is dedicated to that pipeline.
One of those projects is now part of this element of collaboration where we create new enzymes for Nestlé consumer care and medical nutrition. So, one of them is covered by the Nestlé R&D fees that we're generating.
So, it's still a minority of our R&D capacity is focused on this pipeline of efforts. It does challenge us because generating a catalyst that has efficacy or a protein that efficacy as a catalyst requires testing, improving the catalyst yield and ability and fairly straightforward things to do in the laboratory.
For a therapeutic alternate, we have in humans and for that in animals. So yes, that proving protein is in living things has -- is something that we're investing and building technology understanding.
But I will highlight that we push through that very successfully with the PKU program. So, we've been building confidence on these kinds of technical challenges.
Swayampakula Ramakanth
Thank you. Thank you, folks and congratulations.
And I'll talk to you soon.
John Nicols
Thank you, RK.
Operator
Thank you. Our next question comes from Steve Schwartz from First Analysis.
Your line is open.
Steve Schwartz
Good afternoon, John, Gordon. First question, have you disclosed how much you've invested into CDX-6114?
John Nicols
Not specifically, but I did say today that the $14 million upfront payment from Nestlé more than covers the investment to-date in the discovery and the preclinical efforts.
Steve Schwartz
John exactly, and you know when you make a comment like that to a bunch of finance people they're going to ask for numbers. So, anyway okay.
I understand if you don't necessarily want to disclose that figure. But I did catch that comment.
A simple one with respect to the Axela revenue is this the new near term run rate where you're at this quarter?
Gordon Sangster
I think so, yes.
John Nicols
Most likely. The product has faced an increasing generic competition which is why the number is shrinking to pretty small numbers in this third quarter and most likely it'll stay at this level maybe even get close to zero over time.
So, it's become obviously a much less important piece of the company's revenue.
Steve Schwartz
Okay. And then, excuse me.
Certainly, you've talked at length about your penetration of CodeEvolver at large pharma and most of these deals are coming from larger entities. What part of your business is with small and medium biopharma?
John Nicols
It's a really good question. The reason we spend more time talking about big pharma is because large pharmaceutical companies, it's because they have so many more targets, so many more API's can be affected by catalyst that CodeEvolver can create and so the larger companies are better prospects for platform license deals.
But we do a significant amount of business with smaller entities, we do a significant amount of business with generic companies which are categorically much smaller than you know big GSK and Merck. One of our more material revenues in the third quarter from a much smaller pharmaceutical company.
Typically, the small pharma relationship is one project one drug because that's the character of many of these smaller pharma companies. But clearly the bio catalyst cost reductions can work with smaller companies and it does.
Steve Schwartz
And still the biopharma world is all a buzz right now around the opportunity related to biosimilars. And is that a wave in particular that you can ride or is your world of opportunity so big that one particular doesn't necessarily stand out for you?
Gordon Sangster
Biosimilars is a very important big trend in the world of pharma as you've just highlighted. But our technology, our CodeEvolver changes proteins.
It in its - it is creating a new novel protein change in amino acids is something new. So, our technology creates new proteins.
And so, when you think about biosimilar, biosimilar is the same protein just in the generic chapter which leads to great opportunities for manufacturing larger volume protein manufacturers. CodeEvolver creates new proteins.
So, the CDX-6114 is a new novel protein has to go through clinical trials et cetera. That's a better alternative for CodeEvolver.
And that's why we're not so much in the middle of the biosimilars wave. Does that make sense?
Steve Schwartz
Got it. Sure, totally understanding.
And actually, it is a good lead into my next question John, which is I don't know that I have a good handle on exactly how many molecules you've been involved with and how many molecules have moved to various stages in preclinical or clinical development. And I'm just wondering if you've acquired enough data at this point to where in very simple terms if you do a CodeEvolver sales pitch to someone in pharma.
At this point can you say with confidence that you can reduce development time by x% or you improve the probability of approval at certain stages in drug development by using CodeEvolver, is that information out there yet?
John Nicols
Not really and the vast majority of our projects in pharmaceuticals is involved in a process to make the pharmaceuticals where we're helping them to create a process to make the drug. And the key for us and bike by delivering a protein catalyst that makes the drug cheaper or the intermediate cheaper and so the key for us historically has been to engineer that catalyst quickly enough to fit the development timeline of our pharmaceutical client.
So, because the process doesn't drive the timeline the clinical that prove through the phase one, two, three drives the timeline. But if [indiscernible] catalyst installed within those timeline, so that they don't become critical path because the process change is going to drive the customer's timeline only the regulatory and clinical results will drive the timeline.
I'm sort of not answering your question but for us timing is to make sure we're not a timing issues that we can get our catalyst quickly enough. And as CodeEvolver gotten faster and better we've clearly been able to do that which is part of our sales pitch.
Steve Schwartz
No John, you did answer my question perfectly. And in fact, you made me realize it might not have been a good question to begin with.
But no, so that was a good answer. John, when you talked about the Nestlé deal, you talked about a max of $357 million and when you got to the point at which if the molecule goes commercial you noted $250 million as a max, but then you also talked about a certain percentage, I think it was a high teens percentage of royalty and that seemed to be uncapped that element of it.
Can you talk through that again?
John Nicols
Sure. You're absolutely right.
Once the drug, okay so there are $107 million of potential payments from today through the approval of the drug. So that's $107 million, $14 million in the upfront.
Okay, so once the drug gets approved then Codexis -- possibility of generating two different sources of revenue that are additive. The first our [indiscernible] of sales milestones.
Those milestones can add up to $250 million. But in addition, in parallel, we will be generating tiered royalties on the product sales and the upper end of the tier is low double-digit royalty rate.
Once the drug generates both of the news sources in parallel.
Steve Schwartz
Got it. Okay.
And then my last one is for Gordon. Gordon, in the press release this afternoon where you addressed R&D and SG&A expenses you talk about it being higher in the fourth quarter and legal just getting ready for clinical trials but what can you give us an idea of what the run rate might be going through 2018?
Gordon Sangster
[Indiscernible] from point of you of peak view [ph] but also legal expenses.
John Nicols
Yes, and will be offset by account. So, we are seeing new projects to put our teams to work and so that's encouraging us to add to the R&D ranks and I think it was RK asked about constrains and so we were incrementally adding headcount for business development.
So I think next year the PKU spend will go down like Gordon says, but it will be offset somewhat by increased headcount and I think you are right for an overall that is expected to come down on an average off of the $16 million that we were pretty sharp to give you for the fourth quarter.
Steve Schwartz
Okay. Got it.
Thank you for taking all the question.
John Nicols
Thanks.
Operator
Thank you. Our next question comes from Gregg Zenith [ph] from Morgan Stanley.
Your line is open.
Unidentified Analyst
Hi, John. Hi, Gordon.
So, in the Tate & Lyle is considered what a food company or a food and ingredient type of company or flavor house, would that be correct?
Gordon Sangster
I wouldn't call them a flavor house. They are one of the world's leaders in food ingredients and things like fillers and sweeteners and functional additives to make food products more appealing or more healthy.
Unidentified Analyst
And those products are quicker to market so quicker for revenue for Codexis. When you - you have this two-year timeframe, every two years signing a deal.
Do you think the next deal will be with pharmaceutical company which takes longer to bring something to market or do you think it would be with a food ingredients company or do you think it would be maybe and then just one of the other industry that you talked about that you are not in yet?
John Nicols
Since you put or as between all of that, I'll say yes. We're not for shadowing which of these kinds of deals will be the next one we're just making it clear that we have prospects for major partners across the three different categories.
Unidentified Analyst
Yes. I'm just trying to get getting revenue faster in the company versus the long lead time it is for pharmaceuticals except for the research and development money that you get are the upfront payment?
John Nicols
Yes, and it's happening Gregg. First, we've been working on many projects over our 15 plus year history and those projects are requiring R&D sometimes and being for commercialization of those and those are commercializing accelerating in their commercialization which is leading to our product revenue growth and that's all you can kind of get a feel for that in our two years of showing you our pipeline snapshot now.
So that's all happening very nicely and then on top, then we add these new partnerships and these new partnerships create new short term and long-term revenue opportunities and you're right with the food ingredients area or generally every other industry, it should be theoretically quicker for us to commercialize to ultimately get to that sustaining revenue place. Because every other industry doesn't require all the regulatory time and effort that pharmaceuticals do.
So, by growing our business in other industries we're accelerating that timeline to sustainable.
Unidentified Analyst
With Tate & Lyle with food ingredient usually CPG, consumer package goods companies take a lot of time but lot of testing before they are going to change an ingredient and one of their product. Are you doing something within as a brand-new product that they don't have to do testing or is that replacing - is Tate & Lyle providing an ingredient that's replacing an ingredient that's already being used whether they may want to test it?
John Nicols
Yes. Through our partnership with Tate & Lyle we're helping to create new food ingredients that can be used in existing types of CPG products.
Unidentified Analyst
So, there's a chance. I'm just wondering the size of the existing what they've got there if they're slow in rolling these out or do you feel like these things over the next year or two the markets define as far as what the volume is going to be?
John Nicols
You are right. There is resistance to change in big industries like the consumer products companies.
But the fact that we've already, that Tate & Lyle has already been able to commercialize something that we just started three or so years ago is a testament to the process relatively quickly. And now, we're working on our second project, bio.
And as I alluded in my prepared remarks that could be even bigger than the first success we've had. And more hopeful that it also can commercialize in this kind of a timeframe.
Unidentified Analyst
Okay. Thank you very much.
John Nicols
Thank you.
Operator
Thank you. And I am showing no further questions from our phone lines.
I would now like to turn the conference back over to management for any closing remarks.
John Nicols
Okay. Thank you for your questions.
Relentless focus on our core CodeEvolver protein engineering platform technology. Getting more customers using that technology and capturing more of the value -- customer.
That's our recipe here for success at Codexis. We look forward to providing ongoing progress updates to you.
In the meantime, thanks and have a great day.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and, you may all disconnect.
Everyone have a wonderful day.