Mar 8, 2018
Executives
Jody Cain – LHA Investor Relations John Nicols – President and Chief Executive Officer Gordon Sangster – Chief Financial Officer
Analysts
Brandon Couillard – Jefferies Ed Arce – H.C. Wainwright Matt Hewitt – Craig-Hallum
Operator
Good day, ladies and gentlemen, and welcome to the Q4 2017 Codexis, Inc. Earnings Conference Call.
[Operator Instructions] As a reminder, this conference as being recorded. I would now like to turn the call over to Ms.
Jody Cain. Please go ahead.
Jody Cain
This is Jody Cain with LHA. Thank you for participating in today’s call to discuss Codexis’ 2017 fourth quarter and full year financial results and the company’s business progress.
A slide deck to a company today’s call is available on the investors section of the company’s website at codexis.com. 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 these 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 March 8, 2018.
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 could materially affect actual results. For details about these 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.
We’ve posted a brief slide presentation on the investor section of our website to accompany today’s call. I’m very proud to report on an exceptional finish to a highly productive year in 2017.
Fourth quarter revenues reached nearly $22 million more than double those for the fourth quarter of last year, fueled by 78% increase in product sales and our first revenues recognized from our biotherapeutics partnership with Nestlé Health Science. Gross margin on product sales were the highest for the year as well and exceeded 50% for the first time in recent history on the bottom line, we generated nearly a $1 million profit, despite heavy spending in the quarter for the development of our lead biotherapeutic enzyme.
Turning to Slide 3, our full year financial results were equally impressive as we achieved or exceeded all 2017 guidance metrics for the fourth consecutive year. 2017 revenues reached $50 million.
This was an exceptional accomplishment by the Codexis team, especially considering that $22.5 million of revenue in 2016 was non-recurring from the CodeEvolver licensing deals with GSK and Merck. We delivered this by succeeding on multiple fronts in parallel.
First, a high point throughout 2017 was the strong showing by product revenues, which grew 74% reaching the upper end of our upgraded guidance range. Gross margin on product sales of 46% exceeded our 2017 guidance.
In addition, those product revenues were increasingly spread across a growing list of customers highlighting the accelerating penetration of our protein catalysts into our target markets. In fact, in 2017, 13 products produced by 11 customers each used more than $500,000 of Codexis protein catalysts.
This is up from just four in 2016. Our activities to diversify beyond the pharmaceutical industry, also paid off where for the first time more than 10% of company revenues were generated from the food industry.
In addition to widening our protein catalysts penetration across more clients, we deepened relationships into a growing set of those customers. In 2017 four customers secured dedicated protein engineering teams at Codexis up from just one in 2016.
Over a given year a dedicated team, can work across a stream of different targets creating protein discovery efficiencies for the client, while securing predictable and reliable R&D service baseload revenues for Codexis. These arrangements are clear time of customer endorsement of the applicability of our CodeEvolver protein engineering across their portfolios.
They enable more Codexis proteins to be created in a given timeframe, and can be a stepping stone for more expansive partnering arrangements with those clients going forward. Regarding major deal making, we proudly landed and began executing on two major new partnering arrangements in 2017.
With Tate & Lyle, we are collaborating to create a new process for a food ingredient here too for effectively uncommercializable due to its high cost and limited availability. Since the collaboration commenced a year ago CodeEvolver has engineered protein catalysts that enable a breakout low cost process for Tate & Lyle, ahead of schedule and exceeding the catalyst performance expectations established.
With continued progress at this pace these protein catalysts can become amongst our very top product sales generators as well as our fastest to commercialized to date. That highlights the enhanced attractiveness for Codexis to develop novel protein products for other industries.
Faster commercialization timelines, and larger peak revenue prospects for a given targeted development. Other industrial verticals beyond our growing success in food hold similar prospects for Codexis.
In this quest our next target to offer a suite of improved enzymes for molecular diagnostic and biology applications got off to an excellent start in 2017. Here we engineered our first enzyme a DNA Ligase that demonstrates superior performance, 90% plus conversions achieved in less than three minutes for our enzyme, compared with 50% or lower conversions requiring more than 10 minutes for competitive Ligase.
Our enzyme innovation was the subject to post of presentations at the Association for Molecular Pathology Meeting last November, and at the Precision Medicine World Conference in January. Last month, I presented at the International Molecular Medicine Tri-Conference to a well attended highly engaged audience.
We continued gearing up for a successful penetration into this market having recently welcomed former QIAGEN executive Shawn Clairmont to take on a new role that brings her extensive expertise to meet the areas commercial activities for Codexis. And finally, our partnering deal with Nestlé Health Science announced in October, is arguably the best partnering deal we have put in place, so far this decade.
It established an immediate return on our investment in developing the orally administrable enzyme therapeutic candidate targeting patients with phenylketonuria or PKU disease, it also set the stage for CDX-6114 continued funding and provides very attractive potential future economic rewards to Codexis. Upfront payments and milestones can total up to $357 million plus additional tiered at royalties up to low double digits on products sales.
Equally important the deal establishes the credibility of Codexis in the huge biotherapeutics discovery and development arena, an area we’ve been ramping up our capabilities and investments over the recent past. In addition to the anchoring PKU deal, we now have five additional enzyme therapy candidates in discovery; one, newly funded by Nestlé Health Science; two, additional amino acid metabolism disorders of potential interest to Nestlé; and two more programs directed at the needs of lysosomal storage disease patients.
These programs are increasingly validating CodeEvolver as an effective widely applicable drug discovery engine, in parallel, we have established effective drug development competences, both internally as well as through orchestrated external partners. We have successfully driven the preclinical development project management for CDX-6114, capstoned by having a ready produced enough on spec cGMP quantities to carry the programs clinical drug substance needs well into 2019.
Furthermore, we have commenced Nestlé Health Science that Codexis has the right talent and plans in place to manage our first human drug trials, which are set to begin in the next three to four months. It is with great pride that I share all these substantial business accomplishments for Codexis in 2017, but only all the recognition is due to the roughly 120 remarkable employees that dedicate themselves to our great company.
Recognized in 2017 as one of the best and brightest companies to work for in both the San Francisco Bay area as well as a nation as a whole by the National Association of Business Resources it’s an honor to serve as their CEO. Let me now turn the call over to Gordon to provide more details on our financial results.
Gordon?
Gordon Sangster
Thanks John. I’ll now move on to some highlights of our financial results starting with the fourth quarter.
Turning to Slide 4, total revenues for the fourth quarter of 2017 increased 118% to $21.7 million compared with the fourth quarter of 2016. Has John mentioned product sales for the 2017 fourth quarter increased by 78% from the prior year to $7.6 million, which reflected an increase in demand for our enzymes across a world customer base.
R&D revenues for the quarter were up 132% to $12.4 million from the prior year, and included a significant contribution from Nestlé Health Science related to the development of CDX-6114 as well as other projects. Revenue from a revenue sharing arrangement for the argatroban injectable drug with Exela was $1.7 million for the fourth quarter of 2017 up from $400,000 for the fourth quarter of 2016.
The increase was primarily due to $1.5 million in revenue for an exclusive license in connection with the termination of our revenue sharing arrangement with Exela. Gross margin on product sales for the fourth quarter of 2017 increased to 53% from 46% for the prior year with the improvement due to product mix.
Turning to operating expenses, R&D expenses were $9.4 million for the fourth quarter of 2017 up from $6 million in the prior year, the increase was due primarily to higher outside services expenses related to CDX-6114, and to increased costs associated with higher headcount, partially offset by the absence of amortization of intangibles. SG&A expenses for the fourth quarter of 2017 were $7.9 million compared to $7 million for the prior year, this increase was primarily due to higher legal fees and costs associated with higher headcount, partially offset by lower depreciation expense.
We reported net income for the fourth quarter of 2017 of $970,000, or $0.02 per share, this is a substantial improvement from a net loss for the fourth quarter of 2016 of $5.3 million, or $0.13 per share. On a non-GAAP basis adjusted net income for the fourth quarter of 2017 was $3.1 million, or $0.06 per basic and diluted share, versus an adjusted net loss for the fourth quarter of 2016 of $2.8 million, or $0.07 per share.
Turning to our full year financial results. Total revenues for 2017 were $50 million, which is a 2% increase over a $48.8 million for 2016.
Revenues for 2016 included recognition of $22.5 million from Merck and GSK related to non-recurring technology transfer R&D milestone payment and deferred revenue. Revenues for 2017 including $26.7 million in product sales, $20.7 million in R&D revenues and $2.6 million from the revenue sharing arrangement with Exela.
Gross margin on product revenues was 46% for 2017 exceeding our 2017 guidance. R&D expenses for 2017 were $29.7 million and SG&A were $29 million.
We reported net loss for 2017 of $23 million, or $0.50 per share and this compares with a net loss for 2016 of $8.6 million, or $0.21 per share. On a non-GAAP basis adjusted net loss for 2017 was $14.9 million, or $0.32 per share versus adjusted net income of $1.7 million, or $0.04 per share in the prior year.
Cash and cash equivalents as of December 31, 2017 were $31.2 million up from $19.2 million as of December 31, 2016. Let me now introduce our financial guidance for 2018, which is highlighted in Slide 5.
Our revenue guidance is based on the adoption of ASC 606 and a reconciliation of revenues will be available in our Q1 10-Q in early May. We expect total revenues for the year to be between $60 million to $63, a 20% to 26% increase over 2017.
We expect approximately 45% of 2018 revenues to be reported in the first half of 2018 and 55% in the second half of the year. Our revenue guidance does not include another major transaction.
We expect product sales to range from $25 million to $28 million. We expect gross margin on product sales to be between 45% to 48%.
Separately we expect operating expenses, which is the combination of R&D and SG&A expenses to be relatively unchanged from 2017 at around $60 million with expenses spread evenly throughout the year. With that I’d like to turn the call back to John.
John Nicols
Thanks Gordon. As you described our outlook this for another highly productive year in 2018.
Slide 6, outlined the strategic objectives that drives long term growth giving us confidence and achieving the 20% plus revenue growth cemented into our 2018 guidance. Clearly, we will continue our relentless focus on our CodeEvolver protein engineering platform technology.
Artificial intelligence, computational competencies at the center of our ability to discover proteins that meet our customer’s needs at an ever increasing pace, enable our unique product creating synthetic biology machine. Branded as CodeEvolver it has a name of all of our recent successes and will continue to be our core technological focus going forward.
Second, we will continue to accelerate penetration into pharmaceutical manufacturing with our growing portfolio a protein catalyst products. We are widening our impact across more customers and their processes, and our deepening our technology within a growing list of elite partners who seize the importance of low cost green manufacturing enabled by CodeEvolver.
A list of drug substances that had a Codexis protein catalyst installed and commercialized continues to build momentum, plus our pipeline of Elite customers that secure our dedicated protein engineering teams is also poised to grow and these arrangements set the stage for ultimately installing our CodeEvolver inside their R&D operations via a CodeEvolver platform license. From established CodeEvolver platform partnerships, 100% margin revenues from the back ends are expected to start their growth, generating low seven digit revenues in the second half of 2018.
On top of growth generated from our leadership in protein catalysts for the pharmaceutical industry, we will layer a stack of growing revenues in an increasing set of newly penetrated industrial verticals. Sales into the food industry are expected to continue to outpace total sales growth, staying above 10% of corporate sales in 2018 team led by our strong partnership with Tate & Lyle.
In addition, we anticipate meaningful sales revenues to be generated in the molecular diagnostics and molecular biology markets, led by our DNA Ligase and followed by other new enzymes to be introduced. On top of these, we plan to announce the development of additional products and partnerships that position us to enter other profitable niches within the growing $5 billion industrial enzyme marketplace.
And finally, 2018 will follow the step out successes of 2017 establishing ourselves increasingly as a significant biotherapeutic’s discovery and development player. We will drive the advancement of CDX-6114 in collaboration with Nestlé Health Science through the midyear start of human trials that would earn us in $4 million payment and towards Nestlés option exercise trigger in early 2019.
Also we set a new attractive target of bringing at least two more drug candidates in our pipeline to partner a bull status before the end of next year like CDX-6114, we expect these next partnerable drug assets to be discovered and patented by Codexis proven effective in pivotal pre-clinical trials and driven toward or into early human trials by our teams. We envision value creation from each of these partnerable assets approaching that of the Nestlé deal, and obviously given that kind of success will continue the biotherapeutics business build up well beyond 2018.
Our progress across these fronts will further strengthen Codexis as a dynamic driving company these are very exciting times here at Codexis with more to come as we continue to accelerate unlocking the power of proteins. With these comments, I would like to open up the call for the questions.
Operator?
Operator
Thank you. [Operator Instructions]
John Nicols
While we’re waiting for our first question, I’d like to alert you to our busy schedule of upcoming conferences. We will be presenting at the 38th Annual Cowen Healthcare Conference on March 12 next week in Boston.
The H. C.
Wainwright Global Life Sciences Conference being held April 8 through 10 in Monaco, France. The KeyBanc Industrial and Basic Materials Conference being held in May 29 through 31 in Boston.
The 15th Craig-Hallum Institutional Investor Conference being held May 31 in Minneapolis and the Jefferies Healthcare Conference being held June 5 through 8 in New York. Webcast of our presentation at the Cowen and Jefferies Healthcare Conferences will be posted to the investor sections of www.codexis.com.
Okay, operator we’re ready for the first question.
Operator
Certainly. Our first question comes from the line of Brandon Couillard with Jefferies.
Your line is now open.
Brandon Couillard
Thanks, good afternoon. John, certainly sounds like there’s quite a lot happening in the pipeline.
I mean, as you look out the 2018 and pointing to product revenues that are roughly flat. What are the pluses and minuses in that outlook there would have thought that perhaps a ramping up would have been a somewhat bigger contributor in 2018.
What are moving parts there?
John Nicols
So, yes. So and specifically focused on product sales revenue, is that correct, Brandon.
Brandon Couillard
That’s right.
John Nicols
Yes. There’s some puts and takes.
Some of the products that we produced last year will not repeat and we don’t expect them to repeat in 2018 just given the lumpy order pattern of some of our customers in the pharmaceutical industry. So if you moderate size products will not repeat and they’ll be offset by growth in other products in 2018.
So plus minus would basically cementing and very significant product revenues that we generated in 2017 and at quite similar gross margins.
Brandon Couillard
Okay, thanks. And then with respect to the NGS business, nice to see the new director Shawn Clairmont coming on board.
You sort of talk about the commercial plan, how you expect to go to market here, how you think about direct versus distribution, and it a high level really how big you think this opportunity can be in two, three years and how you can help us sort of think about sizing the opportunity there?
John Nicols
Yes, sure. So right now, we have our DNA ligase in the hands of multiple significant potential customers, and they’re all in various stages of testing are ligase and validating the kind of performance that we found in-house for our ligase.
And we are getting a lot of interest and a lot of confirming discussions with these clients. As we build the credibility with these customers will be working to potentially enter into some sales arrangements with those customers, and with that kind of established market, and technical presence, I think it gives us a fair amount of optionality on how to build the business from there.
We can continue to offer enzymes as an independent marketer to customers like these and others. And or we could establish partnership arrangements with players who have more channel presence have more direct access, more direct relationships with the larger list of customers than Codexis could generate quickly that would enable us potentially to penetrate more rapidly albeit probably at the expense of some of our gross margins.
So we’re going to be looking at these options carefully as we move in through the beginning of this year and through 2018. Longer term this is one of the best product opportunities that the company sees in front of itself.
With these kinds of validations from beta testers, we get the end product sales mode very quickly. We’ve lined out the supply chain to be able to sell product as we speak and the market for enzymes that are used in various genomic applications, whether it be next gen sequencing or polymerase chain reaction or otherwise PCR applications pretty remarkably, pretty good size market for us to target.
We estimate that it it’s in the range of one $1000 million of sales of enzymes today are being consumed in those markets. So for us to achieve penetration like we aspire to clearly can put this into an eight digit products sales at above average margins for Codexis in that three year time frame.
And that’s what we would hope to be able to accomplish.
Brandon Couillard
Thanks, that helpful. And last one, and it doesn’t sound like you’ve embedded any contribution from any incremental CodeEvolver deals yet it feels like you know there’s still quite a bit of interest from third parties in the platform out there.
Is that simply conservatism or you de-prioritizing those types of transactions and how your conversations with other pharma partners sort of developed come or less explain [ph]?
John Nicols
Yes, great question. So clearly we – I highlighted a lot of detail that shows just how wider come much we are widening our penetration to pharma manufacturing and deepening relationships as we promoted the CodeEvolver platform license increasingly widely and help forums to educate the larger players and the pharmaceutical universe to how it CodeEvolver license like we did with GSK and Merck works.
It’s led to more and more adoption of our technology, it just hasn’t led to the next CodeEvolver deal being right in front of us. So specific to your question we did not embed another CodeEvolver deal in our guidance revenue $60 million to $63 million.
Nonetheless we’re layering in and kind of intermediate deals with these dedicated project teams. So an increasing number of customers are installing extended dedicated work with Codexis through these dedicated project teams and these are really like I said in the prepared remarks really great stepping stones for potentially entering into the next CodeEvolver license.
So we’re not de-prioritizing it, as we put in place these dedicated project teams we’re generating pretty remarkable economics from those dedicated project teams and so they’re – but also economically kind of in the middle range of having one project between having up a single project and having a CodeEvolver license in place. So it’s working really nicely for us and we’re quite pleased.
Brandon Couillard
Very good. Thank you.
John Nicols
Thank you.
Operator
Thank you. And our next question comes from the line Arce with H.C.
Wainwright. Your line is now open.
Ed Arce
Thank you. Good afternoon, John.
John Nicols
Yes, Arce.
Ed Arce
Couple of quick questions. It is really nice to see on the non-GAAP basis, you’ve shown net income in the fourth quarter.
And going forward how should we expect this and at what point or at what revenue run rate would be see that profitable at least on the operational level?
John Nicols
Sure. Hi Arce.
Non-GAAP profitability in Q4 was excellent and we are looking – if you take a simple split of our revenue 45% first 55% second half. And the layer in the OpEx as fairly flat then the second half of 2018 we’re headed towards profitability on an non-GAAP basis certainly.
willing to stand into 2019 as well if possible.
Ed Arce
Okay. That’s fantastic.
Then – the previous caller you discuss a little bit on the NGS front. What I want to explore with you is besides the DNA Ligase is what we’re talking about.
How in the long run how do you want to take this business segment, because this could be an interesting piece of your total company. And how do you want to take this business segment and run with that say you five to seven year period in the long-term.
And what’s the current strategy and how could it actually evolve?
John Nicols
Yes, Arce. I think Brandon asked the similar question and has a list of questions.
And so obviously we take things one step at a time we’re incredibly focused on getting the technological validation with major players and with that validation which we expect. Then we create an awareness and attention to the larger players in the industry that could evolve a protein-engineering is going to make a significant difference in the use of the especially next get sequencing for very challenging targets in molecular diagnostics like liquid cancer biopsy, et cetera.
And so really that’s, full force that’s what we’re focused on that in parallel with the commercialization of our products so that when customers want to purchase we’re ready to supply and generate revenues. And from there, I think it lends the physician lends itself for a lot of optionality.
And I think I described that you know we could partner with a deeper channel player and penetrate faster probably at the expense of some margin or we can retain independence and maximize margin and maybe grow the volume a little slower and we’re going to figure out what the right way to play is. And that could maybe just giving a little more color over what I said to Brandon, that that could differ by different market segments.
As we – for example work in PCR we may choose to partner versus NGS, we may be more inclined to be independent. Also as we look at academic or research applications, molecular biology applications which are much more diffuse that probably lends itself to a partnering model of NG equal [ph]compared to larger molecular diagnostic applications.
So that’s how we thinking about it. And you’re right this should and we expect will become a very significant part of our company’s revenues over that five-year to seven-year timeframe, because it’s already a large market consuming enzymes.
We believe our enzymes are better than current incumbent enzymes and the market itself is growing rapidly by all accounts double-digit growth rates as next gen sequencing increasingly gets validated as a genomic tool. So hopefully that gave you a little more color to these really good questions.
Ed Arce
Thank you. In your slide presentation on your Slide 6 the first [indiscernible] and you want to utilize the uniqueness of the CodeEvolver in acceleration of protein discoveries.
I understand that could be a very – overall kind of a statement where you obviously use it amongst the different segments, whether it is pharmaceutical manufacturing, pharma manufacturing, or in the biotherapeutic business. Are you trying to do anything different from these three segments that’s question A.
And question B, is within the three segments I’ll use it in the form of manufacturer I should not call it as a mature segment statement at the time, but you’ve done a quite a bit of work already it’s in that segment. Of the other two at least on the biotherapeutic business on the enzyme business – where is it that you’re putting lot more energy now, because you’re trying to build these other two segments as well.
So those – if you can help us understand the long-term there we should think about how we should think about Codexis?
John Nicols
Yes. So I mean let me do that so I can and it’s really good insightful question.
Probably the first place to start and giving you a feel is what are we doing with our R&D, our protein-engineering R&D capacities today. And that give you a feel for the relative priorities of these three segments, those being catalysts for pharmaceutical manufacturing and other industrial enzymes like molecular diagnostic enzymes and third the biotherapeutic discovery and development.
Today still about half of our R&D teams are applied against pharmaceutical catalyst opportunities. As you point out our reputation is much more engrained there, our opportunity set continues to grow and so we continue to do a significant amount of protein-engineering for pharmaceutical manufacturing operations accordingly.
And so that’s gives – that’s roughly half of our R&D capacity. The both of the other two areas, however, have grown because if you’re rewind to four years ago, essentially all of our R&D capacity was being applied against just pharmaceutical manufacturing.
So we’ve gone from 100% of R&D utilization for pharma, manufacturing to 50%-ish. So that just shows the other two areas are growing faster for Codexis and that’s now increasingly translating into top and bottom line results, right.
Now in our food industry sales is over 10% from essentially nothing three or four years ago, we’re generating revenues from biotherapeutics through the Nestlé deal now. So I could see incrementally the other two segments growing faster than pharma manufacturing, but also we’re expanding our R&D capacity as well.
As the next comment, the final comment I’d make in this direction is, we have also in parallel we have increasingly been investing in our own protein R&D. These of proteins that we’re creating that are not being funded by partners.
And we’ve done that in the past to create proteins from the food project then we ultimately partnered that in the second project with Tate & Lyle when announced in March last year. We’ve also been investing on our own account for the molecular diagnostic enzymes and of course we’ve been investing in our biotherapeutic pipeline.
A somewhat larger majority of our self investments in protein innovations are in the biotherapeutics area. And that’s an indication of our growing confidence to be able to discover novel biotherapeutics.
The value of a potential innovation for a protein as a therapeutic exceeds any other potential protein innovation that anybody can envision. So the prospect is greater and we like the way we monetize that protein innovation in biotherapeutics, the Nestlé partnering deal.
So I think that leads us to do a little more investing in our own proteins for biotherapeutics and than in the other categories.
Ed Arce
Thank you very much, John. Thanks
John Nicols
Thank you, Arce.
Operator
Thank you. And our next question comes from the line of Matt Hewitt with Craig-Hallum.
Your line is now open.
Matt Hewitt
Good afternoon gentlemen and congratulations on all the achievements in 2017.
John Nicols
Thanks, Matt.
Matt Hewitt
Few questions from me. First just a point of clarification, just I make sure I understand this.
So you are working towards and believe that there is an opportunity for CodeEvolver deal, but you are not factoring that into your guidance for 2018, is that correct?
John Nicols
That’s exactly correct.
Matt Hewitt
Okay, great. And then secondly, CodeEvolver deals versus dedicated teams internally is there a difference either from a revenue standpoint and/or margin standpoint?
I mean are you indifferent to depending upon how the client wants to, or the customer or the partner wants to bring it in, or use your team does it matter from a margin perspective in particular?
John Nicols
Yes there’s tradeoffs and difference is when there are a lot of multiple project teams we may become indifferent. Say if we have three or more project teams we may become indifferent to CodeEvolver deal, but it takes that kind of order of dedicated project capacity that would put us in that place.
So for the most part we’re trying to drive these large pharmaceuticals towards CodeEvolver deals. They all move with their own pace and we can influence that, but only to a certain amount.
And fundamentally if we have a project team in place, we will generate for each project team we’ll generate seven digits plus. So and you just come to appreciate what kind of revenues we generate from the technology transfer chapter of the CodeEvolver deal is greater than that, but it ultimately will – we will drive those R&D projects to zero in a CodeEvolver license in general.
So the dedicated project teams could last longer they can sustain longer. Also on the backend of a dedicated project team Codexis owns the protein that’s created.
On the back end of CodeEvolver platform license the licensee owns the protein that’s created. And so that sets us up for a different kind of backend margin revenue outlook from a dedicated project team compared to a CodeEvolver license.
So yes, there are trade offs, they’re both really good approaches. We think that on average more and more large pharmaceutical companies should drive towards CodeEvolver platform license and we were instigating that.
But we’re also patient in taking our time and generating good growing revenue in the meantime with a growing set of clients.
Matt Hewitt
Great. Thank for kind of walking through the different scenarios.
Maybe two more from me. Number one, could you remind us what the next steps are on the Nestlé arrangements is that starting that Phase 1 trial or if there’s something between then for you to recognize that last lump sum of cash and then maybe one for Gordon.
Was there any impact – is there ability to quantify the impact from ASC 606 on your fiscal 2018 revenue guidance? Thank you.
John Nicols
Okay Matt let me take the first question on the runway for the Nestlé program on PKU. So Codexis is running the first Phase 1 trial, it will be in healthy patients.
As I said in the prepared remarks we expect to start that that Phase 1 trial in around three to four months or right around the middle of this year. When we start that that would trigger our milestone payment from Nestlé Health Science too Codexis of $4 million.
We’ll run the healthy volunteer trial, that will take us essentially through this year and then we’ll ultimately satisfy all the deliverables needed to call the option exercised by Nestlé. And as I said that should happen somewhere in early 2019.
And that option exercise of course is that there unilateral option if they exercise the option that would trigger a $3 million payment to Codexis and from that point forward again roughly in 2019, early 2019 they would take over that the continued development of CDX-6114 for PKU and the costs associated with that. And Codexis wouldn’t bear any further development costs but would then just be set out for the stream of milestone payments and ultimately if successful and commercialize on the market milestone payments plus tiered royalty.
Gordon Sangster
Okay. Let me jump in on 606 Matt.
So we’ll have in our Q1 10Q we’ll have a disclosure reconciliation between revenues under 605 versus 606. I can tell you that will be contracts that we’ve assessed so far.
We have lost some revenue, but we’re still comfortable that our guidance for 60 to 63 is safe from any effects of 606 and there are many contracts that we are still analyzing with our auditors and consultants. So you’ll build if you can wait until Q1 10Q you’ll see a full reconciliation, okay.
Matt Hewitt
Great. Thank you very much.
John Nicols
Thanks Matt.
Operator
[Operator Instructions] And I’m showing we have a follow-up question from the line of Brandon Couillard with Jefferies. Your line is now open.
Brandon Couillard
Thanks. Just a follow-up for Gordon.
With respect to the PKU asset the $14 million – am I right in assuming that you’re going to just amortize that readably over the 18-month period? And then secondly, did I hear you right that Nestlé took the rights to a second compound and is there any milestone payments or payments otherwise related to that?
Gordon Sangster
Okay. So the revenue recognition for the $14 million and the $4 million milestone that we expect in the first half of this year, we’re recognizing that revenue on the proportional performance methods so it’s not a straight lined over 18 months.
So we will recognize revenues in-line with the costs that we incur. So we have to look at costs for Q4 and then forecast them through the end of the Phase 1A trial and then we are allocating revenue to cover those costs, okay.
John Nicols
And second question. Not exactly correct.
So let me make sure it’s clear. That’s why the deal with Nestlé of course built the option to CDX-6114 for PKU it also put a team in motion to create a new compound in partnership with Nestlé and third was it gave – we gave our right, a first negotiation right to Nestlé for other amino acid metabolism deficiencies that we’re working on in our pipeline.
And so they’ll have a right of first negotiation. No explicit economic terms of that right just as Codexis develops those amino acid metabolism drug candidates to a certain negotiated point that before we share those packages with other potential partners we have to share those – that data package with Nestlé first.
See if we can make a deal with them before we could open up other partners to look at that partnerable asset. So hopefully that clarifies that for you.
Brandon Couillard
Does, thank you.
John Nicols
Good.
Gordon Sangster
Thanks Brandon.
Operator
Thank you. And I’m showing no further questions at this time.
So with that I’d like to turn the call back over to CEO, Mr. John Nichols for closing remarks.
John Nicols
Okay. Thank you everyone for all your good questions.
2018 is stacking up to be a very productive year with growth in our core business, entering into high value new industries and continued success for Codexis in biotherapeutics. We look forward to sharing a stream of presentations at these upcoming conferences, as well as our forward earnings calls each quarter throughout 2018.
Thank you very much.
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.