Codexis, Inc. (NASDAQ:CDXS)
Q4 2012 Results Earnings Call
February 27, 2013 4:30 PM ET
Doug Sheehy - Senior Vice President and General Counsel
John Nicols - President and CEO
David O'Toole - Senior Vice President and CFO
Patrick Jobin - Credit Suisse
Mike Ritzenthaler - Piper Jaffray
Welcome to Codexis’ Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. This call is being webcast live on the Investors section of Codexis’ website at codexis.com.
This call is the property of Codexis and any recording, reproduction or transmission of the call without expressed written consent of Codexis is strictly prohibited. As a reminder, today’s call is being recorded. You may listen to a webcast replay of this call by going to the Investors section of Codexis’ website.
I would now like to turn the call over to Doug Sheehy, Codexis’ Senior Vice President and General Counsel. Please proceed, sir.
Thank you and good afternoon. Today after market close, we announced our fiscal fourth quarter and fiscal year 2012 financial results. Press release is available on the Investors page of our website at codexis.com. With me today are John Nicols, our President and CEO; and David O'Toole, our Senior Vice President and CFO.
During the course of today’s call, management will make a number of forward-looking statements. These forward-looking statements include our forecast for 2013 total pharmaceutical related revenue, product revenue, product margin, total margin for pharmaceutical revenue and total cash burn.
Our expectations of receiving argatroban milestone and royalty payments in the first quarter of 2013, our ability to establish a partnership to commercialize CodeXyme and CodeXol, our ability to expand our pharmaceuticals business, including as a result of our recent collaborations with AMRI and Strem, our ability to increase operational efficiency and execute corporate strategies, startup timelines for our CodeXol demo plant in Rivalta, Italy, the timing of revenue recognition for enzyme sales for sitagliptin and our ability to penetrate our core enzyme business more widely into the world’s complex chemistry market.
These forward-looking statements are based on assumptions and are subject to risks and uncertainties that could cause actual results to differ significantly from those projected here. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements.
Please refer to our Form 10-Q for the period ended September 30, 2012 filed with the Securities and Exchange Commission on November 7, 2012 for some of the important risk factors that could cause actual results to differ materially from the forward-looking statements made on this call. Except as required by law, we disclaim any obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that occur after this call.
Now, I’d like to hand the call over to John.
Good afternoon and thank you for joining us. 2012 was an important year of transition at Codexis, as we worked to position the company for long-term growth, while putting a management team in place that will create and implement strategies to deliver consistent value for our shareholders.
Our overall strategic goals remain clear. We will continue growing our pharmaceutical business and continue to advance our core assets in the fuels and chemicals markets towards commercialization. In parallel, we will position our unique and differentiated enzyme evolution and scale up technology where it can provide cost and sustainability benefits into diverse new customer markets.
Since I joined Codexis last summer, we have made decisions that while extremely difficult will allow us to operate more efficiently, better execute on our corporate strategies, and meet and exceed our targets for a new and refreshed Codexis in 2013.
We undertook a strategic restructuring in the fall of 2012 to streamline our operations following the termination of the Shell Research Agreement, which resulted in necessary headcount reductions and the closing of our Singapore Research Center.
These moves were critical to rationalize our expense lines and protect the health of our balance sheet after the loss of Collaborative R&D funding. These reorganizational efforts have allowed us to focus our efforts on what we do best, developing world leading customize enzymes that enable cost advantaged, manufacturing processes for our partners and customers.
Later in the call, I will discuss a number of developments in pharma that are allowing us to drive greater topline growth and profitability in that business, as well as providing a feel for how we plan to leverage that core capability into new markets and customers.
For CodeXyme and CodeXol, our biofuels and detergent alcohols platforms, we continue to make excellent strides improving the technology and I will provide an update on that later in the call as well.
With much of the transition overhangs now behind us, I believe that 2013 will be a very exciting and important year for Codexis as we reemerge back on to a solid growth track going forward.
Before getting into more detailed business commentary, I’d like to past the call over to David to discuss the fourth quarter and year end financials.
Thanks, John. For the fourth quarter 2012, we reported total revenues of $7.9 million, a 76% decrease from $33.5 million in total revenues for the same quarter last year. The revenue decrease was due primarily to the termination of the Collaborative Research Agreement with Shell as of August 31, 2012.
Product revenue for the quarter was $6.8 million, a 56% decrease from $15.5 million in the prior year quarter, primarily due to the timing of generic and innovator pharmaceutical product orders. Product gross margin for the fourth quarter was 15%, compared to 16% in the prior year quarter and 10% in the third quarter of 2012.
Revenue from Collaborative R&D was $1.1 million in the fourth quarter 2012, down 94% from $17.3 million during the prior year quarter. The decrease was primarily due to the termination of the Collaborative Research Agreement with Shell.
Our total operating expenses for the fourth quarter of 2012 were $23.7 million, down 38% versus the prior year quarter. The change was driven in part by 32% decrease in R&D expenses and a 26% decrease in selling, general and administrative expenses in the fourth quarter.
These decreases were primarily due to reductions in headcount and other discretionary expenses resulting from the company-wide restructuring undertaken by us after the termination of the Research Agreement with Shell.
Net loss for the quarter was $15.5 million or loss of $0.41 per share, compared with a net loss of $5.3 million, or $0.15 per share for the same quarter last year. We ended the quarter with cash, cash equivalents and marketable securities of $49.2 million, compared to $53.9 million on September 30, 2012.
Our ending cash balance exceeded our prior guidance of $45 million. This favorable variance was cause in part by unprojected cash inflow from the exercise of stock options, lower than projected severance costs and lower than projected R&D and SG&A expenses for the fourth quarter.
Turning to the full fiscal year 2012, total revenue was $88.3 million versus $123.9 million in the prior year, a decrease of 29%. Product revenue in 2012 was $35.9 million, a 27% decrease from $49 million in 2011. While product gross margin for 2012 was 15% the same percentage as for 2011. The product revenue decrease was primarily due to the timing of orders from our innovator pharmaceutical customers.
Collaborative research and development revenue for 2012 was $50.1 million, a 30% decrease from $71.4 million in 2011 caused primarily by the termination of this Shell Research Agreement. Research and development expenses for the year were $56.8 million compared to $61 million in fiscal 2011, a decrease of 7%.
Our SG&A expenses for fiscal 2012 were $31.4 million, a decrease of 15% compared to $36.9 million in fiscal 2011. The decreases in research and development and SG&A expenses were mainly due to reductions in headcount and other discretionary expenditures following the companywide restructuring we implemented after the termination of the Shell Research Agreement.
Net loss for the year was $30.9 million or a loss of $0.84 per share, based on 36.8 million weighted average common shares outstanding. This compares to a net loss of $16.6 million, or $0.46 per share during 2011.
Now, let me turn to our outlook for the full year 2013. Our policy is to give annual guidance with updates during the year when warranted. For the full year 2013, we expect total pharmaceutical related revenue in the range of $35 million to $40 million. Of this amount, we expect product revenue to be approximately $30 million.
We expect that our product gross margin will be in the range of 30% to 35% and total gross margin for pharmaceutical revenue will be approximately 50%. Regarding cash burn, we adjust previously disclosed outlook for 2013, which was based on having a CodeXyme funding partner in place as of the end of 2012 to a cash burn range of $12 million to $16 million for the year.
As part of these projections for 2013, we are encouraged that our previous financial support of the specialty pharmaceutical company, Exela Pharma Sciences in its partnership with Hikma Pharmaceuticals for the development of our argatroban injection will start to generate royalty revenue in 2013. We expect to receive a milestone payment, triggered by Hikma’s commercial launch of argatroban injection and are expecting further royalty payments starting in the first quarter of 2013.
Now, I’d like to pass the call back over to John for some additional commentary.
Thanks David. 2012 was a huge transitional year for Codexis. The year was marked by major leadership changes, which of course brought both David and myself to Codexis. The year was also marked by the loss of our largest revenue source that being from the long-standing biofuels collaboration with Shell.
Given that as we finished the year, we laid out expectations for the strategic reductions that would allow us to lower our cash burn and focus more efficiently on commercializing the company’s core assets. Headcount reduction at our headquarters in Redwood City, California and the closure of our Singapore facility were required and implemented, bringing down our expenses significantly during the fourth quarter, enabling us to limit our cash burn to $4.8 million for the quarter.
We ended the year with more than $49 million in cash, significantly higher than the 2012 year-end cash guidance of $45 million. This was very hard work but it shows the type of accountability to deliver what our shareholders expect in terms of cost stewardship. And it highlights the kind of operational discipline that is the pride of the new Codexis leadership team.
For updates on the business development front, let me first turn to CodeXyme cellulase enzymes for the hydrolysis of cellulosic biomass to sugars. Here we continue to deliver significant improvements to the efficiency of our enzymes. For example, at high solids content, we have recently hydrolyzed pretreated corn stover to 85% conversion with just a 1% loading of our CodeXyme cellulase enzyme.
Improving enzyme efficiency to these levels is one of the key factors for enabling our prospective customers return on second generation ethanol capacity investments. We have yet to see the point of diminishing returns for our enzyme efficiency improvement which bodes well for [technical difficulty] success of our CodeXyme business.
We had similarly made solid technical strides with our CodeXol detergent alcohol. The key development here has been the improvement of our strain to be able to make the detergent alcohol to approximately meet the industries demanding specifications.
This will be the strain that we install in our 1500 leader demonstration scale facility in Rivalta, Italy with our partner Chemtex. The construction of that demo plant remains on track to come online in the middle of this year. For both CodeXyme and CodeXol, our efforts to secure commercialization partnership yields continue as a top priority.
In parallel, we have been focused on driving the core pharma products and services business. Despite the fact that our pharma business finished 2012, off of the pace of 2011, we have set up for a strong profit growth for this business moving forward into 2013.
The following are noteworthy developments in our pharma business that I would like to highlight. First, we have continued to deepen our long-term collaboration with Merck, where we are partnered to develop enzymes for use in Merck’s pharmaceutical manufacturing.
The initial catalyst and process development collaboration began in 2007 and in May of last year, we extended this relationship for an additional three years out to 2015. A particular highlight of this relationship, Merck’s receipt of FDA approval for the process using our enzymes for manufacturing sitagliptin, the active ingredient in Merck’s $5.7 billion blockbuster drugs, Januvia and Janumet for diabetes.
We expect Codexis to begin recognizing revenues from commercial enzymes shipments for this product in the first quarter of 2013. We not only see the enzyme manufacturing process for Januvia as a strong proof point of our capabilities and the uniqueness of our technology but also of years of development collaboration with Merck coming to fruition.
Our model of working with Merck forms the cornerstone of our success with major pharmaceutical companies to date and serves as the roadmap for our activities to try to replicate the same business success with other major pharmaceutical companies.
How have we grown to increasingly serve such a demanding and sophisticated buyer as Merck? The answer is grounded into deeply entrenched strengths of Codexis. First, our technical ability to bring new value adding enzymes to the world is leading-edge.
We are faster at designing and making new enzymes than our competition. And our enzyme evolution platform capability enables creation of enzymes that can deliver pure compounds with higher chemistry yields and/or fit into harsh industrial conditions, such as high organic solvent concentrations, higher temperatures and wider pH ranges that would have previously disabled the enzyme.
Second, we have refined a highly collaborative partnership model that works efficiently with our customers and helps us blur the lines between ourselves and our customers’ R&D. Building from these strengths, we have embarked on a campaign to expand our partnership network to help us access more opportunities and show off the power of our model for delivering enzymes for chemical processing more widely into the markets.
In recent weeks, we are proud to have announced the first two collaborations in that campaign. First, we have teamed up with Albany Molecular Research or AMRI, a leading custom research and manufacturing organization, serving the global pharmaceutical and fine chemical industries.
Codexis will participate intimately with AMRI, as they consider how to deliver the best chemistry solutions to their extensive pipeline of projects for their customers. Like Codexis, AMRI recognizes the growing importance of enzymatic approaches to deliver the most cost-effective chemistry to build complex molecules. AMRI explored their options to bring enzyme technology into their toolkit and they chose this new partnership with us.
Codexis’ speed to design and validate new enzymes, coupled with our proven capability to bring them to commercial scale was the differentiator. We look forward to translating the expanded opportunity access that the AMRI collaboration will bring us into new enzyme products for our pharma business.
Additionally, we announced a new product distribution arrangement with Strem Chemicals, a leading global supplier of laboratory chemicals. Our new agreement grants Strem exclusive distribution rights for our new 100 milligram Codex Screening Kits for Codexis’ popular Transaminase and Ketoreductase enzyme platforms. These enzymes enable efficient conversion of ketones to chiral alcohols or amines.
Strem has differentiated itself from its larger catalog chemical competitors by providing a sharp focus on certain crucial niches, leading amongst them catalysis. Like Codexis, Strem sees the growing role that biocatalysts or enzymes are playing in the wider world of catalysis. Strem considered other options to bring biocatalysts into their catalyst -- catalog and they chose to work with us.
Codexis’ reputation of having world-leading enzymatic biocatalysts, build up over its 11-year history was the differentiator. We look forward to expanding the sales of our enzyme kits and research quantities to Strem, which should in turn expand the number of places bench chemists around the world will try out Codexis’ biocatalysts in their early stage chemistry development projects.
Closing out the list of positive pharma developments, we had a breakthrough from our long-standing collaboration with Exela Pharma Sciences. From 2005 to 2008, Codexis supported Exela as they develop the formulation and manufacturing technology for the injectable argatroban.
In exchange for our support, we are eligible to receive milestone and royalty payments should argatroban commercialize. Hikma, which has rights to commercialize argatroban, has recently received FDA approval to launch argatroban. Hence, as David mentioned, we expect to start generating royalty revenue from this new business, starting in the first quarter of 2013.
As an important point of note, as you know we have historically focused most of our efforts developing and commercializing enzymes used in chemical transformations on the world’s pharmaceutical manufacturing market. Given the complexity and high values of the chemistries needed for drug development, this is of course makes sense. But the pharma industry is not unique in its need for piecing together multi-step complex chemistry that could benefit from our enzymatic approaches.
Other markets such as agrochemicals, cosmetics and food additives are also excellent target markets for our core enzyme development and commercialization capabilities. Codexis has increasingly begun to explore these wider markets and fitting with this, we showcased Codexis last week at the Informex USA Trade Show, attended by over 4,000 global participants. This is one of the leading trade shows in the USA that brings together the various players in the supply chains for multiple markets for complex chemistry.
We plan to speak increasingly in the future about our efforts and opportunities in this wider complex chemistry universe. This list of developments reinforces the very solid outlook that David highlighted in his financial section, projecting higher pharma sales and gross margins for 2013.
Combining this with delivering on our expectations for forging new partnerships for our biofuels and detergent alcohols programs, I hope the emerging strength and vision of Codexis in 2013 and beyond is becoming clearer. I look forward to working with our strong management team on all of these opportunities ahead of us, and we will continue to update you on our progress in the coming quarters.
I’d like to now open up the call for question-and-answer.
Thank you. (Operator Instructions) Your first question comes from the line of Patrick Jobin with Credit Suisse. Please proceed.
Patrick Jobin - Credit Suisse
Thanks. Good afternoon. Thanks for taking the question. Two quick questions. The first one, I guess maybe could you touch on the pharma growth outlook, maybe longer-term and maybe 2014. It seems like you’ve had a lot of success with some of these partnerships that you’ve formed, maybe is there a way to quantify what each of those opportunities mean or what kind of a leading indicators, then I have a quick follow-up? Thanks.
Hey, Patrick, thanks for the question. This is John. We have given you a fair amount of detail for how 2013 is stacking up for solid growth over 2012. And it’s only the beginning for several of these projects and we expect those to continue to grow from 2013 and beyond. We have over the last couple of years and growing into 2013, have grown the list of truly commercial products for our company from the hepatitis products to atorvastatin with Arch Pharmalabs and now the coming successes with our argatroban and with sitagliptin.
So, a growing part of our pharma revenues are now in established portfolio of products. And so growing that set of commercial product products is key to growth beyond 2013 and also our success in our project, our earlier development work especially with pharmaceutical companies to move from earlier phases -- Phase I, Phase II, Phase III into a more commercial state and our pipeline in that respect is also quite strong.
We’ve been growing the number of research kits that we supply to our pharmaceutical customers. Significantly over the last several years that has translated into a step up in the number of, I’ll call it small to midsize research orders in the magnitude of $50,000 or $100,000 that we’ve gotten as our customers project advance and we’re confident that those will overtime, it takes time in the pharmaceutical industry, but overtime they will add to our list of commercial products on top of the ones that we’ve been highlight.
Patrick Jobin - Credit Suisse
Thanks. And then just on CodeXol, could you remind us with the 1,500 leader pilot in Italy maybe, is there any capital contribution you need to make, or what should we be looking at to move -- having move beyond that pilot.
Sure. We’ve spent most of the capital required to build the pilot plant in Italy and we have about $1 million more capital to spend in first half of this year to finish that construction.
Patrick Jobin - Credit Suisse
(Operator Instructions) Your next question comes from the line of Mike Ritzenthaler with Piper Jaffray. Please proceed.
Mike Ritzenthaler - Piper Jaffray
Good afternoon, gentlemen. John, now that you’ve been in the seat for seven, eight months now, what -- could you just highlight for us a couple of the key differences as you look to the different segments, a couple of key differences of where your strategy differs sort of the legacy Codexis. It seems like pharma it’s a little bit more articulated with agreements like Strem and renegotiating with Arch, those types of things? Maybe just, a little bit more depth on where the contract currently you see?
Yeah. Sure, Mike. First, yeah, we spent a lot more time on this call and in prior calls, and certainly, before my time on the pharmaceutical business. The pharmaceutical business is in great shape. And as you can tell, this is more of a portfolio business, this the kinds of opportunities the Codexis gets in pharma are of a nature of smaller resource need to have a success.
These projects take a little, they take less time to translate into revenue than the big place that we’ve had in biofuels and bio-based chemicals, and increasingly the strategy of the team is the focus more and more of our efforts in this direction.
We’re also confident that there will be select opportunities to practice the same kind of enzyme evolution work that’s made our success in pharma in other markets and so we highlighted that as well. Anyone who is doing complex chemistry of a certain character could benefit from the use of enzymatic approaches, and our team and our technology is very well suited help them do that.
So you are going to see us talk more about expanding our capability, our leadership capability and doing enzymatic biocatalysis in various different chemistry chains and in various markets as we go forward.
That’s not to say, we’re not continuing to have a very heavy focus on driving the commercialization success of CodeXyme and CodeXol. But it’s unlikely we are going to bring another project of that kind of magnitude into our company, instead we are going to, increasingly be focusing on the nice million dollar opportunities that take less people and take less time to develop like in pharma. I hope that answers your question.
Mike Ritzenthaler - Piper Jaffray
Yeah. Yeah. Absolutely. That was exactly what I was looking for. And I guess, one, I guess, housekeeping item and then I have one other follow up. But on the royalty payments that started 1Q from injectables? Is that -- that’s included in your guidance of $35 million to $40 million?
Yeah. It is.
Mike Ritzenthaler - Piper Jaffray
Okay. I just wanted to make sure that there was appease we have listened there. And then on the -- in the revenues for 4Q, in your prepared comments, I don’t think I got enough of the feel for where the generic innovator split was -- and I don’t -- and I know, you typically don’t break that out. But I was wondering, if you could kind of qualitatively talk about year-over-year changes in generic versus innovator?
Yeah. This is David O'Toole. Going forward in 2013, there’s going to be a significant more associated with the innovator pharmaceutical drugs. Again sitagliptin from Merck is kicking up in the first quarter and will continue throughout the year.
We still believe that we’ll have a good size amount of revenue coming from generic. But I think it is going to be more focused and more skewed towards the pharmaceutical -- the innovator pharmaceutical revenue.
If I may, I would add that I wanted to remind you of the change of our business relationship with Arch that we spoke a lot about on the last quarter call. And they have shifted the historical arrangement where Codexis sold intermediates based on the enzymatic process. And we switch that to Codexis selling enzymes for Arch to sell the intermediates.
Mike Ritzenthaler - Piper Jaffray
Yeah. I mean, that’s reflected in your gross margin guidance being significantly higher for that pharma segment that has been historically.
Mike Ritzenthaler - Piper Jaffray
Yeah. That will make sense. Best of luck guys. That’s all I have.
We have absorbed all the time we have for questions today. I will like to hand the call back over to Mr. John Nicols for closing remark.
Okay. Well, thanks everybody for their attention. And we look forward to talking to after our first quarter results and for showing you the success that we believe in for Codexis. Thank you very much.
Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.
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