Codexis' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.11.14 | About: Codexis, Inc. (CDXS)

Codexis, Inc. (NASDAQ:CDXS)

Q4 2013 Earnings Conference Call

March 11, 2014 04:30 PM ET


Doug Sheehy - EVP and CAO

John Nicols - President and CEO

David O'Toole - SVP and CFO



Good day ladies and gentlemen and welcome to Codexis’ Fourth Quarter and Fiscal Year 2013 Earnings Conference Call. This call is being webcast live on the Investors section of Codexis’ website at This call is property of Codexis and any recording, reproduction or transmission of this call without the 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 Mr. Doug Sheehy, Codexis’ Executive Vice President, Chief Administrative Officer, General Counsel and Secretary.

Doug Sheehy

Thank you and good afternoon. Today after market close, we announced our fourth quarter and fiscal year 2013 financial results. The press release is available on the Investors page of our website at With me today are John Nicols, our President and Chief Executive Officer; and David O'Toole, our Senior Vice President and Chief Financial Officer.

During the course of today’s call, management will make a number of forward-looking statements. These forward-looking statements include our forecast for a number of full year 2014 financial metrics, including total revenue, total gross profit and cash burn; expected year-on-year revenue growth for both argatroban and our chemical intermediate with Novartis, the expected loss of all of our product revenue from our hepatitis C related biocatalyst intermediates, the ability of our technology to reduce costs and create sustainability benefits for our customers, our ability to generate profit, the future market size for our technology in small molecule drug manufacturing, our ability to accelerate adoption of our technology across a wider set of applications and our ability to develop strong relationships with other companies beyond Merck.

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 Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 12, 2013 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 turn the call over to John Nicols.

John Nicols

Good afternoon and thank you for joining us. We at Codexis are on a quest, a quest to prove that much of the world’s pharmaceutical and fine chemical compounds should be redesigned using different catalysts; catalysts derived from biological sources, Codexis’ biocatalysts. A growing list of customers are joining the ranks of saving money and preserving the planet’s resources by working with Codexis to install our biocatalysts in their manufacturing processes. Benefits for our customers can be substantial; lower cost by converting costly precursor materials into more higher value product or intermediate, by foregoing the higher capital costs associated with the higher pressures and temperatures that typically are required by alternative chemistry designs.

Sustainability benefits accrue as well. Our biocatalysts are produced from mother nature, using abundant renewable microorganisms. These do not drive the depletion of the earth’s scarce metals and demand a lower energy intensity to drive chemical reactions than traditional catalyst typically do. Those sustainability benefits enable secondary economic benefits as well. Customers can smooth out their cost outlooks by the minimization of their dependence on these often highly volatile uncontrollable cost inputs. Bottom-line, by delivering savings to our customers and preserving some of the world’s scarce resources, our biocatalysts liberate value and that enables Codexis to be able to earn a healthy profit in the process.

We estimate that over 30% of all the world’s small molecule drugs would be produced at lower cost were they to be built deploying biocatalysts that we can engineer for them. Assuming a generally accepted rule of thumb for the typical cost and use for biocatalysts, that translates into a theoretical biocatalyst potential market of over a $1 billion based on today’s small molecule active pharma ingredient market and that’s just pharma. Increasingly, we are proving out our biocatalyst value proposition in other fine chemical markets as well. As Codexis closed the books on 2013, our biocatalyst sales were $32 million. Clearly we have huge headroom to grow from our solid 2013 base and that’s what lights up every employee here at Codexis.

We are undisputed as one of the world’s leaders at engineering and delivering biocatalyst to enable this lower cost, more sustainable way of building complex drugs and fine chemicals. We built this leadership in biocatalysts by continuously advancing the state-of-the-art of our core enzyme engineering technology. As recipients of three U.S. EPA Presidential Green Chemistry Challenge Awards, we are one of only four companies in the world since Codexis had its first full year of operation in 2003 to win three of these sought after Green Chemistry awards. The other companies Dow, BASF and Merck are some Green Chemistry innovating peers to be compared against.

Over 210 granted worldwide patents and growing, these forums are based for such technological advancement, spanning across a wide ranging set of carefully orchestrated specializations, from molecular biology, to computational biology, to high throughput robotic experimentation capabilities. We’ve also built this leadership through nearly a dozen years of focus and refinement on the way we work to solve and exceed our target customer's needs for biocatalysts.

This has driven us to refine business practices such as A, making standard biocatalysts handily available through our kits and panels; B, shrinking the time to design a new customized biocatalyst from over two months a few years back to less than two weeks and shrinking today; and C, ensuring that quality biocatalyst quantities are made available on a timely and cost competitive basis as our customers advance from development through to full scale commercialization. A unique set of competencies, this is what we have learned it takes to please and grow with our demanding list of innovative, hungry blue-chip customers.

As we closed 2013 we are proud of the excellent progress we have made driving our biocatalyst business. First we are growing in our penetration across major pharmaceutical customers. During the last quarter of 2013, we signed another new master services agreement with a top 20 global pharmaceutical company. Large and technically complex in nature, these MSAs are a crucial milestone for collaboration, enabling Codexis and its customers to build comfort with each other in such mutually delicate areas as intellectual property ownership and sharing for any new technology is developed.

With an MSA in place, a wide exploration across a customer's developmental and or commercial drug pipeline can be explored for potential conversion to our biocatalytic approach. Multiple projects are typically spawned with a given customer thereafter. A typical project progression will start out with screening projects designed to rapidly validate biocatalyst feasibility. This often then leads to larger customized biocatalyst optimization service projects. Across the developmental timeline and then sustainably upon the customer's commercialization, we supply quantities of biocatalysts or chemical intermediates based on those newly engineered biocatalysts. We generate revenue and gross profits for all of these primary offerings across the project lifecycle.

Bottom line as we close 2013, we now have such master service agreements in place with many of the top 10 and are currently doing business with the majority of the top 20 global pharma companies. While major pharma clients are the leading target for our biocatalyst business, 2013 marked the beginnings of successfully applying our biocatalyst to other industries' challenges. From large and small biotechnology companies to our growing partnership with the leading food ingredients company we highlighted mid-year 2013 to other industry prospects under development, our biocatalyst business is building momentum in accessing and working attractive opportunities as we have kicked off 2014.

That growing and widening opportunity set leads to our next area of success as we finished 2013, the improving breadth and quality of our biocatalyst project pipeline. It is true that much of the business we now have across the wide set of customers is early and/or small in nature and our customers’ developmental timeline is often quite slow in nature. But we have been building this biocatalyst pipeline now for almost 12 years, adding to and advancing projects across the pipeline step by step ever since.

The ultimate aim of this pipeline is to spawn a growing list of sustained sources of profitable revenues. Our business arrangement with Merck, which we have consistently highlighted in many past earnings calls is our benchmark for how our biocatalyst business should work. From wide corporate awareness of the power of bio-catalysis, to bench chemists proactively reaching for bio-catalytic solutions, to a widening list of customer biocatalyst projects across their drug development pipeline, to the successful commercial installation of our biocatalyst into their blockbuster JANUVIA type two diabetes drug, our trajectory for growth serving Merck is well secured.

Proudly in 2013, our pipeline has also spawned two additional material commercialization successes to stand alongside our successes with Merck. Early in the year, we began to deliver very material revenues from our arrangement with Exela Pharma Sciences for their successfully approved injectable argatroban drug. That business continued to grow throughout last year and is set to continue year-over-year growth in 2014. In addition, in the final quarter of 2013 we achieved another major commercialization milestone coming out of our pipeline, the first material sales to Novartis of a chemical intermediate manufactured from another proprietary Codexis biocatalyst.

This business with Novartis is also well set to continue year-over-year growth for Codexis in 2014 and beyond. Momentum from these growing customer relationships and the project pipeline populated from them continues to translate into bottom line results for the company. Biocatalyst gross profits, defined as total revenues less the cost of product revenues ended 2013 at $17.4 million, up 60% versus the prior year.

2013 was a year that accelerated the long term 44% compound annual growth rate trend line that the biocatalyst business gross profit line has been on since 2009. This is core evidence that we are doing things right for our shareholders. Our biocatalyst business model is increasingly proving out its profitability.

Before turning over the call to David to get into more specifics on the financials, I am compelled to close out this section by turning attention to the strength and dedication of our phenomenal employee base as the real source of success for the Company. Holding the keys to making the technology work and for delighting our customers, our team has remained strong and true for the Company and its shareholders through some very tough times.

As we closed out 2013, we affected the majority of the restructurings curiously needed to reduce operating expenses to ensure the minimization of our forward cash burn. Resulting from these last 18 months of transition, we are left with the best and brightest we had available from the much larger Codexis employee base and my walks in the halls and lab showcase them as loyal and motivated and productive as any team I've ever had the experience to work with in my 28 years' professional career.

On top of that we now have added fresh deeply experienced talent such as Scott Watson, sales veteran from the fine chemical industry. Greg Hughes, innovation champion from Merck and our latest Dr. Patrick Yang, former top executive of Roche, Genentech and Merck becoming recently appointed to join our Board of Directors. This team at Codexis is an honor to be associated with and makes coming to work at this Company an energizing prospect for all of us as we wake our mornings.

Now let me turn the call over to David.

David O'Toole

Thanks John. Good afternoon. The fourth quarter of 2013 was a very productive and to what was a transformative year for Codexis. Our revenue for the fourth quarter and full year, as well as our ending cash balance exceeded or met the adjusted guidance given on our pervious call.

In the quarter we reported total revenues of $9.5 million, a 20% increase from $7.9 million in the fourth quarter of 2012. The increase in total revenue was primarily due to an increase in revenue from our arrangement with Exela Pharma Sciences from the sale of the injectable drug argatroban and $3 million from the sale of an intermediate for Novartis.

Product revenue for the fourth quarter of 2013 was $5.3 million, a 23% decrease from $6.8 million in the fourth quarter of 2012. Collaborative research and development revenue, which consist of license payments, R&D services, milestone payments and royalties was $1.9 million for the fourth quarter, an increase of 79% from $1.1 million in the fourth quarter of 2012.

Revenue from our arrangement with Exela Pharma Sciences for the injectable drug argatroban was $2.3 million for the fourth quarter. Research and development expenses in the fourth quarter of 2013 of $8.8 million, a decrease of 17% from $10.6 million for the fourth quarter of 2012.

Included in research and development expenses for the fourth quarter is a write down adjustment of $1.6 million to bring the carrying value of certain assets related to the winding down of our bio-fuels business to their estimated realizable value and $0.6 million related to severance charges associated with a headcount reduction announced in the fourth quarter of 2013. These two charges represented 25% of total research and development expenses in the fourth quarter.

Selling, general and administrative expenses in the fourth quarter were $5.8 million, a decrease of 21%, compared to $7.3 million in the same period of 2012. The decrease in research and development and SG&A expenses for the quarter were primarily due to headcount reductions and scaling back of third-party expenditures resulting primarily from the company-wide restructuring undertaken after the termination of the Shell funding arrangement.

Net loss for the quarter was $9.8 million, or a loss of $0.26 per share, based on 38.3 million weighted average common shares outstanding in the fourth quarter. This compares to a net loss of $15.5 million, or a loss of $0.41 per share during the fourth quarter of 2012.

Turning to fiscal year 2013; total revenue was $31.9 million versus $88.3 million in the prior year, a decrease of 64%. The significant decrease was primarily due to the termination of the Collaborative Research Agreement with Shell. Product revenue in 2013 was $20.4 million, a 43% decrease from $35.9 million in 2012, while product gross margin for the 2013 was 29%, compared to 15% for 2012. The product revenue decrease was due in large part to the impact of the new enzyme supply agreement with Arch Pharmalabs executed in November of 2012, and Arch’s subsequent financial difficulties during 2013, which led to lower than expected sales of atorvastatin.

Collaborative research and development revenue for 2013 was $6.9 million an 88% decrease from $50 million in 2012. Again this decrease was caused, primarily by the termination of the Shell research agreement. Revenue from our arrangement with Exela Pharma Sciences for the injectable drug argatroban was $4.6 million for 2013, compared to $0.2 million in 2012.

Research and development expenses for the year were $31.6 million, compared to $56.8 million in fiscal 2012, a decrease of 44%. Our SG&A expenses for fiscal 2013 were $26.9 million, a decrease of 14% compared to $31.4 million in the prior year. The decreases in R&D and SG&A expenses were mainly due to reductions in headcount and other discretionary expenditures following the company-wide restructurings we implemented after the termination of the Shell research agreement and also from the winding down of the biofuels business.

Net loss for the year was $41.3 million, or a loss of $1.08 per share, based on 38.2 million weighted average common shares outstanding. This compares to a net loss of $30.9 million or a loss of $0.84 per share for 2012. We ended the quarter with cash, cash equivalents and marketable securities of $25.9 million, compared to $49.1 million on December 31, 2012.

Now I'd like to turn to our financial guidance for the full year 2014. We expect total revenue in the range of $33 million to $35 million or a year-over-year sales growth of 3% to 10%. This modest year-over-year revenue growth is primarily due to the expected loss of all of our product revenue from our hepatitis C related biocatalyst and intermediates. Hepatitis C related product sales accounted for almost 20% of our revenue in 2013. Despite the significant loss in revenue, our projected revenue growth reinforces the solid underlying fundamentals of the Company’s biocatalyst business.

With the revenue indicated we expect total gross profit, again defined for these purposes as total revenues less cost of product of approximately $19 million to $20 million, which would be an increase of 9% to 15% over the previous year. Regarding cash burn, we expect our cash burn to be less than $8 million for the year.

Before turning the call back over to John, I wanted to highlight an 8-K that was also issued today. It states that Dyadic has withdrawn the Notice of Breach letter that they delivered to us back in July 2013. Lastly, I’m proud to note that the material weakness in internal controls that we had reported for 2012 has been completely remediated in 2013.

With that, back to you John.

John Nicols

Thanks, David. In closing, we thank everyone for their continued interest in Codexis. After a dynamic transformative year now behind us, we are driving the company full speed ahead and fully focused on the exceptional opportunities that lay ahead for us in bio-catalysis.

With that, I’d like to turn the call back to the operator for Q&A.

Question-and-Answer Session


(Operator Instructions). And at this time I'm showing no questions in queue, I would like to turn the call back over to Mr. John Nicols for any closing remarks.

John Nicols

Okay, thank you everyone for participating in the call. We look forward to updating you again soon. Thank you.


Ladies and gentlemen, this concludes today's presentation. Thank you once again for your participation. You may now disconnect. Have a great day.

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