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Codexis, Inc. (NASDAQ:CDXS)

Q1 2014 Earnings Conference Call

May 07, 2014, 04:30 PM ET

Executives

Douglas Sheehy - Executive Vice President, Chief Administrative Officer, General Counsel and Secretary

John Nicols - President and Chief Executive Officer

David O'Toole - Senior Vice President and Chief Financial Officer

Analysts

Katja Jancic - Sidoti & Company

Kevin Hanrahan - KMH Capital Advisors

Operator

Welcome to Codexis' first quarter earnings conference call. This call is being webcast on the Investors section of Codexis website at codexis.com. This call is the property of Codexis and any recording, reproduction, or transmission of this call without the express 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' Executive Vice President, Chief Administrative Officer, General Counsel, and Secretary.

Douglas Sheehy

Thank you and good afternoon. Today after market close, we announced our first quarter 2014 financial results. The press release is available on the Investors Page of our website at codexis.com. 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; our ability to generate revenue growth and positive gross margins; our ability to reduce our costs and preserve the cash in our balance sheet; our ability to deliver an intermediate later this year and in 2015 through our partnership with AMRI; and our ability to get enzyme or intermediate supply agreements with our MSA customers.

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 Annual Report on Form 10-K that we filed with the Securities and Exchange Commission on March 13, 2014, 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. 2014 is shaping up to be a breakout year for Codexis. The hard work of realigning the company is behind us, and management and the entire employee base are focused on executing and delivering value to our shareholders.

We are going to accomplish that through driving topline growth at continued healthy gross margin mix, effecting responsible cost reductions, and preserving our balance sheet. Revenues and gross profits for the first quarter of 2014 were in line with our expectations.

During the quarter, we delivered another material sale to Novartis of a chemical intermediate manufactured from one of our proprietary Codexis biocatalysts. In addition, we continued to deliver material revenues from our arrangement with Exela Pharma Sciences for their successfully approved injectable argatroban drug.

Our cash burn for the quarter was only $300,000. This very positive result was helped in part by our announced sale on March 13 of our Hungarian subsidiary to Intrexon for $1.5 million. As a result, we were able to transfer our dedicated and talented employees in Hungary to Intrexon, and to monetize one of our assets as part of our wind down of our biofuels business.

Our cash position was also helped by collection of an annual payment required under one of our agreement with Merck. The result for the first quarter is a great start to achieving our significantly reduced cash burn objectives for 2014.

Since the announcement of the collaboration between Codexis and AMRI last year, we have not spoken about this arrangement, and so today, I would like to give a positive update. During the Informex Pharma Services Trade Show recently held in Miami, leaders from AMRI and Codexis highlighted our collaboration for show attendees and held a joint press conference.

As part of the collaboration, AMRI now provides Codexis marketing materials about Codexis biocatalysts, when it distributes the AMRI catalogue of chemical products. In addition, the AMRI sales team has received training on Codexis' biocatalyst capabilities and joint customer calls are delivered from mutually interesting sales opportunities.

As a result of this partnership, in the current quarter, a top-10 pharmaceutical company has committed to purchase a drug intermediate from Codexis manufactured by AMRI, using Codexis' biocatalyst technology. This order is scheduled to be delivered in 2015, with a small portion of the order to be completed and recognized later this year.

This and other recent successes encourage both AMRI and Codexis that we will continue to find more ways that the partnership can benefit our customers and ultimately the patients who benefit from taking the drugs, we jointly help to manufacture.

Before turning the call over to David, to get into more specifics on the financials, I want to highlight the excellent progress we continue to make in driving our biocatalysts more deeply and widely across the world's leading pharmaceutical companies. Regarding our business with the top 20 global pharmaceutical companies, we now have master service agreements singed with seven of the top 10, and 10 of the top 20 pharma companies.

As I indicated on the last call, these agreements are large and technically complex in nature, but 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 for any new technologies developed.

With an MSA in place, a wide exploration across our customers' developmental and/or commercial drug pipeline can be explored for potential conversion to our biocatalytic approach. 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 customers commercialization, we supply quantities of biocatalyst or chemical intermediates based on those newly engineered biocatalysts. We generate revenue and gross profits for all of these primary offerings across the drug commercialization lifecycle.

We currently have early-use biocatalyst sales comprised of kits and research quantities, with 15 of the top 20 pharmaceutical companies and have generated at least $1 million of revenue from four of the top 20 pharmaceutical companies in 2013. The momentum for projects from our widening access across the world's leading pharmaceutical companies is accelerating, and we are confident that will lead to years of growth going forward for Codexis.

Now, let me turn the call over to David.

David O'Toole

Thanks, John. Good afternoon. In the quarter, we reported total revenues of $7.1 million, a 38% decrease from $11.5 million in the first quarter of 2013. Product revenue for the first quarter was $3 million, a 67% decrease from $9.1 million in the first quarter of 2013.

The decrease in product revenue was primarily due to the expected loss of our biocatalyst and intermediate sales to customers in the hepatitis C drug marketplace as a result of both unfavorable market pricing and newer products entering the market along with a one-time enzyme inventory sale of $2.1 million to Arch Pharmalabs Limited recorded in the first quarter of 2013.

Biocatalyst collaborative research and development revenue, which consists of license payments, R&D services, milestone payments, and royalties, was $2.1 million for the first quarter, an increase of 65% from $1.3 million in the first quarter of 2013. Revenue from our product share arrangement with Exela Pharma Sciences for the injectable drug argatroban was $1.9 million for the first quarter, an 86% increase from $1 million in the first quarter of 2013.

Research and development expenses in the first quarter were $4.8 million, a decrease of 34% from $7.3 million for the first quarter of 2013. Selling, general, and administrative expenses in the first quarter were $6.1 million, a decrease of 25% compared to $8.3 million in the same period of 2013.

The decrease in research and development and SG&A expenses for the quarter was primarily due to headcount reductions and scaling back of third-party expenditures resulting from the companywide restructurings. In addition, research and development expense for the first quarter was benefited by an $800,000 gain realized from the sale of our Hungarian subsidiary.

Net loss for the quarter was $6.4 million or a loss of $0.17 per share based on 38.5 million weighted average common shares outstanding in the first quarter. This compares to a net loss of $9.6 million or a loss of $0.25 per share during the first quarter of 2013. We ended the quarter with cash, cash equivalents, and marketable securities of $25.6 million compared to $25.9 million on December 31, 2013.

Now I'd like to turn to our financial guidance for the full year 2014. We continue to expect total revenue in the range of $33 million to $35 million, which will translate into total gross profit 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 continue to expect our cash burn to be less than $8 million for the year.

Now, I will turn the call back over to John for closing remarks.

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 biocatalysis.

With that, I'd like to turn the call back over to the operator for question-and-answer.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Katja Jancic with Sidoti & Company.

Katja Jancic - Sidoti & Company

You're guiding for revenues between $33 million to $35 million. Now, are we still going to see the lumpiness this year? How could we look at this?

David O'Toole

I think we still will have some variances in between quarters. There are going to be quarters that are going to be better than others. But overall, I think that for this year, there won't be as great peaks and valleys that we saw last year. I think it's going to be more consistent.

Katja Jancic - Sidoti & Company

Is there any, I mean, seasonality or anything that we could look that could help us to model revenue more precisely?

David O'Toole

I don't think so, Katja. To be honest, I don't think there is any seasonality. It really depends on our clients, when they actually need the supply of enzymes, and so it depends on when their orders come in and when we can sell them.

Katja Jancic - Sidoti & Company

Is there any further cost savings that you're planning to initiate going forward?

David O'Toole

The only cost savings that we're going to potentially see this year and next year is, we are trying to sublease some of our space here at Redwood City. And once we get that space subleased, we will see a cost reduction as far as our lease expense for the year.

John Nicols

Katja, this is John, I would add that in the first quarter, you are not seeing the full benefit of the sale of the Hungarian operation materialized yet. And so, you'll see the full cost reduction benefit in the second quarter and beyond as compared to the first quarter.

Katja Jancic - Sidoti & Company

Could you provide any percentages, how much more we could see?

David O'Toole

I think, not at this point. I think it would be better just to see how the second quarter plays out. The percentages on the first quarter, I don't really have that in front me Katja, so maybe we can talk offline.

Operator

(Operator Instructions) Our next question comes from Kevin Hanrahan with KMH Capital Advisors.

Kevin Hanrahan - KMH Capital Advisors

John, I had a question about the food ingredients project that you guys announced, I think, last summer. Can you expand on that? And can you say anything about that or is it continuing on?

John Nicols

As we disclosed last year, we have entered into a joint development agreement with a major food ingredients company. We did not disclose the name of that food ingredients company at that point nor since . However, we've had a very excellent development success with them.

We continue to progress the development of the biocatalytic solution with them. We forecast growth in revenues associated with that arrangement in 2014 as compared with 2013. And we look forward to when we deliver those growing revenues in the out quarters of this year, against our expectation that I just described.

Kevin Hanrahan - KMH Capital Advisors

I saw the recent report that I think life sciences had done, but didn't talk pretty much about the food ingredients opportunity. They mentioned it in there, but didn't talk very much about that. So we wish you best of luck with that and with your other projects as well.

John Nicols

Thank you very much, Kevin. I appreciate that.

Operator

We have no more questions in queue at this time.

John Nicols

Well, this is John, again. Thanks everyone for participating in the call. And we look forward to updating you again soon. Thank you very much.

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Source: Codexis' (CDXS) CEO John Nicols on Q1 2014 Results - Earnings Call Transcript

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