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Codexis, Inc. (NASDAQ:CDXS)

Corporate Conference Call

July 15, 2014 8:30 AM ET

Executives

Douglas T. Sheehy – Secretary, Chief Administrative Officer and Executive Vice President

John J. Nicols – President and Chief Executive Officer

Analysts

Katja Jancic – Sidoti & Co. LLC

James Bennett Liberman – Wells Fargo Advisors LLC

Operator

Good day ladies and gentlemen and welcome to Codexis' Special Investor 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 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 Doug Sheehy, Codexis' Executive Vice President, Chief Administrative Officer, General Counsel and Secretary. Please proceed.

Douglas T. Sheehy

Thank you and good morning. Yesterday after market close we announced an important collaboration in licensing transaction with GSK. The press release is available on the Investors Page of our website at codexis.com. With me today is John Nicols, our President and Chief Executive Officer.

During the course of today's call, management will make a number of forward-looking statements. These forward-looking statements include the belief that our CodeEvolver licensing business model will have broad appeal among our customers. The ability of biocatalysts to reduce drug manufacturing costs and to provide sustainability benefits; GSK’s ability to derive cost savings and sustainability benefits from the use of our technology; Codexis’s ability to receive and the expected timing for recite of wave one, two and three milestone payments.

Codexis’ expectation that it will receive up to $25 million over approximately the next two years under the GSK agreement, Codexis’ expectation that it will receive $11 million in cash during 2014 as a result of the GSK agreement. Codexis’ expectation that it will not receive and backend project based milestone payments during the first two years of the agreement.

Potential for Codexis to receive backend project based milestone payments that range from $5.75 million to $38.5 million per project. Potential for Codexis to receive royalties from GSK for net sales of certain GSK products developed using the CodeEvolver platform technology, the belief that backend milestones will generate significant long-term income for Codexis and the benefits to our customers of using CodeEvolver technology.

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. 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 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 would like to turn the call over to John Nicols.

John J. Nicols

Good morning and thank you for joining Codexis’ special investor call. We are very pleased and excited to share with you the details of our new groundbreaking biocatalysts deal with Glaxosmithkline GSK. This is a very significant transaction for Codexis. First, it highlights a substantial multi-year partnership with one of the world’s greatest pharmaceutical companies. Second, it showcases a new business model for Codexis in which Codexis’ grants, non-exclusive licenses for our CodeEvolver Protein Engineering Technology to select third-parties.

This new business model represent a new step out approach to serve our customers in deploying biocatalysis that we believe we’ll find broad appeal amongst our innovative blue chip customer base. And third, it will deliver very meaningful financial benefits to Codexis. In this call we will review all these points and we’ll leave time at the end to address whatever questions you may have regarding the transaction and our new CodeEvolver license approach to the market.

With Dough having read the forward-looking statements, let me turn your attention to Slide 3 in the PowerPoint deck that we have provided in conjunction with this special investor call. At a high level, the CodeEvolver license deal with GSK is a major validation for our longstanding quest to drive biocatalysis more widely across the world’s small-molecule drug manufacturing.

Two fundamental premises drive are belief in biocatalysis. First, biocatalysts can dramatically reduced drug manufacturing costs in tandem with delivering inherent sustainability benefits. And second, biocatalysts are only installed in a small fraction of drug manufacturing process. When customers join us and becoming aware of these two points, they then focus on whether to use biocatalysis more widely installed across their portfolio. It is here that could access shines and wins business, showcasing our decades plus experience, our CodeEvolver protein engineering pro us in our speed and success rate at hitting or exceeding customers’ costs saving targets. We work with our customers in a very customized and flexible way.

Let me turn your attention to Slide 4, we can work on project-by-project basis converting a specific drugs manufacturing to one using a novel custom design Codexis biocatalysts. This has been our traditional business model approach to help lower our customers’ cost. Now, I showcase with today’s announcement with GSK, we can also work in a much more accelerated way with our customers by installing our proprietary CodeEvolver Protein Engineering Technology inside the customers’ R&D programs, enabling them to accelerate the cost savings and sustainability benefits attributable to biocatalysis on their own. This is an exciting new business model approach synergistically complementing and expanding our offering to our customers.

Let’s get into that business model the CodeEvolver license in more detail now. First, what is CodeEvolver? Let me turn your attention to Slide 5. CodeEvolver is Codexis proprietary Protein Engineering Technology platform, which enables the rapid development of custom designed biocatalysts that are highly optimized for efficient chemical transformation in manufacturing processes.

CodeEvolver is among the most advanced achievement standing on the intersection of three great technologies. Molecular biology, High-throughput chemistry and Bioinformatics; CodeEvolver excels at all three, it is comprised of; A: proprietary methods for the design and generation of diverse genetic libraries. B: automated screening techniques that rapidly validate chemistry in high-throughput on thousands of the best candidate variance. And C: computational algorithms for the interpretation of screening data thereby enabling us to eliminate the need to run tens of thousands of additional costly experiments.

It is only through the margin of these leading edge scientific capabilities that we can achieve the goal of rapidly engineering the ideal biocatalysts. Consider that a typical biocatalysts is composed of a sequence of hundreds of amino acid with any one of 20 natural amino acids possible at each position. The number of possible candidates is nearly infinite, but that’s exactly what we've refined CodeEvolver to do to quickly and cost effectively develops the ideal biocatalyst. Of course the CodeEvolver platform technology is heavily patent protected, covered by a robust portfolio of more than 150 issued patents and patent applications worldwide. This is CodeEvolver protein engineering and this is what Codexis is enabling GSK to practice as part of today’s technology collaboration and license agreement announcement.

Let me now explain the key element of the agreement which GSK using Slide 6 through 8. For each of these slides, you will find some additional details in the 8-K we filed with the SEC on July 14, yesterday in conjunction with our press release. Slide 6 is an overview of the license Codexis has agreed to grant to GSK. At its highest level GSK is acquiring a non-exclusive license grant from Codexis to practice the CodeEvolver Protein Engineering Technology in the field of human healthcare, for the use of CodeEvolver to develop novel enzymes of the synthesis of small-molecule compound that are owned or controlled the GSK the license is exclusive.

In addition, GSK can use CodeEvolver to develop enzymes as therapeutic, diagnostic and or prophylactic products in the human healthcare field. However,

GSK is excluded from using CodeEvolver for the development of enzymes therapeutic products for the first five years of this agreement.

Turning to Slide 7. Slide 7 provides additional detail for the technology transferred deliverables and fees associated with the CodeEvolver technology transfer to GSK's Upper Merion, Pennsylvania facility. Now that the agreement is signed, GSK will make an upfront payment to Codexis of $6 million. From here the project is broken down into three waves of activity.

Wave one is estimated to take Codexis between one and two quarters to accomplish. During wave one, we will be providing GSK with our pre-existing biocatalysts libraries and kits and we’ll be training GSK on biocatalysts screening procedures. At the end of wave one, GSK will pay Codexis $5 million. Codexis expects to receive this payment in 2014.

In parallel with wave one, wave two activities can commence. In wave two Codexis will assist GSK in setting up the CodeEvolver capabilities in Upper Merion, Pennsylvania. Codexis will not be responsible for the cost of equipment, construction or lab space associated with the build-out of GSK's CodeEvolver lab. Two biocatalysts evolution projects will be performed at Codexis’ Redwood City, California facilities and are included as part of wave two.

These biocatalysts projects will be shadow by GSK researchers at our sight as part of GSK’s training on how to use our CodeEvolver technology. We estimate that wave two will take between two and five quarters from now to complete, Codexis will be due $6.5 million from GSK at the completion of wave two.

The final tech transfer period wave three begins once GSK’s CodeEvolver lab has been constructed and commissioned, from that point GSK will perform two biocatalyst evolution projects at their site, this time with Codexis’ researcher shadowing for support. The result of the biocatalysts evolution runs at GSK during wave three will need to meet or exceed an agreed upon evolution performance target in order for Codexis to be able collect the wave three payment of $7.5 million.

We expect wave three completion and hence technology transfer completion to be accomplished from between five and eight quarters from now. By the end of the technology transfer period, GSK’s Upper Merion CodeEvolver capability will be equivalent to the state of the art for Codexis at that time. GSK will also have the single right upon completion tech transfer and our GSK’s sole option to acquire future improvements to the CodeEvolver technology for an additional three years, for an additional pre–arranged $3 million fee payable in advance at $1 million per year. Based on our expectation for the timing of these tech transfer payments, Codexis expects to receive $11 million in cash for the remainder of 2014 as a result of the GSK transaction.

Finally, turning to Slide 8. Slide 8 covers the scenarios in which Codexis would earn additional back end milestones and or royalties from GSK’s successful application of the CodeEvolver technology to the development of new processes or products. We have agreed with GSK to a set of tables that govern the amount of specific milestone payments that would be due to Codexis depending on the type and advancement of a given project.

Naturally individual milestone payments grow as any given GSK project or product advances across its development cycle. In addition, sets of table have been agreed upon with different milestone payment structures for different types of projects. Project using CodeEvolver different in payment structure depending on whether the is small-molecule of drug project is commenced during developmental stage or when the drug is already commercial, also project done in direct collaboration with Codexis will warrant higher milestone payments than projects done GSK on its own.

Finally, Codexis will be entitled to different milestone payments depending on whether the project is applied towards a GSK small-molecule drug, a therapeutic product, a diagnostic product or a prophylactic product. While we cannot be sure we will collect any of these milestone payments. We do not expect to collect any backend milestones until after the tech transfer period is completed in approximately two years. If we do earn milestone payments it could be very material to Codexis in the future.

Specifically, the aggregate milestone payments due Codexis for a given project from start to commercial stage can range from between $5.75 million to $38.5 million. There are some limits placed on the number of milestone payments Codexis is eligible to receive, for most prior project categories Codexis is eligible to receive these milestone payments for up to two or three projects.

There are two project categories for which there is no project limit on the number of milestone payment that Codexis is eligible to receive. In addition, Codexis will receive low single digit royalties based on net sales, if any of all GSK enzyme therapeutic products up to two diagnostic products and up to two prophylactic or non-enzyme therapeutic products that GSK develops using the CodeEvolver platform technology. The royalty rate can differ for the various types of products successfully commercialized using CodeEvolver.

Given our enthusiasm for the prospects of more widely applying biocatalysts across the world’s drug manufacturing, the boldness of GSK in acquiring this license and the fundamental strength of our CodeEvolver Protein Engineering Technology, we believe these backend milestones and royalties maybe a significant long-term generator for income for Codexis; over and above the more predictable and near-term technology transfer payments detailed in Slide 7.

Let me close out the discussion of the GSK agreement with the word of thanks and excitement for having the privilege of working with GSK. We are honored to be in partnership with this great drug company as part of this deal. We will strive to execute the deal successfully so that our new partner can fully enjoy the benefits of our CodeEvolver technology. We are enthused to share the vision of a more widely adopted biocatalysts world alongside another leading innovative drug company.

Before we close out the session, I want to take an extra minute to share our enthusiasm for the new CodeEvolver licensing business model. We believe that the prospect of delivering a series of CodeEvolver licensing deals along the lines of what we had just closed with GSK is promising.

Let me turn your attention to Slide 9. At the top of the page, you can see our typical project-by-project approach where Codexis drives the process. The CodeEvolver license is a natural alternative for us to present to those companies that are equally convinced as we are on the wider prospects for applying biocatalysts or protein engineering more generally.

The benefits versus our traditional offering are clear, enhanced ability and competitive advantage for the customers to develop novel products or processes, reduced variable cost to develop a biocatalyst and finally the enabling of a variety of additional controls versus working arms length with Codexis. We see these as compelling benefits to some select innovative customers, we have recently begun promoting a CodeEvolver license to other companies besides GSK and we expect these discussions will advance overtime.

Thank you for your time and attention and continue to support for Codexis. Let me now turn the call back to the operator for questions and answers.

Question-and-Answer Session

Operator

Okay, thank you. (Operator Instructions) okay and our first question comes from the line of Katja Jancic with Sidoti. Please go ahead.

Katja Jancic – Sidoti & Co. LLC

Hi guys.

John J. Nicols

Hi Katja.

Katja Jancic – Sidoti & Co. LLC

Thank you for taking my call. Could you talk a little bit about how do these discussions go and how long do you expect for it to take lets say to get another such similar contract? Is there a lot of interest, is this still something that is very unknown among the other companies or could you talk a little bit about that please?

John J. Nicols

Yes. Sure, Katja thanks. This is a fairly big concept approach and it is – we've always offered this as an option to the traditional project-by-project approach. So, the conversations advance slowly and because the magnitude of the economics of the deal and complexities of the deal, warrant a very deep and healthy and critical set of discussions between us and the potential customer to get comfortable with putting a deal in place like this.

We have begun discussions, but quite frankly we’ve been primarily focused on getting this deal with GSK in place. So, those discussions are very early stage at this point. And the universe – the potential customers for a deal like this is not nearly as large as the universe of potential customers for us to do our project-by-project approach. Nonetheless, we are hopeful that in the future we’ll be able to deliver a stream of deals, CodeEvolver licensing deals like this GSK deal. I wouldn’t expect more than one every year or maybe two as a feasible target for our company over the next five year horizon.

Katja Jancic – Sidoti & Co. LLC

Okay. So, this is something that really takes some time to develop.

John J. Nicols

Yes, absolutely it does. You get a sense from this call the legal complexities, the intellectual property complexities of the deal and we have to – both sides have to be very comfortable with those sensitivities to proceed and that takes time, plus the payments that we will require of customers just like we did with Glaxo are very significant and the customer needs to believe fundamentally that the value of having the CodeEvolver licensing capabilities in-house is going to more than pay for those kinds of economic payments.

Katja Jancic – Sidoti & Co. LLC

Okay. Now I know historically you have provided guidance, I’m guessing this was not in the previous guidance, this was not includes or is it partially already included in that guidance?

John J. Nicols

Katja, we have our second quarter earnings call is coming up in early August and we’re going to as usual provide an updated guidance in that quarterly earnings call in early August, so I’m just going to hold on questions like that until we get to our traditional quarterly guidance at that time.

Katja Jancic – Sidoti & Co. LLC

Okay, that’s all for me. Thank you.

John J. Nicols

Thank you, Katja. I appreciate it.

Operator

Okay thank you (Operator Instructions) Okay, we do have a question – our next question comes from the line of James Liberman from Wells Fargo. Please go ahead.

James Bennett Liberman – Wells Fargo Advisors LLC

Thank you. This is quite an exciting development, it’s far to say that you have fairly extensive relationship with Merck already and now this agreement with GSK, does that mean that you are pretty flexible of how you may arrange other agreements down the road, so this seems like a very creative approach you are taking.

John J. Nicols

Yes and thank you very much. Yes, we have a very longstanding relationship with Merck as its been highlighted by our partnership to develop biocatalyst for especially their Januvia diabetics drug and every major drug company will come out an opportunity of CodeEvolver license with a different set of strategic intentions and we would be generally flexible to those differing strategic approaches of one major drug company to another.

So while some of fundamentals will be pretty firm in our mind for striking the deal, we can be flexible on the key elements of the deal to fit with general strategic approach of another drug company as versus the way we structured this deal with GSK.

James Bennett Liberman – Wells Fargo Advisors LLC

Thank you very much that’s quite helpful.

John J. Nicols

Great. Thank you for the question. Appreciate it.

Operator

(Operator Instructions) And we do have a question and it comes from Greg Vinet [ph] private investor. Please go ahead.

Unidentified Analyst

Good morning. Could you possibly use the same approach for things that are outside the small-molecule pharmaceutical business such as going back to the chemical business for instance?

John J. Nicols

In theory sure, the technology the CodeEvolver technology which I described in one of the slides today is broadly a protein engineering technology, how to select the ideal sequence of amino acids to design a protein that perform a specific function. Our core business historically has been to design that protein to catalyze chemical transformations and especially in the markets space of pharmaceuticals.

However, it could have applicability to anyone whose innovative R&D processes require the design of novel proteins and so in principle overtime we maybe able to work a similar kind of arrangement with client outside of the pharmaceutical space. Thanks for your insightful [ph] question.

Unidentified Analyst

How about in the ethanol business that several years ago you all were working on? I guess that would be included also.

John J. Nicols

Well when we were designing enzymes or proteins for the hydrolysis of biomass into cellulosic ethanol, cellulosic sugars and cellulosic ethanol, we absolutely applied the CodeEvolver technology to come up with what we believe was one of the world’s best cellulosic ethanol enzymes. So the technology is certainly applicable in that space.

Unidentified Analyst

Thank you very much.

John J. Nicols

Thank you sir.

Operator

Thank you. And now I would like to turn the call back over to John Nicols for any final remarks.

John J. Nicols

Thank you very much. I really appreciate the attention, energies, good questions associated with our groundbreaking CodeEvolver licensing deal with GSK. We look forward to talking with you in our upcoming earnings call in early August and thereafter. Thank you very much.

Operator

Thank you ladies and gentlemen, that concludes your conference call for today. Thank you for joining us and you may now all disconnect. Thank you.

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