Codexis, Inc. (CDXS) CEO John Nicols on Q3 2019 Results - Earnings Call Transcript

Nov. 05, 2019 10:40 PM ETCodexis, Inc. (CDXS)
SA Transcripts profile picture
SA Transcripts

Codexis, Inc. (NASDAQ:CDXS) Q3 2019 Earnings Conference Call November 5, 2019 4:30 PM ET

Company Participants

Bruce Voss - MD, LHA, IR

John Nicols - President and CEO

Ross Taylor - CFO

Conference Call Participants

Brandon Couillard - Jefferies & Co.

Matt Hewitt - Craig-Hallum Capital

Doug Schenkel - Cowen

Swayampakula Ramakanth - H.C. Wainwright

Marc Silk - Silk Investment Advisors


Ladies and gentlemen, thank you for standing by and welcome to the Codexis Third Quarter 2019 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After speakers; presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded [Operator Instructions].

I would now like to hand the conference over to speaker today, Bruce Voss. Thank you. Please go ahead, sir.

Bruce Voss

Thank you. This is Bruce Voss with LHA. Thank you all for participating in today's Codexis' call to discuss third quarter 2019 financial results and business progress. Joining me from Codexis are John Nicols, President and Chief Executive Officer; and Ross Taylor, 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 that statements made by management are not descriptions of historical facts regarding Codexis, they are forward-looking statements reflecting the beliefs and expectations of management as of November 5, 2019.

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 the actual results. For details about these risks, please see the quarterly news release that accompanies this call, as well as 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?

A -John Nicols

Thanks, Bruce. Good afternoon, everyone, and thank you for joining us. I'm exceptionally proud of our strong performance for the third quarter. Revenues reached nearly $22 million up 29% over the prior year, representing our highest quarterly sales in seven years, and the highest quarterly revenues ever under our current business model. The quarter delivered on the stepped up revenue generation we promised for the second half of this year.

That momentum continues into the fourth quarter, enabling us to confidently reaffirm our full year revenue guidance of between $69 million and $72 million. Sales growth was spread nicely across our product and R&D revenue lines, with growth of 23% and 35%, respectively, versus the prior year. The strong revenue performance in combination with discipline to management of operating expenses resulted in an operating profit in the quarter.

Our Performance Enzymes business segment powered the quarter with revenues up 68% year-over-year, and comprising over $20 million of the company sales. In parallel and importantly, we continue to expand our Performance Enzymes revenue generation over a growing set of customers and a diverse list of industrial verticals. This is core to showing success against the segments mission to harness the untapped possibilities that are enabled by proteins. And to prove that Codexis and our CodeEvolver protein engineering platform is the way to do so.

Let's start with the momentum we delivered during the quarter and expanding and deepening our protein catalyst penetration in global pharmaceutical manufacturing. Here we are proud to share that five customers each contributed product sales of more than $1 million in the quarter. Merck again led the way with the use of our enzyme for their manufacturer of the active ingredient in Januvia, followed by a notable contribution again from Kyorin Pharmaceutical for their manufacturing of vibegron, a treatment for overactive bladder. The same top 25 pharma customer we highlighted for the first time last quarter took another seven digit product shipment in Q3 as a lineup for their expected drug approval and launch in 2020.

Novartis purchased nearly $2 million worth of one of our enzymes for one of their commercial drugs, noting that this is an infrequent manufacturing campaign that typically takes place less than once per year. And rounding out the list of seven digit product sales, one of the world's largest generic pharmaceutical companies continued their relatively consistent purchase of our protein catalyst for two of their commercial generic drugs.

Our CodeEvolver licensing strategy was also a major highlight for the quarter. For the first time we delivered material revenues from both the front end and the back end of CodeEvolver deals in the same quarter. The transfer of technology to our newest CodeEvolver licensee Novartis continues at an excellent pace. A team of Novartis scientists has been working in our Redwood City California labs for the last several months learning from their peer Codexis scientists. In parallel, we have been transferring materials and establishing the Novartis CodeEvolver lab in Europe. These activities earned us several million dollars of R&D revenues from the Novartis CodeEvolver deal in the quarter.

In addition, during Q3 we recognize a $2 million milestone payment from the GSK CodeEvolver license, the first of what we expect to be a growing stream of significant back end revenue generated from our historical CodeEvolver licensees. This milestone was associated with the advancement of an enzyme that is designed to improve a key step in the manufacturing process for one of GSK's commercial patented pharmaceuticals. More potential seven digit milestone payments to Codexis are possible for this enzyme should it continue to advance in its commercialization over the coming years.

Continuing our growing penetration of Performance Enzymes into pharma manufacturing, we performed CodeEvolver R&D services with four other top 25 drug companies in the quarter. For three of these customers, we have started their first ever 6 digit project work in the last few months. In addition we are pleased at the pace of adoption that Porton Pharma Solutions is having with their much larger set of custom pharmaceutical manufacturing opportunities. That model is working well also as they appear to be nearing more sizable installations for our technology with their customers.

Shifting to Performance Enzymes highlights and other markets. We had a relatively light quarter in the food industry, but our forward outlook in this sector continues to be encouraging. Tate & Lyle continues to market their new TASTEVA M stevia sweetener aggressively and they have shared with us enthusiastic product qualification responses from their wide customer base. The two newly initiated projects we discussed last quarter with Tate & Lyle and one other new customer each in different non-sweetener food ingredient applications are set up for growth in 4Q, and 2020.

In molecular diagnostics and molecular biology applications, once again we delivered combined R&D revenues in excess of $750,000 with the two new clients and two new applications, we highlighted last quarter. It's great to see momentum from these projects continue in Q3. And even better they are on top of revenues that are beginning to materialize in this fourth quarter for our DNA light days for next generation sequencing.

Other exciting new clients and application opportunities in these and other industrial verticals continue to move towards revenue generation, as well. As a highlight to the continued expansion and diversification of our Performance Enzymes customer base across both product and R&D revenue 12 customers exceeded six digits in sales in Q3, and half of them contributed sales above the $1 million level. These are exciting times for the expansion of applicability for our Performance Enzymes business.

Shifting to our Novel Biotherapeutics segment, sales to Nestle Health Sciences made up the full $1.5 million of segment revenues. As expected, the sales were lower than last year segment sales as revenues and costs associated with CDX-6114 as a clinical candidate for phenylketonuria or PKU were negligible versus making up the large majority of sales in the same quarter last year. Nonetheless, that program continues well in our partner's hands, and we know that they have dosed PKU patients with CDX-6114 for the first time in recent months.

Biotherapeutics discovery work partnered with Nestle Health Science for another disease target made up the vast majority of the segment's revenues for the quarter and that programs preclinical research results are quite encouraging as we close out the year. For our self-funded Novel Biotherapeutics pipeline, we continue to advance favorably across the entire list of targets. We've remained on track and look forward to sharing details of the two product candidates we expect to achieve partnerable status around year-end.

And lastly, I want to share our excitement with two events that demonstrate a coming of age of synthetic biology and its near infinite power to engineer new high value proteins. I'm truly proud of our team at Codexis for organizing a groundbreaking two day protein engineering forum held in Palo Alto, California last month. Attendance of more than 150 innovators from more than 50 mostly industrial institutions exceeded our expectations.

This forum highlighted recent successes in enzymatic manufacturing, biologics discovery, and agricultural and diagnostic applications as well as technical progress in library generation, high throughput screening and bioinformatics. We were thrilled to have Dr. Frances Arnold as our keynote speaker. You may recall that Dr. Arnold received the 2018 Nobel Prize in Chemistry for her pioneering work in the directed evolution of enzymes. The high level of interest and the quality of discussions and presentations generated tremendous energy over the entire two days and inspired new ideas to expand the impact of proteins in real world.

The event followed Codexis's leading participation and sponsorship at the Annual SynBioBeta Summit arguably the world's largest gathering focused on advancing synthetic biology and its impact on mankind.

Our participation included a main stage fireside chat between me and the Chief Technology Officer of Tate & Lyle, and several workshops, highlighting CodeEvolver, and our lead in the space in delivering a stream of real world commercialization successes. The success of both events is truly a sign of the increased importance of synthetic biology and protein engineering, as well as the preeminent role Codexis enjoys in this leading edge technology arena.

With those remarks, let me now turn the call over to Ross Taylor, who has done a great job to get up to speed and impact Codexis during his first quarter as CFO. Ross?

Ross Taylor

Thank you, John. Total revenues for the third quarter of 2019 were $21.9 million, up 29% from $16.9 million in Q3 of 2018. Third quarter 2019 revenue included $20.4 million from the Performance Enzymes segment and $1.5 million from the Novel Biotherapeutics segment.

Product revenue for the third quarter of 2019 increased by 23% to $10.4 million from $8.4 million a year ago, with the increase due to higher demand for enzymes for both generic and branded pharmaceutical products.

R&D revenue for the 2019 third quarter increased 35% to $11.6 million, up from $8.5 million in Q3 of 2018. The increase was primarily due to revenues from the Novartis CodeEvolver agreement that we announced in May and a milestone payment from GSK from the GSK CodeEvolver agreement that John mentioned previously. These increases were partially offset by the prior year completion of services to Tate & Lyle and lower development fees from the Nestle Health Science.

R&D revenue for the third quarter of 2019 included $10.1 million from the Performance Enzymes segment and $1.5 million from the Novel Biotherapeutics segment. Gross margin on product revenue for the third quarter of 2019 was 51% compared to 55% a year ago, with the decrease due to changes in product mix.

Turning to operating expenses, R&D expenses for the third quarter of 2019 were $8.7 million. This amount included $5.3 million from the Performance Enzymes segment, and $3.1 million from the Novel Biotherapeutics segment. The increase in R&D expenses from $7.9 million a year ago, was primarily due to higher expenses related to headcount, occupancy related costs and lab supplies, partially offset by lower outside services.

SG&A expenses in Q3 were $7.9 million, which included $2.0 million from the Performance Enzymes segment and $0.7 million from the Novel Biotherapeutics segment. The remaining portion of SG&A expense of $5.4 million is included in corporate overhead expense and depreciation expense.

The increase in SG&A expenses from $7.3 million a year ago, was primarily due to an increase in costs associated with facilities and headcount, which were partially offset by lower outside services.

Net income for the third quarter of 2019 was $0.3 million or $0.01 per diluted share, which compares with a net loss for the third quarter of 2018 of $2.0 million or $0.04 per diluted share. On a non-GAAP basis, excluding noncash depreciation and stock based compensation expense, adjusted net income for the third quarter of 2019 was $2.5 million or $0.04 per diluted share versus non-GAAP adjusted net income a year ago of $91,000, or zero cents per share.

Turning to the year-to-date financial results, total revenues for the first nine months of 2019 were $49.8 million up 12% from the first nine months of 2018. Product revenue was $24.6 million. R&D revenues were $25.2 million and consisted of $16.5 million from the Performance Enzymes segment and $8.7 million from the Novel Biotherapeutics segment.

Gross margin on product revenue for the first nine months of 2019 was 50% compared with 44% for the prior year period, with a change due to product mix.

R&D expenses for the first nine months of 2019 were $25.0 million and SG&A expenses were $24.2 million. We reported a net loss for the first nine months of 2019 of $11.3 million or $0.20 per share, which compares with a net loss for the first nine months of last year of $10.4 million or $0.20 per share.

On a non-GAAP basis, the net loss for the first nine months of 2019 was $4.4 million or a loss of $0.08 per share versus a non-GAAP net loss for the first nine months of 2018 of $3.4 million or $0.07 per share.

Cash and equivalent as of September 30th were $92 million, up from $53 million on December 31 of 2018. This increase includes proceeds from the $50 million private placement that we completed in June.

As we noted in the press release, today we are affirming the 2019 revenue guidance introduced on our conference call in February. We continue to expect total revenues for the year to be between $69 million and $72 million, which represents growth of 13% to 18% over 2018. We are maintaining our expectation for product sales to be in a range of $26 million to $29 million. And we are also affirming our expectation for gross margin on product sales to be between 48% and 52%.

Lastly, with regards to operating expenses year-to-date operating expenses of $49.2 million, trended modestly below our expectations so far this year. We currently estimate operating expenses should be in a range of $68 million to $69 million for the full year, compared to our previous expectation of approximately $72 million.

With that, I'll turn the call back to John.

John Nicols

Thanks Ross. Let me close my prepared remarks by highlighting the strategies that are driving our confidence to deliver a consistent double-digit near and longer term revenue growth. Our strategy begins with a relentless focus on our CodeEvolver protein engineering platform technology.

We were delighted with the reception at the Codexis sponsored events as we continue to expand and commercialize real world applications for high value proteins engineered with CodeEvolver at an ever accelerating pace. Proprietary artificial intelligence competencies are at the core of our ability to discover proteins that meet customer needs. The cutting edge synthetic biology practiced by the dynamic scientific teams at Codexis together with the constantly improving CodeEvolver platform, continues to demonstrate our prowess in rapidly discovering and commercializing novel high performing proteins.

Our ability to produce such exceptional financial results for the quarter further reinforces our confidence in our strategies. We continue to make progress growing and penetrating deeper into pharmaceutical manufacturing, as well as layering on growing revenues and new Performance Enzymes verticals like food, molecular diagnostics and molecular biology. Plus, we're confident in other new applications we develop on top as well.

In Novel Biotherapeutics, we are further validating the ability of CodeEvolver to discover and develop differentiated patentable, new drug candidates as we watch our partner advance our first clinical drug candidate, and we bring at least two other programs to partnerable status around year-end.

Our balance sheet featured more than $90 million in cash at quarter close and we are extremely well positioned to capitalize on a variety of high value growth opportunities afforded by our talented Codexis team and the versatility of our CodeEvolver technology. At the final note, we will be introducing 2020 financial guidance on our next conference call in February when we discuss our 2019 fourth quarter and full year results.

With that overview, I'd like to open the call for questions. Operator.

Question-and-Answer Session


[Operator Instructions]

John Nicols

While we are waiting for our first question, I would like to alert you of our busy investments conference schedule. We would be participating in the Craig Hallum Alpha Select Conference next Tuesday, November 12 in New York and will be at the Stephens Nashville Investment Conference the following day. We will be presenting at the Stifel Healthcare Conference on Wednesday, November 20, 2019 in New York. And will be at the Canaccord Genuity 2019 Medical Technology & Diagnostics Forum the following day also in New York.

Webcasts of our presentations at the Stephens and Stifel Conferences will be posted to the Investors section of For those of you heading to San Francisco for the Annual JPMorgan Healthcare Conference in January, please contact LHA to work with them to arrange one-on-one meetings with us during that conference. Okay, operator, we're ready for the first question.


Our first question comes from Brandon Couillard with Jefferies. Your line is open.

Brandon Couillard

Hi, thanks. Good afternoon.

John Nicols

Hi, Brandon.

Brandon Couillard

John, I would like to start with the food business. You mentioned it was a little bit light in this quarter. Can you just share with us an update of where Tate stands with the stevia ramp [indiscernible]? And at what point, you think, we can begin to ramp toward that $10 million number you've kind of talked about in terms of the revenue potential for that product at steady state? Thanks.

John Nicols

Yes, it's early days still. Tate & Lyle continues to very assertively market and position that product within their sweetener portfolio. And they continue to encourage us with qualitative inputs about how their customers are receiving the new better tasting TASTEVA M stevia sweetener. But the volume ramp has yet to really kick in.

We had a little bit of inventory build that they were working down through the most recent quarter. And we'll get as much color and quality as we can from Tate & Lyle about what they expect in calendar year 2020 as we finish this year, and come back forward to you in February and talk about 2020 guidance.

Yeah, but we're certainly expecting that their growth will ramp and the question just really is just what is that slope of curve. And how quickly can they penetrate their market. It's pretty hard to see at this very early state. But we continue to be encouraged by the long term prospects of the kind of product growth sales of reaching the top of our list in not too distant future Brandon.

Brandon Couillard

Excellent. On the Biotherapeutics side, understand that you may want to hold off to share a little bit more color. But any qualitative color you can share with us in terms of the nature of your conversations with other third parties, the quality of conversations and perhaps list of partners you may be talking to relative to where you stood with 6114 the first time around? And then in general, how many teams do you have working on discovery programs today and talk about maybe your capacity in terms of number of compounds, you can really thoroughly investigate with the team right now? Thanks.

John Nicols

Yeah, good question. So, partner bill status means that we've gotten our asset preclinically validated with preclinical research results that show the differentiation of our product versus the disease needs and/or competitive products that may be out in the market. So plus of course getting our patentability in a row. So that doesn't presume that we're in conversations with clients to reach this partnerable status.

On some of the areas we consistently show where we are with our Biotherapeutics preclinical research data to get a kind of an ongoing and a continuous sense of how strategic companies in the marketplace are seeing the data that we're generating. But, between, sharing with you that we may have a partner event or that we have the kind of data that's going to be driving preclinical value. We're going to be showing that kind of data as we finish this year, maybe into early next year. It's very close. So we're very encouraged.

The success of data generation. The discovery candidates that are coming out of the R&D team are a very impressive across, effectively the entire pipeline, both in partnership with Nestle, as well as for these programs that we've been working on now for a little over a year. Those have advanced from candidate generation into preclinical research trials. Those preclinical research trials on average had done very well to validate the kind of data that we believe will need to have a differentiable preclinical candidate to proceed towards the clinic.

So we're really excited with how well our Biotherapeutics discovery pipeline is advancing. Your final question with regards the number of teams or the kind of the R&D capacity that we're applying both for the whole company and the percentage that we're targeting for the therapeutics pipeline. Today, the company is operating roughly 15 or 16 parallel protein engineering teams. So in effect inside the labs of the office building that we're in right here we are working on 16 brand new to the world protein molecules right now.

As we've highlighted many times, the speed with which we can discover protein molecules and hit demanding real world targets is accelerating. So those that's the number of teams can discover more molecules going forward versus yesterday. And of those 15 or 16 teams roughly 30%, or five or so of those teams are focused on the Biotherapeutics pipeline right now.

The other 10 are mostly working on funded projects for the Performance Enzymes business. But we also continue to do some minor share of those 10 of the teams for Performance Enzymes were self-funding. For example, the two programs for the next generation sequencing area, we continue to invest in making our DNA ligase product even better and we are nearing the launch of the second product, the DNA polymerase for the next generation sequencing market as well.

Brandon Couillard

Thanks. That's helpful. And then just one for Ross, the guidance for the year implies product revenues in the fourth quarter is only about $1.5 million to $2.5 million, which would be the lowest quarterly number in sometime. Can you just help us with some of the puts and takes and how realistic that is for 4Q? Thanks.

Ross Taylor

Well, I think where we are year-to-date the product sales, I think at the higher end of that guidance range is probably more realistic as opposed to the lower end. At the same time, I think we had a really strong quarter in terms of product sales, the business hits a little bit, unpredictable. So, we just weren't real comfortable bringing that range up at this point.

Brandon Couillard

Very good. Thank you.

John Nicols

Thanks, Brian.


Our next question comes from Matt Hewitt with Craig-Hallum Capital. Your line is open.

Matt Hewitt

Good afternoon, and congratulations on the continued strong performance.

John Nicols

Thanks Matt.

Matt Hewitt

First up, on the food the non-sweetener food segment there last quarter, you had a couple new projects there. Sounds like there was a little bit of a pause here. Is that a function of those customers going back to their teams kind of figuring out where they stand? And do you expect that to come back in Q1 and how maybe walk through that process a little bit?

John Nicols

Yes, I think you got it at a high level. So the work with those two applications, one with Tate & Lyle and one with another client that we're not at liberty to disclose yet, took place in the third quarter. We generated modest revenues less than $1 million in combination for those two projects combined back in the third quarter. And there we did, we used CodeEvolver to create candidates that could be validated downstream with those clients.

And so really, it's a natural kind of short-term pause for the customers to go cast and actually trial it and get a sense for how the food ingredient and where the process that makes that food ingredients is performing and the customers. And so while it didn't really generate any significant revenue or much significant revenue in the third quarter. Like I commented in the prepared remarks, we continue to be encouraged that even in the fourth quarter and certainly into next year those two project areas are going to become bigger contributors for us, so it's still quite encouraging.

Matt Hewitt

That's great. And then regarding the PKU opportunity, I think it's Phase 1b is expected to be completed by the end of the year. Does the completion trigger a milestone or is it you know starting Phase 2, just walk us through what the next trigger would be on a milestone payment?

John Nicols

The next trigger is the completion of a Phase 1b patient trial. And so I think you mentioned that it will be done by the end of the year. Is that true? Is that some possibility that it could be done towards the end of next year and may not be done until 2021? And we will sharpen that for years as we come forward with, clarity about our 2020 guidance in the beginning of next year, but at the point at which that Phase 1b trial is completed that's when the milestone payment to Codexis triggered and that's a $5 million milestone payment.

Matt Hewitt

It's $5 million. Okay, that was going to be my next question. So that's great. Thank you very much congratulations on the strong quarter.

John Nicols

Thanks, Matt.


Our next question comes from Doug Schenkel with Cowen. Your line is open.

Doug Schenkel

Hey, good afternoon, guys.

John Nicols

Hey, Doug.

Doug Schenkel

Maybe just a follow up to the last question on Nestle. So according to clinical, Nestle initiated a 20 patient Phase 1 PKU study in early September. I'm just curious, like, is that what was expected? Maybe this is a naive question, but I thought normally because this was a rare disease situation that you might be able to move right to Phase 2a.

So I'm just curious if this is all as expected, and if the initiation of this small study was something that was suggested by the FDA or whether Nestle is just conducting additional pharmacodynamic study to have a better handle on the dosing.

John Nicols

Yeah, this was certainly not dictated, this was expected as the ongoing clinical plan for CDX-6114 by Nestle for the get go. This is what we've been expecting them to do. They've been running it according to plan. And I think that they're on the right clinical plan. And we're involved - of course they're running it, it's their expense, it's their control, but we think the way they're running the trials and how they plan to do the ongoing clinical trials through this trial and beyond assuming the data continues to bear out positively, is very appropriate and the right way to run this clinical program.

Doug Schenkel

Okay, all right. That's helpful. Thanks for walking me through that. And then one on the quarter that I just want to go back to guidance. In the quarter, obviously almost every line item was a bit better than expected. The one line that was maybe a little bit light up forecasts was gross margin. Was that just a function of mix or was there anything else going on there?

Ross Taylor

Yeah, that's purely just your product mix.

Doug Schenkel

Yeah. Okay, that makes sense. And then on guidance, if we go back to the Q2 call you indicated you expected the split of second half revenue to really be 40% Q3, 60% Q4. Based on guidance now, which was reiterated for the year and now it seems like you're expecting this to be about 50-50.

I guess I point out these facts just largely because I'm wondering if you're basically positioning Q3 straight as really just a function of pulling forward revenue from the fourth quarter or would you say that you're tracking ahead of plan? It feels like you're tracking ahead of plan. And maybe you're just being conservative recognizing the inherent lumpiness of the business. But I just want to make sure.

Ross Taylor

Yeah, I think a couple things there. I mean, we didn't keep our total revenue guidance the same as well as the product revenue guidance. And even though we did very well in the third quarter, we get better than we expected. We still do have a big number to accomplish here in Q4, we have to get $20 million plus in revenue here in Q4. I mentioned before, and I'm sure you guys have heard this in past quarters, past years.

I mean, business is a bit volatile quarter-to-quarter. We do have reasonably good visibility for results this quarter. But at the same time, we think we still have a fairly big hurdle to accomplish. And again, we've kept our total revenue guidance the same and we think that's very reasonable at this point.

Doug Schenkel

Okay. All right. That's all super helpful. Thank you for taking the questions.


Thank you. [Operator Instructions] Our next question comes from RK with Wainwright. Your line is open.

Swayampakula Ramakanth

Thank you. Good evening, folks. Most of my questions have been answered but a couple of them. To start off, you were talking about Porton Pharma partnership. Trying to understand what's the status there regarding finalizing the tech plans for and also potentially them starting to use products from the CodeEvolver in their manufacturing processes. If you said some commentary before I apologize, I got on the call a little late.

John Nicols

No problem. The partnership with Porton is going very nicely. So we're a little over a year into the partnership. The technology transfer and demands for that partnership were modest, nothing like what we're doing right now with Novartis. Because in the case of Porton we just set them up with screening capabilities and library capabilities, no protein engineering like we do with Novartis.

So the technology transfer has been done quite some time ago, certainly well before the end of last year. So they've just been out running the model. And just to reinforce the model, importancies and many, many more pharmaceutical manufacturing opportunities that Codexis does that's their business, it is pharmaceutical manufacturing. So they bid on many different projects every month.

And the model is for them to be very rapid and efficient in screening our existing biocatalysts, protein catalyst against those much larger set of manufacturing opportunities. And they've done a great job of that. They're very efficient. They're great chemists. We're very collaborative with them. We talk routinely about kind of screening results that they get. We talked about whether its warrants doing protein engineering back here in Redwood City to support them.

And with that, now with that traction, and with their growing experience with protein base catalytic processes, we're now starting to see them see real prospects to get our technology installed. So we're quite encouraged, we're very pleased. They're a very, very competent, western oriented, sophisticated partner and we're continue to hope for and look forward to growing things with, growing business with Porton.

Swayampakula Ramakanth

Thank you. And regarding our CodeEvolver licenses. So because I think we will - I was under the impression that we can pollinating once you get your license started. So where are we on that track at this point? Should we expect something within the next six months in terms of initiating a new CodeEvolver license?

John Nicols

No, I wouldn't want to set your expectations for another CodeEvolver licensing deal to be struck that quickly RK or any other investor. It takes quite some time for the client themselves to build a business case that justifies the kind of expand for the CodeEvolver license entails, not only the licensing fees to Codexis, but also the investment in some equipment, the dedication of laboratory footprint and the hiring of at least a dozen or more employees to run the operation.

So it's a big investment decision. And as we've witnessed with all three of our CodeEvolver partners it takes them some time to validate the applicability. It usually means that they're working on projects with us to show that the technology works against their kind of molecules that they're trying to commercialize.

So, just a little bit of a long winded answer. We are having excellent progress as you heard consistently to widen our penetration of big pharmaceutical customers who theoretically could justify CodeEvolver license investment. We're getting more and more business. Doing more and more CodeEvolver work with our larger number of these companies. And those are all just the right steps to build the business case and to ultimately bear fruit for other CodeEvolver investments beyond Merck, GSK and Novartis.

So we'll keep you posted. We're working that processes as assertively and as effectively as possible [technical difficulty] as quickly as you you'd hoped for in your question.

Swayampakula Ramakanth

No. Okay. Thank you. Then regarding you're talking about widening the revenues streams are in that sense, you were talking about how this quarter there were seven customers who contributed $1 million or more. So how sustainable are these revenue streams and what potentially could be the pros and pushes for these revenue streams over the next quarters or year?

John Nicols

Yes, I mean of the seven; we've got Novartis, Merck, Nestle. And these are solid consistently growing consistently contributing partners for us. I highlighted a world leading generic manufacturer, their products are commercial, our enzymes are commercial. So that's a pretty steady sustainable revenue base.

Another one of the $1 million plus, pharmaceutical customers have mentioned them two quarters in a row where they lifted $1 million or more of product sales. Lining up for their approval, they've already gotten positive Phase 3 data. So it's highly likely they will get the approval and launch. So but we would be waiting for them to launch and get traction in their market.

So assuming all that happens that'll be a very sustainable multimillion dollar revenue generator for the company. I did put some color into a relatively spotty $2 million product shipment to Novartis in the quarter. This is a relatively small, commercial, active ingredient for Novartis. So they don't manufacture their product routinely, they manufacture it in batches. And usually not as frequently as once per year.

So we had that occur in the third quarter of this year and probably that won't occur again until possibly next year, but maybe the year after that. So that's not as consistent of a revenue generator as, certainly not on a quarterly basis is the others that I highlighted.

So I think, that's a fairly detailed answer, RK to give you and other investors some confidence that these, when they reach this $1 million plus status, they generally are in a stage of sustainability, not always but generally. And that growing that list of million dollar plus clients is a great sign on average of growing the sustainable revenue base for company.

Swayampakula Ramakanth

That is for sure. Thank you. Thank you for taking all the questions.

John Nicols

Thank you, RK.


Our next question comes from Marc Silk with Silk Investment Advisors. Your line is open.

Marc Silk

Thank you for taking my questions. So John, the first one is no matter who wins in 2020 selection, the big focus will be on reducing the cost of medication to the masses which will impact Biopharma's gross margins. How could this shift impact Codexis?

John Nicols

Yes, boy, that's a softball. Thanks. It's definitely a modest tailwind for the company. That as big pharma in particular has pricing pressures impacting their margins, that one place they can turn is to the cost of manufacturing and that's exactly what our technology enables is to properly applied our technology can enable a step change in the costs of the active ingredient, which is the largest cost component of pretty much every drug out there.

So, we see this as an underpinning that's enabling the strength of our core business the Performance Enzymes for our pharmaceutical manufacturing. And we're encouraged by it. We see a little more support for process engineering within big pharma in general, which then enables more sophisticated higher capacity teams to work with us in our technology.

Marc Silk

Well, if that's the case, hopefully the baby doesn't get thrown out with the bathwater if these prices do go lower. Next question with the rise of the plant based meat products from the likes of Beyond Meat. Is there any opportunity there people kind of reached out to you I just was kind of curious?

John Nicols

Yes, it's a really exciting trend in the wider synthetic biology world that companies like Beyond Meat, Impossible Burger. There's other bio synthetic pathways to natural things that we're used to consuming that are having some success in the world. So we find this a very interesting class. These companies are relatively new and their penetration of markets is relatively new, but this could be a prospect space for the company. It hasn't been so far certainly not materially, but this is an area that we are watching and we'll see how Codexis is rolling that unfolds overtime.

Marc Silk

That's interesting. And for the life of me, I'm still trying to figure out, while your stock got pummeled last quarter, whether they didn't think you're going to hit your guidance. I think that question is answered. But more importantly, let's say it was that you were going to increase the amount of projects you were self-funding, which obviously increases the costs near term, but also increases your revenue potential in the future.

So I would assume that the shift to the self-funding and less partnerships is something where, with your knowledge, you can kind of figure out because you have all the answers, where you'll know which ones make sense to sell fund, and then which ones might be more beneficial to partnerships. Is that kind of - am I thinking correctly?

John Nicols

Yes, five or six years ago, we didn't sell fund anything. Today close to half of our R&D capacity is towards self-funded projects, not quite half, but close. And we've got a great batting average of pickings some winners, right. In the beginning of our stevia story was a self-investment. And then we brought it to Tate & Lyle and made the deal with Tate & Lyle.

The PK, the orally administrable enzyme for phenylketonuria disease that was a self-investment until we made the deal with Nestle. So we are priding ourselves with a great batting average and we think we can continue that. And clearly when we self-invest, that puts us in a stronger position to monetize the asset and a higher value way for Codexis and its shareholders. So that's increasingly what we're doing. But at the end of the day, a lot of times the best way to go forward is a funded partnership to spread the risk to give us some short-term cost cover. So we've got a very nice mix of both.

Marc Silk

Great. And I do appreciate you and the other insider buying shares back to just basically saying listen, this is overdone, and I have enough confidence in the company to put my money where my mouth is. So congratulations on a good quarter and continued success.

John Nicols

Thanks Marc.


Thank you. This concludes the question-and-answer session. I now like to turn the call back over to John Nicols for closing remarks.

John Nicols

Okay. Thanks everyone for your questions. We're very excited about our results for the quarter, and our outlook for the remainder of 2019 and beyond. We look forward to providing ongoing progress updates to you. And in the meantime, everyone have a great day. Thanks.


Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

Recommended For You


To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.