Codexis, Inc. (CDXS) Earnings Call Transcript & Summary

All right. Hi everybody. This is Doug Schenkel from the Cowen life science and diagnostic tools team. It's my pleasure to welcome John Nicols, President and Chief Executive Officer of Codexis to the 41st Annual Cowen and Company Healthcare Conference. John, thanks for being here today.

My pleasure. Appreciate it.

So John's been with Codexis since 2012 and has been key to really turning around the company and positioning it for sustained growth in SynBio, building partnerships with global biopharma giants as well as in other industries. And increasingly, the company is advancing more proprietary products. John, I thought maybe what we would do is I'd hand it over to you. You could provide a little bit of background and updates on the story. And then I'm sure we'll have some time left after to just get into some Q&A.

Yes. Thanks, Doug. I'll just have a couple of minutes of kind of introductory kick off remarks. So first, I'll be making some forward-looking statements today, so I encourage everyone to review the company's risk factors detailed in our recent March 1, SEC filing. So Enzymes. So they're nearly unlimited potential to have a growing impact in our world. How Codexis is uniquely tapping into that potential, enabling better, healthier living, and enhance sustainability of our planet. Botanica defines an enzyme as a molecule that acts as a catalyst regulating the rate at which chemical reactions proceed. Succinctly, enzymes enabled chemistry within a cell throughout this human body all over the planet to be performed more efficiently. The lunch you just ate is being digested with naturally occurring enzymes. The beer you might have had last night was brewed with them. All cellular level biochemistry is powered by enzymes. That's cool. But the pallet from which we can design enzymes is effectively infinite, hundreds long chains of 20 different amino acids to choose at each link. 20 to the x 100 power possibilities. Mother nature has barely scratched the surface of tapping into this limitless enzyme optionality. The McKinsey Global Institute quotes the bio revolution could transform what we eat and where, the medicines we take, the fuels we use and how we construct our physical world." Imagine all the products that could be created to improve our world if we could solve with the power of enzymes. While that limitless enzyme design pallet ignites enthusiasm, all that optionality is also a huge problem. How do we correlate the universe of unique enzyme structures to each of their relevant performance attributes? How do we best determine what real-world issues can be solved by new enzyme product innovations? For each of those, how does the enzyme need to perform, under what conditions at what scale? A successfully commercialized enzyme must solve for all of these questions in tandem quickly, efficiently. That is exactly what Codexis has focused its entire 20-year history on. Indeed, as the McKinsey study states, synthetic biology holds great promise to disrupt much of the global economy. But how does synthetic biology interact with the physical world after all through enzymes, Codexis enzymes. At the heart of everything we do at Codexis is CodeEvolver. Our enzyme engineering platform. Refined over our entire 2-decade history, multiple factors compound improvements simultaneously making CodeEvolver the most powerful, largest scale enzyme discovery engine in the world today. An enzyme engineering project 15 years ago took 20 scientists 2 years to discover. That same type of enzyme discovery project now takes a team of 3 to 4 scientists less than 3 months, ever improving machine learning algorithms, acting on the rapidly growing proprietary enzyme data we generate ensures that CodeEvolver continues to shrink the time needed to engineer tomorrow's value-creating enzymes. And where others can reach maybe 5 or tenfold enzyme performance improvements, CodeEvolver can often achieve 1,000 or even 100,000-fold improvements in the same period of time. It's no wonder that when GSK, Merck, and Novartis sought to bring an enzyme engineering technology in-house. With every possible option at their disposal, they each chose to license CodeEvolver from Codexis. Today, we are running 16 simultaneous CodeEvolver enzyme discovery projects, creating 16 new high-performing, patentable new enzymes, the lifeblood for tomorrow's commercialized sustaining revenue products. We've amassed over 1,600 patents worldwide, up from 1,100 just 3 years ago. So where can the world most benefit from new enzymes? The Codexis business development teams have been exploring that question for nearly 2 decades, too, with our efforts compounding and rapidly expanding the list of high value applications, for our engineered enzymes. Today, we are pointing CodeEvolver at 3 large high-value growing markets, both in partnerships with some of the world's greatest, most innovative companies, as well as a growing number of projects self-funded and championed by internal Codexis experts. Enzymes that enable more efficient and sustainable manufacturing solutions, built over decades working with the world's greatest pharmaceutical companies. Extending into food and other industrial verticals with larger product opportunities that can commercialize faster. Life science tools, enzymes that improve the reliability of genomic diagnostics and enable the extension of countless new applications in molecular biology. And finally, harnessing engineered enzymes as a source of new differentiated drug candidates, enabling the next generation of gene therapies, and the oral administration of large molecule drugs. We're very excited -- we're at a very exciting time in Codexis' history with our product generation flywheel truly picking up steam. CodeEvolver continues to accelerate its discovery power. We're expanding our R&D capacity, and we're targeting a growing number of projects that can both commercialize faster and address larger recurring revenue possibilities. We're like a baseball team getting more times at that, getting on base more frequently and with more extra base hitters on deck all at the same time. So thanks for allowing me to kick off with the overview, Doug. And so looking forward to getting into some Q&A with you.

Thanks, John. That was great. Really helpful to just set the foundation for our discussion. One thing amongst many that I found really interesting in that, and we've heard you talk about this before, is just how much more powerful and how much more efficient CodeEvolver has become since you first rolled it out about a decade ago. I think you said when it started, some of those projects would take -- could take 15 years. Now you're down to 3 months. You pointed to other metrics that were emblematic of improvement in speed and efficiency. How important have the different improvements spends opening up new markets. And as you continue to evolve CodeEvolver further, are there other adjacencies? I mean you have plenty, don't take this the wrong way. But if you keep improving at the rate you've been improving, should we be thinking that this actually opens up new opportunities for Codexis beyond the myriad you've already mentioned?

Yes. Thanks, Doug. Absolutely. The source of advantage really comes from, I'll say, data. And after 20 years, we're making this -- our CodeEvolver platform more efficient and scaling it significantly, and we continue to scale it. We're creating more data, which helps us uniquely understand the relationship between changing enzyme structures and what that translates into real-world performance parameters. And so accelerating that data knowledge, and in tandem, improving the machine learning algorithms that can predict into unknown space and enzyme structures is enabling us to go after new enzyme classes that we wouldn't have even thought to go after 5 years ago. So a big chunk of our portfolio today are new for Codexis' classes of enzymes. We continue to create standard classes of enzymes for growing list of pharmaceutical manufacturing operations and we've gotten really fast at creating enzymes for those applications, which is great because it minimizes the barrier to our customers applying our technology. But what's most exciting is to go after new enzyme classes, like what we're doing in DNA synthesis. It's -- when we go after new classes, it does take more time and intensity of our R&D teams to create a commercial enzyme. But what can be unlocked is so much larger in terms of value creation. And so we're getting faster at the kinds of enzymes that we did in the past, and we're able to crack open new classes of enzymes that really can break open value creation that was unheard of for us in the past.

One of the things I remember talking with you about when we're first getting to know each other and our experts getting to know Codexis was the history with Januvia with Merck. And they've been a great partner. That was a great validator for your approach. But I think it took a while to get them on board. As a new approach, a newer company, customer acquisition was tougher. And, as it is, I think we're any company with any new technology at that stage, and it was also harder to get the economics that you might have wanted to get at that point. Again, good partner, no criticism there. But I think what we've seen over time, I think at least in biopharma is the activation energy, what's required to get biopharma onboard, it's got a lot easier, right? You don't have to go in and convert every time. Now you can preach the gospel and folks get on board. Is that the right way of thinking about it in biopharma, specifically? And then where are you in that journey as you kind of try to move into some of these other adjacencies?

Yes. No, I think that's very accurate, Doug. And hats off to Merck for taking the early risk with us now a little over 10 years ago to believe in what we believed we could do because it was based on belief at the time. We had never developed an enzyme that could transform the complex small molecule drug for Januvia up until that point in time. So they took a leap with us. And what happens from there is wonderful. We've been able to publish on that story. We got accolades for the successful transformation of the Januvia drug substance manufacturing process. And with any Merck, that was the torch to do a lot more. And the number of molecules that Codexis and Merck have worked on transforming with enzyme -- enzymatic processes has just been tremendous. Maybe half of their small molecule portfolio over the last 5 years has been looked at with small molecule -- with enzymatic transformations. But then outside of Merck, people see what we've done for Merck, and they would not have believed that we could apply an enzyme at commercial scale to make a difference in a complex process like that. And then with time, Codexis has proved itself a reliable supplier to critical supply chains for manufacturing profitable drugs. I mean, Merck is making a lot of money off at Januvia, and they depend on us to be able to manufacture their drug. So all of these lend credibility, both inside to make the next project easier and outside to make more believers take the leap of faith. And that's starting to now translate outside of pharmaceuticals because as you know, we've been working with pharmaceutical companies for 20 years. And now we're looking to use enzymes to do breakthrough chemistry in other markets, and we've broken in early days in the food industry with Tate & Lyle, and we've now brought 2 commercial success stories forward with them in the sweetener space. We're looking at other project opportunities with them, and we've got a pipeline of other projects in the food space that follow the public successes that we've had with, Tate & Lyle there. So it does -- there's still always a show-me attitude in the world. But with these kinds of anecdotal stories, it carries a good bit of way to break down the activation energy. And with CodeEvolver getting more efficient, we don't have to drive as much upfront at-risk R&D to get there.

John, there's a lot to talk about. And as you mentioned, in your response to my last question, you again highlighted the fact that this isn't just pharma, pharma is great, but there's a lot of other opportunities. That being said, let's stay with pharma for a minute or 2 longer.

Sure. Sure.

I wrote this down. I did go back and double check it. So again, just to clean up if I'm messing this up. But I think you've said you have 19 Phase II and 3 small molecule projects in the pipeline. Are there -- presumably, there's a bigger funnel of earlier-stage projects as well. So this pipeline is going to continue to get bigger, correct?

It's going to get bigger just from what we've done historically, plus new projects that we take on every month in the company.

And then I mentioned Januvia. I mean that currently represents about half of total product revenue right now. Is there anything in the pipeline that would be similar to Januvia's revenue potential for the company?

Yes. If you let me go outside of pharmaceuticals and talk about [ science ] tools. Yes. No, just real quick in pharmaceuticals. Those 19 Phase II, Phase III projects have almost tripled in the last 4 years. We had 7 in 2016. And so -- and projects in this stage don't require Codexis R&D time anymore. We're basically just waiting for the advancement of the drug for us to be in a position for a new recurring revenue product sale, like we've done with Allergan and Urovant, [ vibegron ] in the recent past. But typically in the pharmaceutical arena, the peak revenue opportunities aren't as large as Januvia. Januvia is a very large drug. But as we've ventured into other markets, the enzymes that we've developed for Tate & Lyle for the better-tasting Stevia, that could potentially grow to be as big as the sales revenue we have with Merck today for Januvia. The recently launched enzymes for life -- in life science tools could also be in that range. We -- developed. I think you'll get into it. We've developed DNA polymerase for next gen sequencing. We developed an RNA polymerase for messenger RNA-based manufacturing. These products, if they hit their stride that we believe they will could be as large -- and the number of these kinds of products that we're acting on and advancing and developing is accelerating for the company as well. It's another piece of why we believe there's going to be continued top-line acceleration for the company as we're working on more and more larger project opportunities.

Yes. That's really helpful. And John, the way I think about it, I think the way you think about it, too, in some ways, is if you bring it back to the Exela model, there's all these shots on goal. I'll move from baseball to hockey and maybe a patronizing in Canadian way. But you get more shots on goal in pharma, there may not be something as big as Januvia, but over time, you should get a stack of revenue streams associated with all those pharma projects.

That's right. And the way our business model is real quick, is we always have the customer pay for the upfront R&D. So we're never really digging an investment hole, and we're setting up for future annuities. So...

Yes. And then to your point, mixing metaphors, but you get a shot at more doubles, triples and home runs outside of pharma could happen in these pharma partnerships but are on the product side. But in proprietary pharma development and then in other areas like food with Tate & Lyle and with the proprietary enzymes that we'll talk about in a sec, that that's where the numbers can get bigger on single products.

That's right. That's right. And we're working to encroach a fairly large and mature set of enzyme industries also that are much larger than the kind of enzymes at scale that we've developed with Merck. And our approach is to showcase CodeEvolver. Our history of improving enzymes beyond people's expectations and to say, hey, you're using an enzyme, we can make it better. What would you like that enzyme to do that it's not doing, stability, coexistent with other components in the recipe, new value-adding performance and convince them that we can use CodeEvolver to do that?

There is a lot to cover here, John, in 10 minutes. So I'll try to get as far as we can. I won't see the portfolio justice. But look, let's talk a little bit about life science and diagnostic enzymes. You talked about this in your prepared remarks, but just a refresher, you guys have 5 life science and diagnostic enzymes either launched or expected to launch, I think, over the balance of this year.

Correct.

So those include an exclusive partnership with Roche for your DNA ligase, a deal with Alphazyme's, which is a CMO, it's a launch of polymerase. Then there's at T7 RNA polymerase which I think is for mRNA vaccine manufacturing and a reverse transcript days, which has a role in RNA point-of-care diagnostics. And before I have to stop and catch my breath, you have a partnership with Molecular Assemblies for enzymatic DNA synthesis. So there's a lot going on here. On the DNA ligase, which again, is partnered with Roche, how big an opportunity does that project represent? And why was Roche the right partner here? I think beyond just being a big company, I think they have a lot of expertise in an important market share position. Why did you go with Roche?

Yes. So I'll take each of those in turn. So the DNA ligase was our first attempt to bring an enzyme into licensing tool applications. And as you know, it was focused on next-gen sequencing workflows. And the ligase is critical for conversion of target DNA to allow it to be amplified and detected by next-gen sequencing machines. So this conversion step is really critical. We think we nailed that. We had significantly higher conversion, especially when the target DNA is in trace quantities like it would be in liquid biopsy or in earlier stage oncology detection, for example. So we went out and marketed it. And we, ultimately, we were promoting it to, say, for example, liquid biopsy companies, et cetera. And it drew the attention of leading next-gen sequencing kit workflow players like Roche. And with Roche, they -- so we did strike a deal with Roche, we announced it at the end of 2019. And really, what they do is they open up far more market than we could access on our own. They are in the process of installing it into their -- on their library preparation kits, for their next-gen sequencing business, I think you, Wyeth, well know the Roche Sequencing Solutions is a leader in the space. And so we're very encouraged about their adoption of our -- their use of our DNA ligase in their upgraded new library prep kits. The nature of the relationship is -- Roche has got the capabilities to manufacture enzymes like these. So we struck a license deal versus us making and selling the enzymes, which is more typical for us. So as Roche sells their library prep kits, Codexis is set up to earn royalties on those kit sales. And we expect that with expected penetration of their markets. This should turn into low to mid-single-digit millions of dollars of 100% margin royalty revenues as it gets installed in the marketplace. It could be bigger, it could be smaller. It's early days for us to see, but that's the expectation of the partnership in terms of royalty generation for Codexis.

This is probably about as far as I've made it in any discussion this week without bringing up COVID. I don't think we've talked about that yet here today. You've talked about the T7 RNA polymerase, which could play a role in the development or it could play to be a component in COVID-19 Vaccines. Is this still something you're spending a lot of time on -- time automating? It's not going to be part of the first few vaccines that have come out but unfortunately, it sort of seems like we're going to need vaccines for a while. So is this still an exciting opportunity and unmet need that you're fulfilling?

Absolutely, it is. It's a really exciting product launch for us. And as we work with the current message RNA-based COVID vaccine companies, we -- they worked with us to validate our -- the improvements that we've engineered into our RNA polymerase, more efficiency, so less of our enzyme is needed compared to incumbent enzymes. We've built in some capping efficiency. So there's the ability to minimize the cap agent that's also needed in the manufacturer of messenger RNAs. So we've gotten validation of that. It hasn't led us to get -- to be able to get into the supply chains for the current COVID manufacturing, as you noted. But it did reinforce the incremental value. And now we're getting increasingly installed in developmental stage, messenger RNAs, not just vaccines, not just future COVID vaccines, but other therapeutics. And the whole success story of messenger RNA, COVID-19 vaccines has just shown the world, got a lot of wind in the sales of messenger RNA as a modality. So there's a significant growth in developmental stage programs that we believe we can get widely installed. And we've already had our first commercial sale in the developmental pipeline. So we're quite excited about the prospects for.

Yes. It's a really important point, right? I mean that's silver lining out of the pandemic is the advancement of -- and the validation of these mRNA-based approaches, and it's not just going to be for COVID. You're going to see a lot of new vaccines with these approaches' therapeutics. So you can play a role there.

Yes. Absolutely.

What about Molecular Assemblies? You've mentioned that you're targeting, it could be over a $1 billion synthetic DNA market? How does molecular assemblies get you into that field?

Yes, the promise of synthesizing DNA with enzymes is really compelling because all biology synthesizes DNA inside our bodies inside ourselves with enzymes. But you take those enzymes outside of the cell and the nucleotides outside the cell the chemistry doesn't work. The enzymes aren't stable. So it's been a really difficult target to achieve. And back to one of my -- our earlier discussions, this is exactly what we loved to go after where an enzyme is deficient against a target need that could really unlock significant value. So we saw this as an opportunity. We found Molecular Assemblies as a partner. Molecular Assemblies is a great chemistry team, and they're building a platform technology to synthesize gene length DNA as a core business for themselves. They're a private based company based in San Diego. So we've been working on engineering those enzymes. We're making tremendous progress. We expect we'll be able to finalize enzyme discovery project around the third, maybe the fourth quarter of this year. And finalized for us means those enzymes can be cost competitive with the current economics of synthesizing DNA. With that, we'll -- we own equity in Molecular Assemblies. We're a minority shareholder. I serve on the Board. So we'll work on commercializing their business to synthesize DNA as their core offering. Codexis' enzymes will be used, and if it works well, Molecular Assemblies would be a very successful company, and our interest in that company will grow along with it. So super cool way to bring enzymes to the world and super significant opportunity for us to be targeting.

John, we're about out of time. And the fact that we didn't actually get that far talking about all your products and development programs just speaks to the breadth of your efforts.

Thanks.

With the 30 to 60 seconds we have left, I just want to make sure that I asked you on the therapeutic development side, where you are developing your own therapeutic candidates. Some of them are still all your own. Some of them have been partnered with folks like Takeda and Nestlé Health Science. What are the key milestones we should be looking for in this category of product development for 2021?

Yes. Yes. We had almost nothing in this space 5 years ago. Today, we have 12 projects in the pipeline. 7 of them are partnered with Nestlé Health Science and Takeda. One is already in clinical development. So 1 of the key milestones for Codexis this year is the second project that we've been working on in partnership with Nestlé will reach clinical stage development, we estimate in the third quarter of this year. We co-own that asset. So we are looking to hold equity on that molecule as it moves into clinical development. And hopefully, as we expect, it reaches a proof-of-concept to clinical point. That would be a milestone for Codexis to own a part of an asset. In addition, we need proof of -- we're developing proof-of-concept for engineered enzymes in gene therapies, and we're working on new programs self-funded beyond the 7 partnered program. So it's super vibrant and these are the kinds of enzymes that could really create breakout value per project for our company.

John, we're going to have to leave it there, but that was great. We really appreciate you taking the time.

My pleasure. Thanks very much, Doug. Good luck with the rest of the conference.

Thank you.