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

Thanks for joining us to have a conversation with John Nicols, CEO of Codexis. Codexis has developed a unique platform called CodeEvolver that helps to take natural enzymes and, with some specific protein engineering steps based on CodeEvolver, develop them into highly efficient enzymes that can be used to improve manufacturing efficiencies in pharmaceutical, food or industrial biotechnology sectors and also generate novel biotherapeutics or even develop life science tools. While sustainable manufacturing has provided a strong base for Codexis, the management has been focusing a lot of their energy recently in life science tools and biotherapeutics. Happy New Year, John. Glad to see you and appreciate you accepting our invitation to talk to our audience today.

Let's start off our discussion by talking through some of your thoughts for commercial growth in '22 and then also on the long-term strategy. So John, during the last couple of years, Codexis has gone from being known for just a biocatalyst company to one that has developed its own Biotherapeutics business while still paying some -- same or even better attention to sustainable manufacturing. So what's the secret sauce there? And how do you see this natural progression continue into a sustainable growth company, not just in '22 but even beyond that?

Thank you, RK. It's a pleasure to be here and a great opening question. The secret sauce is the continuous productivity enhancements of our platform technology. Our ability to more rapidly and more effectively discover new-to-the-world enzymes that deliver new-to-the-world performance properties. And through the acceleration of -- via machine learning, predictive capabilities, continuously improving in our ability to automate the actual creation and testing of enzymes, we just continue to accelerate our ability to discover new products. And in parallel, given team can discover more quickly a new product, we're also scaling up and adding new teams. So we're basically doubling this capability to discover new products over time. And so we're discovering more. And that's been married together, RK, with commercial teams that are increasingly capable of working externally or identifying on their own what kind of new enzymes and the kind of proteins the world can benefit from. So this combination of a platform that's discovering more quickly and our team understanding more and more markets where enzymes and proteins as, frankly, an untapped class of new materials can bring value to the world. And these things are accelerating together and it's translating into more project growth, more partnering deals and an acceleration of products that we are commercializing and selling on a continuous and sustained basis. It's a really exciting chapter, and we see these accelerators continuing going forward.

Talking about excitement and acceleration. Just in the recent past, the Sustainable Manufacturing vertical, the product revenues have grown at a steady pace throughout '21 and also we saw the Pfizer COVID-19 antiviral, which was a good testament for what your team can achieve. So what steps are you and the management team taking to ensure that, that base business continues to grow while you also focus on some of these high-growth revenue verticals, such as Biotherapeutics that we'll talk about later?

Yes. Yes. I mean engineering enzymes, or as you referred to them, as biocatalysts that significantly enhance the manufacturing process for complex drug molecules has and continues to be a core for the company. And we've been focused on that market and its growing needs that can benefit from engineered enzymes for our entire 20-year history. And so we've become quite efficient, and we become quite well known in the industry as a leader in being able to bring biotransformations to complex drug manufacturing processes. So like when I first joined the company 10 years ago, we had to build -- we had to work hard to build awareness. Today, awareness is there. Success stories like we've had in the past with Merck on Januvia manufacturing being overhauled by our enzymes, now with Paxlovid, our enzyme being a core ingredient in the manufacture of the world's leading antiviral solution for COVID that's unfolding. We're not only showing how widely applicable our engineered enzymes can be in drug manufacturing, which we showcase growth in applications consistently year-over-year, but we're also showing how relevant we are at scale, how quickly we can bring engineered enzymes into tomorrow's molecules, how critical we can -- how well we can deliver in critical supply chain buildup activities like supporting Pfizer in the rapid buildup of tremendous scale of Paxlovid. All this is helping to enhance our reputation and how mature we have become in our ability to serve this industry, and it's really helping us to domino further without a lot of investment as a company. So we're very confident. We have a lot of headroom to continue to grow. Our engineered enzymes are still not widely applied in drug manufacturing processes, so we see a lot of headroom and we see a more simplified process to get the marketplace to reach out to us and a more streamlined ability for us to serve them as we continue to mature and build this. So continue to see nice solid double-digit growth from this area even over -- even without the Paxlovid, which is a tremendous big growth story for the company underneath significant growth and penetration and translation into new product sales to the company.

Yes. So again, talking about opportunities within the Sustainable Manufacturing segment of the business. Obviously, your total business within this sector can be divided between pharma manufacturing, food and nutrition and industrial biochemistry. Of these 3, obviously, you've done quite a bit in the pharma manufacturing side of things. So in the other 2 sub-verticals, if I can use that word, which ones do you think you would want to spend a little bit more energy, not only in '22 but beyond, so that the whole business segment as such can have a very good and well-rounded growth trajectory from here on?

Great question, RK. The rest of the industrial market verticals for where our technology can bring benefit are actually there's not quite as many potential applications as we see in pharmaceutical manufacturing, but each one of them are significantly larger. Enzymes are already a critical material, and a wide range of industries as we've watched great larger competitors like Novozymes and now the biosciences division of IFF, they've built multibillion-dollar businesses. And what we can bring that these incumbent larger competitors can't is this rapid ability to bring in new high-performing enzymes, and we're finding these opportunities. Each one of those projects is larger in scale, probably a little harder for us to execute on, so they take more enzyme engineering intensity. But with success, we can commercialize very quickly, unlike pharmaceuticals, and will hit a larger peak revenue target. And we're seeing that with our historical successes in the food industry, in particular, and we're holding out and we're doing a significant amount of work in other industrial verticals. We really look forward to showcasing successes in those areas. Each of which -- each single success story there would be large compared to a typical success in the pharmaceutical market. So it's really -- this is presenting a lot of opportunities for us. And this area continues to be a healthy minority of our project portfolio as we've built them and moved forward.

Great. So moving into Life Science Tools segment of the business, basically, it has built itself up from 2018, where we didn't see much of revenues to almost $7 million or maybe even better in '21 because I don't have the final numbers. You have -- you are certainly putting a lot of thought and energy into this segment. So how should we think about this in '22 and beyond that?

Yes. In 2 accelerating dimensions. I mean, first, engineered enzymes from our platform for this market is very new. 5 years ago, we didn't even really see this as a target market and now it's exploding with opportunities. I'd say the fastest, most dynamic part of our development pipeline are enzymes for use in life science tools applications. Both enzymes that we're improving -- enzymes that are currently used from natural sources that we're improving we're showcasing to a wide range of customers, better enzymes that have been engineered with our CodeEvolver platform to a wide range of customers. Also, a growing set of custom partnerships where a partner is looking to advance their life science application and needs an enzyme to be engineered specifically for their application. So we have growing partnered programs, which are driving immediate revenues on the R&D revenue line. And we've launched now 5 different products into the life science tools market that can be broadly marketed to multiple customers for next-gen sequencing, RNA -- messenger RNA synthesis. And soon in 2022, we should be launching -- finalizing an enzyme for DNA synthesis in partnership with Molecular Assemblies, a leader in enzymatic DNA synthesis, to disrupt that marketplace with enzymes as well. So it's really super exciting. So there was a lot of dynamic. And so for 2022 plus, you're going to see us selling more of the products that we've launched in 2021, launching and commercializing new products to a wide customer range and expanding the partnership list and seeing some commercial success coming out of that partnership pipeline, all in tandem. So look for significantly above average growth for Codexis in this area in 2022 and beyond.

So in this short period, as you said, within the last 5 years of really spending a lot of time in this business segment, you have 3 major relationships or collaborations: Roche, Alphazyme and Molecular Assemblies, as you said. How are these relationships progressing at this point? And also, what are your expectations going forward from these collaborations?

Yes. So the Roche collaboration is progressing quite nicely. Here, Codexis engineered its first enzyme into the next-gen sequencing space, a DNA ligase, which enhances conversions, especially in low DNA content samples like liquid biopsy for targets like cancer diagnostics, et cetera. And Codexis built that enzyme on our own. We broadly went to market with that enzyme. And as we went to market, we attracted the attention of the big players like Roche. And ultimately, we struck an exclusive commercialization partnership with Roche. And so they're out. They've been installing our DNA ligase in their library preparation kits. They are in the process of launching and marketing that as an enhanced library prep kit for their very wide deep channel and connection sequencing. So look forward to generating royalty revenues from that relationship. There's some modest milestone opportunities in that partnership deal as well. And Alphazyme is a different kind of partnership, RK, I think you're aware. They're a manufacturing partnership. And as Codexis commercializes our enzyme products, for the most part, we partner with custom manufacturing companies who will manufacture our enzymes at commercial scale. So in the pharmaceutical manufacturing arena, we have a different set of custom manufacturing partners who helped us build our product sales into that key market. In life science tools, it's a different scale. It's a different quality system that's required, and that led to the partnership with Alphazyme. So the partnership with Alphazyme is expanding significantly. They are a manufacturing partner for the products that we have launched and continue to launch into life science tools. And given their company's character, they also understand the market well. So we're partnering with them to access customers and to convince customers to move from whatever enzyme they have been using to Codexis enzymes. So that partnership is going extremely well, so they'll continue to be a go-to manufacturing partner. The partnership with Molecular Assemblies is unique and extremely exciting for Codexis. Enzymes have the ability -- engineered enzymes have the ability to truly transform the way the world manufactures DNA. All of DNA is synthesized today without enzymes, and without enzymes, there are fundamental limitations in the length of DNA and the quality of manufacture of the DNA strands, especially longer strands, that traditional chemistry cannot overcome. It's old chemistry. Enzymes have the ability to liberate that, but the enzymes have to be radically engineered. And that's what we, at Codexis, have been doing and we are -- we have finalized or nearly finalized an enzyme that is truly groundbreaking in enabling a competitive advantaged approach to DNA synthesis with Codexis-evolved enzymes. As we've been doing that, we have been partnering with a company that can do DNA synthesis with our unique enzymes and helping them with our equity investments and our Board participation to enable them to scale and compete ultimately with the incumbents in the space like IDT Danaher and Twist Bioscience. And so this combination of Codexis' platform bringing uniquely advantaged enzymes that can open up this market and helping our partner, Molecular Assemblies, scale and commercialize, we think these are going to come together as we finish this year and move into 2023 to open up a disruptive channel for Molecular Assemblies to start to really penetrate this multibillion-dollar and high-growth market. And Codexis will benefit by selling the enzymes to Molecular Assemblies and by being an equity owner and a successful partner in the downstream market. It's a great, great opportunity and it's really unfolded extremely well in 2021 and we expect in 2022 and beyond as well.

Perfect. So just to finish off our conversation on the Life Science Tools part of the business, there have been several customer trials going on with the reverse transcriptase enzyme for diagnostics part. And also you are thinking -- or you've just got started on a broader commercial launch of this enzyme. So what's been the experience of -- from the -- of these customers' trials? And also, how do you -- based on that, is there anything that you can highlight to us in terms of expectations for the reverse transcriptase enzyme specifically?

Yes. The reverse transcriptase enzyme, we just announced the launch of that broadly at the end of last year in December, so it's just now in the hands of customers more widely. We've brought our reverse transcriptase to deep partnering trial partners, and we've gotten strong validation. And those partners have helped us to refine the product to ensure that its adoption and its technological advantages are actually built into our reverse transcriptase versus incumbent reverse transcriptase. So we're going to be talking more and more as we move through the beginning of 2022 about how those broader customer trials are going. And it's too early to say at this point, but we're very encouraged. But it's following a track of similar kind of launches that we've talked a good bit about with our investors in 2021: different applications but same model, use Codexis' platform to engineer enzymes to be better performing than any incumbent enzyme is. And we've launched an RNA polymerase for the manufacture of messenger RNA, as messenger RNA has taken off as a developmental class of new therapeutics and vaccines. And we've had multiple commercial sales already and we're very encouraged by the uptake broadly for RNA polymerase. And following not too far behind that was the launch of a DNA polymerase, a more broadly critical enzyme for next-gen sequencing. And that's also, as we finished last year, had its first commercial sales. Dozens of customer trials, a lot of good activity. And so Codexis is building an internal team, an applications team, that works intimately with customers to have them understand how to use our product. It's different than the current -- the incumbent enzymes. It's to teach them how to unlock these performance advantages. And we've built that team, we continue to build that team and we're leveraging that team to bring new products forward like our reverse transcriptase. So this is a key part of Codexis' go-forward strategy to bring enzymes to -- better enzymes to customers who are using inferior enzymes, unlock those performance attributes, create proprietary enzyme sales -- product sales for Codexis. So it's gone really well and this is a key investment area, and we're very proud and quite encouraged about continued success not only for the enzymes that we've just talked about but also other enzymes we're working on to bring into this channel behind these.

Perfect. In the other business, which has actually grown very well, has been the Biotherapeutics business, which has seen a lot of growth in the last 5 years, right? And you also have 2 relationships with well-placed market leaders, Nestlé and Takeda. Starting with the programs with that of Nestlé, what can you tell us about those 2 products, 6114 and 7108, in terms of their development -- progress in their development? And also, what should we expect from that from -- in terms of data in '22?

Yes. Both CDX-6114 and CDX-7108 are now in clinical trial stage, and Nestlé Health Science is leading the clinical development on their own for CDX-6114. And they are lining up for a multiple ascending dose study, which will be a very pivotal early clinical trial for the advancement of CDX-6114. This is for PKU disease, you well know. We expect that, that trial will initiate sometime not too far from today. And then as we move through 2022, maybe into early 2023, we'll see the readout of the multiple ascending dose study in patients in multiple trial centers for CDX-6114. It's a really critical point to reach. That's a milestone opportunity for Codexis, so stay tuned for news on that front. CDX-7108 is for pancreatic enzyme insufficiency. And we just entered the clinic with CDX-7108, a highly engineered lipase that can dramatically reduce pill burden and enhance efficacy for patients who have pancreatic enzyme challenges from multiple potential disease sources. This program is actually being cosponsored between Codexis and Nestlé Health Science, so we are co-leading this program. We own half of the equity in this clinical stage compound, which is a significantly higher equity stake in 7118 -- 7108 compared to 6114. And we just started the clinical trial. So we have lined out some details for our investors about a series of early clinical trials in volunteers leading to patients, which will ultimately have its readout as we move through the end -- towards the end of this year as well. So these are some of the leading highlights for our therapeutics business. We have significant activity with Takeda and on our own behind that. We're starting to show our investors and you a lot more data about what we've been investing in to showcase that our platform is a drug discovery engine as well as enhancing manufacturing of drug processes, food, life sciences, et cetera, and that we're increasingly going to showcase real evidence for patients over time for these drug candidates, which is super exciting for us also.

Okay. So -- since you already mentioned Takeda, I just want to make sure that we touch upon some of your preclinical programs, too. If you want to highlight 1 or 2, which one would you pick so that we start looking for them going into '22?

Yes. I'll pick 2, and I know we're running out of time here, RK, but we now have 4 gene therapy partnership programs with Takeda. The most advanced of which is in Fabry disease, which is a pretty sizable lysosomal storage disorder. And gene therapies hold a lot of promise for Fabry patients, but it's been a challenging space and we believe it's because the enzymes that are being introduced into these patients' biology have not been engineered for the life of that enzyme. And so that's what CodeEvolver is doing. We've now engineered enzyme -- transgenes or enzymes that Takeda has combined with their AAV vector, gene therapy vector, and they're doing advanced preclinical research to validate that, indeed, engineered transgenes are going to be -- enable breakthrough results for these patients. So we're -- it's a Takeda-led program, so we're looking forward to them sharing data on how our transgenes are making a difference in Fabry patients and other -- 3 other areas. On the last, I'd say, in the few seconds we have left, is increasingly now Codexis is doing more of our own self-funded work. Most of the activity up till this point has been in these 2 partnerships, which we've touched on to some extent, and now Codexis has built up the capabilities to advance assets on our own to a greater extent. And just as we ended last year, we showed some exciting early preclinical data in a couple of other rare diseases, homocystinuria, maple syrup urine disease. We shared some scientific data at an amino acid metabolism disorder conference, and we're looking forward to bringing those towards the clinic as we move through 2022 and 2023 as well. So pretty exciting to see the expansion and advancement of this pipeline alongside all the other industrial successes in our company. A lot going on, a lot of fun, and really just an exciting time just validating how much our technology and our team can make a difference for this world.

Sure. So John, you know that JPMorgan conference is our anniversary in terms of meeting you about 6 years ago, I think, and it's a lot of pleasure for me to see the growth that I've seen you bringing to Codexis. And I'm really excited to see and anticipate more growth in '22 and even certainly beyond that. Good luck with everything, and I'll talk to you soon.

Thank you very much, RK. Super appreciate it. And happy new year and best of luck to you, too.