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

Alright. Welcome, everyone, to the Jefferies Global Healthcare Conference. I'm Matt Stanton. I'm on the Life Science Tools and diagnostics team here at Jefferies. It's my pleasure to have Codexis back with us at the conference again this year. Joining us from the company, we have President and CEO, John Nicols, John, thanks for being here.

Yes, please. Thank you.

I guess to kind of kick off with a big picture question. You have the core enzyme business and the biotherapeutics pipeline. You recently started to break out segment financial performance before unallocated corporate overhead, which I think has been well received based on investor feedback. Can you just talk about how you're thinking about balancing investment in the 2 -- on one hand, you have the Performance Enzyme business, 30%-plus EBIT margins before the corporate overhead and the biotherapeutics pipeline that's consuming cash, especially in this environment. So just kind of how do you think about and balance the investment between the 2?

Yes. Yes, great question. So historically, we have been building the Performance Enzymes business for our entire 20-year history. The development of the biotherapeutics pipeline is really only about 5 or 6 years old. And it's grown remarkably based on the success of applying the platform and validating increasingly that our enzyme engineering CodeEvolver platform actually is increasingly bearing out as a drug-discovery engine, which is really exciting. Clearly, an enzyme that's going to be used in the Performance Enzymes segment for more industrial uses is going to be a modest-sized potential peak revenue opportunity. The fact that our platform can be involved in discovering products, drugs that could, in principle, be hundreds of millions of dollars or maybe even a blockbuster drug someday is very exciting for us. At the same we're building both sides of the company. So we're very cautious and careful and cognizant of the time and the cost and the clinical development risks associated with drug discovery and development. So that's led to us doing early partnering for the biotherapeutic pipeline assets that we have been building out in our pipeline. But to really do a proper investment to show that our platform has created a new drug, we need to make some material investment. We need to use the platform to discover. We need to validate in relevant preclinical models. And we need to show the strategic universe that we're willing to take programs into at least our late stage clinical. So those are some material investments over a few years' period of time. But once we get through that investment cycle, we have already demonstrated that we -- when we monetize and we flip these assets to partnering events, we recoup all of our investment plus some, and we mitigate the costs associated with drug development. So it kind of creates a short-term use of cash that ultimately when we create the partnering event will reverse itself and we'll set up an upside opportunity for milestones and royalties once we shift to a partnering model. So we like this. We like this exposure, much larger opportunity on top of steadily growing the pipeline of products and incrementally increasing the margin on our products in the Performance Enzyme's business and consistently show through the segmented financial statements that, that part of the company is clearly driving for sustained, significant, full EBIT margins as we continue to mature that portfolio over time.

And on the biotherapeutic side, has your risk appetite for holding the assets longer or partnering sooner changed at all, just given kind of the current backdrop?

Yes. I think it changed first by showcasing that we could be successful here. So with -- and this goes back a couple of years, showcasing that we are actually hitting differentiated data generation, using our platform gave us a little more confidence, hold assets a little bit longer during that chapter. But in this capital environment, we also want to balance how much we invest in biotherapeutics against extension of runway of our balance sheet. So all things equal in these more difficult capital market times, all things equal, shading it towards partnering a little sooner without any significant strategic value destruction and doing those partnering. So yes, I think we're looking at showing our investor base. We got plenty of cash in the runway in our balance sheet. And by playing the assets in the biotherapeutics a little more towards partnering that's one key tool demonstrate that.

All right. And then shifting over to the on the gross margin side. If I go back to look at the model, '18, '19, gross margin about 50%, fast forward today. You guys just stood 70% plus in the first quarter. I think you guided to 65% or 70% this year. Can you just kind of talk about longer term what the gross margin profile the company can be? And I guess, what have been some of the key drivers from that 50% to range right now? Is it just kind of mix with older things rolling off? Or what's kind of an underpinning that success?

Yes. Thanks. I mean, your first question, we've steadily built our gross margins, grown our gross margins up to the high 60s level. I'd say the outlook is maintenance or incremental improvements from there because fundamentally, how we've gone from 30%, 50% to these high 60s is by picking better targets, applications where our platform can generate more value for our customer means we can capture more value in our pricing. And being more assertive to actually negotiate for that value to come to our P&L. So we've just gotten better and better as we've matured as a company in Performance Enzymes to pick better targets and to price to make sure that the value is flowing to Codexis. And that's what's led to the incremental -- steady incremental lift in our gross margins and should add to some margin lift even from this place incrementally over into the future as well.

Okay. And just sticking with the theme of margins for a second. If we zoom in on the Performance Enzyme business. Like I mentioned, last year, I think 35% EBIT margins before the corporate overhead 1Q even better. Obviously, there's some dynamics with PAXLOVID and COVID in there. But kind of if we think about the Performance Enzymes business, just how you think about the more medium- to longer-term margin opportunity there as well.

Yes. I think if you -- now if you factor in corporate overheads and G&A and R&D expenses to get to a more fully loaded EBITDA for this segment. Here, we're making investments to expand the pipeline. We're also making some modest shift to do more self-funding of enzymes that we're bringing to market on our own that we're self-developing versus using partner funding. So that is a modest growth in investment, but it's really modest. Over our recent history, we have clearly driven top line growth, especially the margins from the top line faster than the overall investment in the Performance Enzymes business. And that's clearly our strategy is to ensure that top line growth exceeds the investment growth on the average sustainably over foreseeable future so that we do get to this sustained recurring EBITDA, positive EBITDA and double-digit EBITDA margin in place for Performance Enzymes.

That's helpful. I guess if we think about competition within your Performance Enzyme business. As you kind of enter some of these newer Life Science markets, which we'll talk about a little bit later, are you seeing more competition in other competitors than kind of the legacy business? What's kind of the competitive dynamics within the -- some of the Life Science end markets that you're making your way into?

Yes, I think and not very materially. As we've moved into the food sector successfully, and we continue to do development work with food industry companies and over time, more industrial sectors, bringing our platform into those non-life science, non-pharma sectors, we kind of bump into the big industrial enzyme competitors a little bit more. But we're very careful about target selection. We're not going after the huge volume applications of our very large competitors. We're going after high performance, high-value niches. But there is some growth in competition against the large players, but we're being very smart and very selective. In life sciences, we're -- as we've entered that market, we're starting to compete against traditional life science companies, some of whom have brought enzymes into next-gen sequencing workflows or other applications. And here, our edges, bringing our platform's engineering capabilities to bear as a competitive tool for us. Because traditional life science enzyme companies don't have that much enzyme engineering capabilities, not like the history and breadth of Codexis. So we're showcasing how engineered enzymes can outperform legacy enzymes from incumbents. In the pharma sector, we see very little competition, and we've encountered little, and we don't expect to see a lot of competition in that sector.

Okay. Makes sense. Jumping over to PAXLOVID and understanding the picture there is fairly murky looking out a little bit. Can you talk about...

Murky or Pfizery?

If we kind of talk about your visibility into '23, do you have any kind of firm per stores for next year? And then if we do try to think about in '24 and beyond, just maybe help us frame or think about how there could be some durability of that business moving beyond there just from where we sit today.

Yes. I mean first, implicit in your question, we're very secure in our outlook for delivering $75 million to $80 million of enzyme sales to Pfizer this year. For 2023, it does get opaque. We do have purchase orders that cover some of the early months of 2023 with -- from Pfizer already. So that gives us some runway into 2023. But it's really hard for them to project the outlook for the drug and, hence, the need for them to purchase more enzymes. So we're being pretty cautious about what the outlook is, and we need more time, and the world needs more time to see how durable this business will be for Codexis in 2023 and 2024 and beyond. That said, we are seeing a little bit of a tailwind from the medicine patent pool generic companies. They were just announced earlier this year, and we are seeing activity from these generic companies to try to access our enzyme. We don't expect that enzyme business to be material in 2022. It will take longer, but it should create some tailwind left to sell this enzyme to other companies besides Pfizer in 2023. So I'd say everyone should watch the developments for PAXLOVID for the pandemic. We'll give you as much visibility as we can, but let's wait until later in the year to give a little more visibility to 2023 at this point.

Yes. And I'd just be curious, obviously, PAXLOVID everywhere in the news and everything, have your conversations with some of your customers changed at all since you've proven you did this in scale in a quick time or potentially customers where you're able to grow wallet share with them or open doors that I mean a year ago, the scale is pretty incredible. So has that kind of changed conversations?

Yes, it has. So we've -- we're doing business with -- some measure of business with 21 of the top 25 drug companies already before the PAXLOVID success story. But the reality, I mean, these huge companies, our relationships are embedded into the R&D department and actually in the process chemist within R&D. So we know that universe of the big pharma organizations very well. What PAXLOVID, the PAXLOVID success story is done as it's kind of showcased how materially relevant our technology can be for cost savings. And it's opened up doors to the heads of manufacturing, the heads of supply chain, where they didn't appreciate how well we could scale the enzymatic chemistry that they've heard a lot about from the bench chemist, but they haven't seen as much of its real-world impact. So for us to be able to rapidly bring dozens of metric tons of enzymes, which can affect hundreds of tons of API in such a short period of time is really a great testament to how mature our technology is to enable costs -- significant cost savings for big pharma. And that's been really exciting for us to showcase to this universe of great companies.

It's quite a proof point of kind of lab to scaling up short period of time.

Yes, well said.

We've seen from other companies a little easier maybe said than done. If we shift over to the life science market. Again, like I mentioned earlier, like you guys have moved into last year. I think you've introduced 3 different products there, the DNA preliminaries, RNA preliminaries and then the reverse transcriptase. Just kind of talk about a high level how those are progressing versus your expectations? And then maybe remind us what you're penciling in for that Life Science business this year?

Yes, thanks. Super excited about really the relatively recent entry into the world's Life Science application. Three or 4 years ago, we really didn't even talk about it as a target market within Codexis. Fast forward to last year, we did $8 million of sales, mostly R&D revenues in custom collaborations with some great companies. But we also -- as you said, we launched 3 products. They followed a product that we had launched a year or 2 earlier into sequencing. And we started to really showcase how our enzymes can affect the world of nucleic acid synthesis. So really exciting applications, high growth, and we're bringing forward evidence of significant material benefits in these applications. So that's all really great. It's early days for actual product uptake for the enzymes that we launched last year, but all evidence is really positive. We've had excellent customer trialing events. We've had first commercial sales for the 2 products that you referenced that we launched earlier last year. We just launched the reverse transcriptase at the end of last year. So we've now gotten into trials, and we're getting excellent feedback from customers. So the prospect for us to make first commercial sales of the reverse transcriptase sometime in 2022 is also quite high. All of which really just reinforces that Codexis' reach of these products is on the ramp to ultimately achieve what we hope will be peak revenue sales of about $10 million for each of these products over time. And we're just working on accelerating that slope curve. These are all products that should be certainly within the average gross margin for Codexis' products today. So really exciting for us to have line of sight to that kind of product sales in this new market. To your second question, we don't expect a huge amount of sales for these products in 2022, probably first commercial sale for the reverse transcriptase. So that's very immaterial, and we expect it will do in a couple of million dollars of product sales of the combined RNA and DNA preliminaries as we launch year. The total segment sale, we expect to grow by 50-plus percent. So from last year, it's just under $8 million to this year, it's roughly $12 million is what we project, and we're in a good place to do that as we move through the first 5 months of the year.

Okay. And then I guess just to kind of go back to you mentioned, I think it was a year ago, the DNA ligase kind of gets lost with so much everything you guys are doing. There just kind of a quick update on how that's progressing, the partnership there, the launch there, how that's been going?

Yes, we were super excited to see the endorsement and the ultimate commercial partnership deal with Roche for our DNA ligase for next-gen sequencing. They've been in the process of installing that into their library prep kits. We haven't generated -- they're set up to be able to make that enzyme. So unlike most of our commercial product success is where Codexis' makes and sells that the enzyme for our customer in this deal with Roche, they can make the enzyme themselves. So instead of a product sale, we'll be generating royalties on the sales of their kits. And we haven't seen that the royalty stream developed just yet, but they're encouraging us that they're making good progress with those library prep kits in particular, for their oncology library prep for liquid biopsy.

Okay. And then sticking with the Life Science theme on the RNA polymerase, your HiCap product, mRNA remains a big focus, I think, for folks. Can you just talk a little bit about the product offering you have there? And then just kind of what the competition is? Is it in-house kind of home brew type things, enzymatic tapping? And then I imagine most of these are earlier stage processes, you're not going to switch out for a Phase III. So just kind of how things are progressing there.

Yes, thanks. We're doing terrific with our HiCap RNA preliminaries since its launch. We've gotten installed in a range of different clinical stage manufacturing recipes with a number of different customers to date already, and we see a nice momentum building because the performance attributes that RNA preliminaries is delivering are material. We've engineered capping efficiency into our HiCap RNA polymerase, which enables the customer to reduce the amount of the corollary cap agent that's required in the manufacturing recipe. And that's a nice -- that's a fairly expensive component, so they're able to reduce that by using RNA preliminaries compared to using a traditional RNA preliminaries, number one. Number two, and we didn't see this as much until we launched. Our RNA preliminaries actually drives a higher yield of the single-strand RNA by minimizing an undesirable production of double-stranded messenger RNA. And if some co-product double-stranded is produced, it's very hard to separate. If it ultimately does make its way into product, it can lead to immune response issues for the product or the customer has to go through significant lengths to separate out that double-stranded RNA from the product single-strand RNA at significant cost, and potentially yield loss. So we're seeing both of these attributes playing out to get us some nice momentum and acceleration of getting our HiCap installed in a growing range of clinical stage vaccine and therapeutic developments for -- that are messenger RNA modalities. So we're really excited. You're right. We are getting installed in the clinical stage. It will take time for those clinical stage messenger RNA programs to ultimately hopefully become FDA-approved, where our enzyme sales will become much more material. But we're still making sales in the clinical stage as a customer goes from Phase I to Phase II. They need to make the messenger RNA, they need to buy a HiCap RNA. So we're starting to see some accumulation of sales as we widen the installed base for our enzyme.

Great. And then shifting over to partnerships, Molecular Assemblies. You guys have been involved with a few years now. A lot of progress continues to be made there. I think they're going to do a kind of informal launches than more formal commercial launch next year. Can you just talk about real quick kind of how Codexis is helping Molecular Assemblies with their enzymatic synthesis platform? And I guess, if we look out a few years, what would you consider kind of a successful launch of that program?

Yes, cool. So the world has built its DNA synthesis industry without enzymes. Unlike inside biology, enzymes are the core approach to synthesizing DNA in biology, take those enzymes outside of the nucleus of cells and they don't -- they're not stable, they don't work. So what we did was design an enzyme that approaches the efficiency and the stability of enzymatic DNA synthesis inside the nucleus of cells. We had that as a benchmark model. We have used our platform to stabilize, to drive a very complex chemistry because in effect, what you need to do is be able to attach any of AGT or C to any strand of AGTC. So it's actually a range of chemistries that this one enzyme needs to be able to drive at extremely high efficiencies, extremely high yields to be competitive with nonenzymatic traditional approach for DNA synthesis. That's what we've done. We've already accomplished that. It was actually the largest enzyme engineering project in the company's recent history, which took us 18 months where a typical project takes us 3 to 6 months. And we needed to do that much work to make it that cost competitive. So that the enzymes that Codexis is engineered together with nucleotides is at least cost competitive with traditional phosphoramidite chemistry. So that the advantage of being able to stitch together longer strands DNA can be exploited by our partner, Molecular Assemblies. So that's where we are. The chemistry is elegant. It's beautiful. It's designed for cost competitiveness and differentiated speed for the customers. So Molecular Assemblies job is to build a solid state manufacturing platform to perform that chemistry. And that's what they're well along the way to do -- they do have pilot scale, which they're starting to work with customers this year, but the full commercial scale manufacturing system should be up and running next year, enabling a full launch and a penetration of a multibillion dollar high-growth industry of DNA synthesis. So I mean 3 to 5 years from now, success looks like $50 million, $100 million of Molecular Assemblies sales, enabled by a growing amount of Codexis enzymes that we'll be selling. And if they're successful in breaking into that level, they're going to penetrate even deeper. And as a leading equity shareholder and Molecular Assemblies will enjoy the company's value creation will accrue to Codexis. So we're super excited about our exposure to this industry, and we're thrilled with what we've been able to do with our enzyme engineering to enable a disruptive new entrant like Molecular Assemblies to succeed.

That's really helpful. I guess in the last minute we have here, sticking with the partnership theme, the new seqWell. Can you talk a little bit more about the rationale behind signing that strategic investment in a partnership deal with them? And then just kind of economics of the deal, I think you noted some potential downstream value creation. Just kind of how to think about that quickly.

Yes, very similar model to Molecular Assemblies. seqWell, awesome late private stage company. We led the rounds, the Series C round with a $5 million investment, which is not a big amount of money because seqWell is already generating revenue. They've already penetrated markets with their disruptive library approach for next-gen sequencing. They're using a different enzyme that enables a more efficient workflow. It's an enzyme that probably haven't heard of is called the transposase, but what it basically enables is library prep and fragmentation to be combined. So it creates a workflow efficiency that they've already been able to exploit and break into markets and generate a significant growing revenue. So we were excited by participating with them because of their success in the market, and we're going to synergize together as enzyme and kit producer, but they've been able to penetrate without engineering this transposase. So Part B to the partnership is Codexis is going to engineer this transposase in collaboration with them to make them even more efficient at breaking into next-gen sequencing library prep. So super exciting. We're going to generate enzyme sales ultimately. We're going to enjoy the downstream -- the downstream value for us will be enjoying the growth in the company value and the equity that we have invest in.

All right. Great. Unfortunately, we're out of time. Thanks for joining us today. Appreciate it.

Yes. Thanks a lot, Matt. Appreciate it.