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

Ladies and gentlemen, thank you for standing by, and welcome to the conference call being hosted today by Codexis' management. [Operator Instructions] Please note this event is being recorded. I'll now turn the floor over to Carrie McKim, Director of Investor Relations. Please go ahead, Carrie.

Thank you, operator. With me today are Dr. Stephen Dilly, Codexis President and Chief Executive Officer; and Sri Ryali, Chief Financial Officer. Kevin Norrett, our Chief Operating Officer, will also be joining us for the Q&A session following the prepared remarks. 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, including our expectations for our ECO Synthesis manufacturing platforms, the benefits of our innovation hub, our cash flow, our ability to reach positive cash flow around the end of 2026, our ability to refinance our facility with Innovatus as well as our strategies and prospects for revenue growth and successful execution of current and future programs and partnerships. To the extent that statements contained in this call are not descriptions of historical facts regarding Codexis, they are forward-looking statements reflecting the beliefs and expectations of management as of the statement date, February 13, 2024. 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 Codexis' control and that could materially affect actual results. Additional information about factors that could materially affect actual results can be found in Codexis' filings with the Securities and Exchange Commission. Codexis expressly disclaims any intent or obligation to update these forward-looking statements, except as required by law. And now I'll turn the call over to Stephen.

Thank you, Carrie, and thanks everyone for joining us today for a brief update. This afternoon, we announced that we've further secured our financial future through a strategic debt financing with Innovatus Life Sciences for up to $40 million. Since unveiling our ECO Synthesis manufacturing platform just under a year ago, the progress we've made with this technology has exceeded our expectations. After announcing the achievement of gram-scale synthesis in December, we're well on our way to synthesizing longer clinically relevant siRNA that incorporates the different RNA modifications most frequently found in approved therapeutic assets to date. We expect to demonstrate this update at the TIDES USA meeting in May, just 1 year since we introduced our ECO Synthesis manufacturing platform in the same conference last Spring. Given this rapid pace of advancement, there are certain levers that we could pull to accelerate our technology value creation. And while we were already in a strong financial position, this capital gives us the optionality to invest thoughtfully without taking dilution. We're excited to partner with a leading financier like Innovatus and believe this loan agreement will support our path towards realizing the full potential of our ECO Synthesis manufacturing platform. Before Sri gets into the specifics of the deal terms and use proceeds, let me take a step back to further explain the rationale behind this financing. Last year, we took decisive action to establish a clear prioritization strategy, monetize noncore assets and reduce our cash burn by more than 50%. Since then, we've been executing on exactly the strategy we laid out, highlighted by the strength of validating accomplishments that we announced in December. Those actions, combined with cash generated through our [ pharma ] manufacturing business, have positioned us to reach positive cash flow around the end of 2026 within our existing sources. As a result, we put ourselves in the enviable position of not needing to raise money through a diluted equity financing to fund our planned operations. From that position of strength, we have set how best to support the ongoing development commercialization of our ECO Synthesis manufacturing platform, especially considering the rapid technical progress that I mentioned. With that in mind, we made the decision to pursue capital for two important purposes. First, to reinforce our already strong balance sheet; and second, to build out what we call the ECO Synthesis Innovation Lab. This facility will foster further technical advancement of our platform by enabling us to develop new RNAi constructs, test additional nucleotide modifications, ensure process flexibility and collect data on how our process performs against traditional chemical synthesis. On the commercial front, this Innovation Lab will serve us invaluable resource for partnering discussions. and customer testing by allowing Codexis to better demonstrate critical elements of the ECO Synthesis manufacturing platform, including purity profiles, process optimization and transfer protocols. In short, by giving the venue to showcase our technology, this facility will shift our interactions with potential customers and collaborators from theoretical conversation to concrete demonstrations of our capabilities, and because the heavy lifting of our ECO Synthesis manufacturing platform is done by the enzymes, building and equipping the lab itself straightforward. As we look through towards moving up the value chain, taking this step will also put us in a strong position to focus on potentially establishing a full-scale GMP facility down the line by becoming an important player in the manufacture of RNAi therapeutics. We've already spoken at length about providing enzymes and raw materials to CDMO drug development. On top of that, small, early-stage innovators represented an entirely separate market segment where we can drive meaningful value if we're able to produce [ siRNA ] cells at a small scale. Many of those early innovators will ultimately grow into or collaborate with major players in the RNAi space, and we want to make inroads with them as early as possible. Enthusiasm for the ECO Synthesis Innovation Lab is largely driven by learnings from our long-standing pharmaceutical manufacturing business. There, we found that response time is critical particularly early in the clinical development time line. Our ability to rapidly supply enzyme products to customers is the key element of getting incorporated into their manufacturing process early. To do that, we need to readily provide customers with the information on product quality, consistency and process protocol. Building this facility is the most efficient way for us to generate data to support this early commercial conversation and it paves the way for a GMP-grade facility in the future. Ultimately, we believe that the ECO Synthesis Innovation Lab will put us in the best position possible to drive rapid uptake of our platform. That said, we continue to be deliberate and disciplined with our spend. And maintaining a clear profitability remains a critical guiding principle for our business. This financing needs to be considered in that light. The majority of the proceeds will remain on our balance sheet and will improve our optionality as we begin generating revenue probably ECO Synthesis manufacturing platform and move towards profitability. With that, I'll pass it over to Sri to take you through some additional details.

Thank you, Stephen, and good afternoon, everyone. We are pleased to be here today to discuss this loan facility, which serves as a mechanism for us to bolster our balance sheet and make incremental investments carefully without taking dilutions. We're able to take on debt now because we project that our foundational cash-generating pharma manufacturing business will return to growth this year. We are confident in the potential of the ECO Synthesis technology platform to propel the company to an even higher trajectory of financial growth. Following a competitive process, we are excited to be working with a financing partner who after extensive due diligence recognized both the magnitude of the RNAi opportunities and the significant potential value Codexis commands in the space. With the rapid technical progress of the ECO Synthesis manufacturing platform that Stephen described, along with increased inbound interest from potential customers and collaborators following our update at the TIDES EU meeting in November, we decided to accelerate a process to obtain capital to invest in the platform development. It became clear that the Innovation Lab supports to further accelerate both development and commercial progress. So this facility became the obvious next step toward driving value creation. While we remain disciplined in our spend, the non-diluted capital from Innovatus gives us the flexibility we need for this undertaking. When we initiated this process, we have the following goals in mind for any potential debt financing. First, to secure enough capital to maintain a strong balance sheet and provide operating flexibility on our path to positive cash flow around the end of 2026; second, to find incremental investment to accelerate development and enhanced commercialization of the ECO Synthesis manufacturing platform; and finally, any loan agreement we need to provide flexibility in terms of covenants, prepayment and our ability to conduct business development. With this agreement, we believe that we have met all of these goals. We filed an 8-k earlier today detailing the terms, but I'll call out a few highlights. This is a 5-year term loan with 3 years of interest only. This means that we expect to repay or refinance the loan once the company is cash flow positive, underscoring why we felt that the circumstances were right to take on this loan. The interest rate is floating and equal to the greater of either the prime reference rate of 7.5%, plus 3.25%, with 2% eligible to be paid in kind and add to the principal until the third anniversary of the closing date of the term loan agreement. In addition to the $30 million available at closing, we have access to another $10 million tranche after meeting prespecified revenue milestones and other conditions. There is minimal warrant coverage in this transaction. Innovatus has a warrant to purchase approximately 424,000 shares of our common stock with an exercise price equal to $2.83, which was a 30-day volume-weighted average price immediately received in the execution of the loan agreement and may have a 10-year exercise window. Following the closing of the term loan agreement, we retain approximately $29 million in net proceeds from the first tranche. We expect to use roughly $10 million of this initial amount to fund and operate the ECO Synthesis Innovation Lab for the next few years. As Stephen noted, we expect the rest of the proceeds to remain on our balance sheet, invested in money market funds and earning interest income. In addition to enhancing our technology development time line, this financing provides a runway with add attrition and greatly reduces the risk of sitting below 12 months of cash without the need for a diluted equity financing. And our relatively short time horizon to reach positive cash flow coincides with the interest-only portion of debt. We are confident that we can service the interest payments with the cash generated by our pharmaceutical manufacturing business, which again, we expect to return to revenue growth this year. Bottom line, given the structure of the loan, we expect to repay or refinance the principal and the company's cash flow positive, and our cost of capital is significantly lower. We previously announced that as of December 31, 2023, we had pro forma cash and cash equivalents of roughly $70 million. This included approximately $65 million as of the end of the year, plus $5 million received in January with the upfront payment related to the recent CDX-7108 asset purchase agreement with Nestle. Now, the $29 million in estimated net proceeds from this facility, we are in an even stronger position, including our anticipated build-out of the ECO Synthesis Innovation Lab, we expect that our existing cash and cash equivalents will be sufficient to fund planned operations through positive cash flow anticipated around the end of 2026. With that, we'd be happy to take your questions. Operator?

[Operator Instructions] Our first question is coming from Steven Mah from TD Cowen & Company.

Congratulations on the financing. A question here. Would it be possible for you guys to kind of lay out a framework to get to cash flow positive by the end of 2026. What milestones and achievements should we be looking for over the next few years for you to hit that cash flow positive by year-end 2026?

Steve, it's Sri, happy to fill that. There are a few things that we're looking for that we've built into our own internal projections, first of which is returning the pharma manufacturing business to top line growth this year. I will provide specific guidance for 2024 when we do our year-end call later this month, but that's a key driver of getting to positive cash flow by the end of 2026. The other driver is the successful launch of the ECO Synthesis platform, and that can take many different forms. We project commercialization, as we've said, in 2025 with the first early access licenses and then full commercialization in 2026. But we also have the double-stranded RNA ligase that we expect to make widely available in the second half of this year, which will drive revenue starting in 2025. So there are a number of ways to get there. The other part of the equation, of course, is the burn. And we've taken, as Stephen mentioned, decisive action with the restructurings exiting the biotherapeutics business and the facility that went with that such that our cash burn now is less than half of what it was going back to last year.

Okay. Got it. I appreciate that color. And you guys talked about refinancing it, the loan once you get to cash flow breakeven. Is that going to then be -- do you anticipate the refinancing to provide capital then for the ECO Synthesis commercial launch? Or how should we think about how you guys are going to fund the commercial launch?

So when we talk about refinancing is one of the options that we have, we expect to be cash flow positive by the time that principal is due. So we could find ourselves in a position where we decide to pay down the debt or we can refinance it. In terms of the commercial launch costs, and Kevin can comment more on this, but we don't view this as a significant ramp-up in terms of the commercial launch costs. We're leveraging a key part of our business with the pharmaceutical manufacturing, commercial infrastructure. There are a number of synergies in terms of the potential customers we'd be talking to in ECO and the fact that they're already customers of ours in the pharmaceutical manufacturing space.

Yes. The only thing I would add to that, Steve, is just that the RNA ligase launch of that also leverages that same customer base with expansion in the second half of this year to that same customer base. So I think at the end of the day, the commercial build-out is much, much different than what would be if we were pursuing a biotherapeutics or something else, whether we're using the existing infrastructure, existing facility and the existing sales force and other technical capabilities.

Okay. Got it. That makes sense. And last question, and sorry if I missed it, I joined a little bit late. But did you mention the GMP facility? And do you have any time lines for when that's going to be built out?

Thanks for the question, Steve. I was going to volunteer that if you didn't ask, so this facility that we're talking about the ECO lab is really a test bed, is a place where we can deliberately tweak the process. It marks our transition from enzyme engineering to process engineering. The next step adjacent to that will be a GLP lab, which will allow us to supply these small-scale players within siRNA to go through their tox studies. The next biggest step beyond that is full-scale GMP. We're not quite ready to make that investment, that declaration yet because we have not yet close enough define the process parameters to allow us to exactly define the scale. But we see that's something that we'd be talking about in the second half of this year, what the trajectory is for full GMP, but we see it as a very important part of capturing the whole value of the platform.

[Operator Instructions] Our next question is coming from Jacob Johnson from Stephens.

Maybe first, Sri, just the $10 million is kind of a pilot lab, it sounds like that's over a couple of years. Can you just flesh that out a little bit more in terms of how much of that is kind of cost of goods sold, SG&A, et cetera? How much is that kind of CapEx? And then how should we think about the pacing of that over the next couple of years?

Yes. So Jacob, we expect that, that $10 million number will cover really the next 3 years of operating the facility, including the upfront capital investment. It's roughly $2 million to $3 million a year to operate and then some incremental upfront capital. This is a facility that we're able to fit within our existing footprint here in Redwood City. Hence, the reason why the CapEx buildout is not a heavy lift. And it's also a testament to the process itself that we're building in terms of ECO that it doesn't require a lot of extra refitting of the facilities because the aqueous-based solution, and we can make that work within our facilities.

With a lot of our existing equipment repurposed, we really are walking the walk on that.

Got it. That's helpful. And then just, Stephen, you mentioned these smaller customers. It seems like this lab is really important for them. And maybe some of this is for Kevin. Just one, what have you been hearing from your customers that maybe decide to do this? And two, kind of why is it so important for those customers maybe versus the CDMOs?

Partly, what we get from them is when we do a show and tell them, we show them the column, they go, "Wow, is that it?" Actually being able to do that more frequently and have somewhere that's a little more bullish to be able to do that. It's also -- what we're learning is that their strategy around manufacturing is also defined by our process and there's a sort of to and fro. It's not so them just bringing us a construct and saying, can you make it? It's an iterative process. And so the ability to bring them in, show them the system working and then actually do the tech transfer back to them, we're right in the middle of those conversations right now. So we can make your product here. Can you make your product there, right? And a lot of this, let's say, has now moved from -- we're very happy with how the enzymes work and particularly for sort of [indiscernible]. And now it's around working how the enzyme work in the context of the process and the process engineering and the scaling. And that will also inform us about next-generation offerings as well, what this does really well. And I'm sort of into that very strong technical progress. We've actually been pleasantly surprised by the ability of the enzyme to keep going, the ability to actually adopt the new novel modifications, the kind of constructs we're making, which means we're very excited the sort of prospects that we're going to show in the TIDE U.S. meeting.

No, I was just going to say, I don't think I have a lot to add there other than one of the things Stephen highlighted is being able to demonstrate a side-by-side to their expectations from phosphoramidite chemistry is probably one of the biggest things that makes me excited about this ECO Innovation Lab because that's really -- it's not just the show and tell, but it's a side-by-side and that comes from years of learning on the pharma manufacturing side and also what we're hearing from our early access testing with customers around the RNA ligase that we like to launch later this year.

Got it. Maybe just if I can sneak one last one in. Just Stephen, on the GMP facility, it sounds like maybe you may have an update on kind of how you're thinking about that in the back half of this year. It sounds like this lab can support kind of preclinical type work. It all goes well with these customers. when would they need you to have a GMP facility to support them? Like how quickly could something like that come online? Just trying to think about the time line here.

If we had a GMP facility right now, we have customers, and this is about doing things in a sort of prudent cadence that working out how we scale it efficiently, the size of the tanks that we need, some of the other sort of parameters around getting the right footprint also the aspirations in terms of scale because we can supply early phase of big indications that a relatively small footprint, we can also supply commercialization of small indications. It's really -- sort of going through that is it's going to take a few things with a lot of runs, all the different things can actually be a seat based for tech transfer. So we're going through all that right now, and we really need the ECO lab to refine our thinking. So that's why I'm saying second half of this year.

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Dr. Dilly for any further closing comments.

Well, thanks again, everyone, for joining us. And today's announcement is really a clear signal that our focused strategy, consistent execution is not going unnoticed. We plan to continue delivering on the milestones we've laid out. I hope you'll join us for a full update during our 2023 results call in a couple of weeks. So thank you for that.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.