Codexis, Inc. (NASDAQ:CDXS) Q3 2023 Earnings Call Transcript

Codexis, Inc. (NASDAQ:CDXS) Q3 2023 Earnings Call Transcript November 2, 2023

Codexis, Inc. misses on earnings expectations. Reported EPS is $-0.5 EPS, expectations were $-0.32.

Operator: Welcome to the Codexis Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note this even is being recorded. And now I'll turn the call over to Carrie McKim, Director of Investor Relations. Please go ahead.

Carrie McKim: Thank you, operator. With me today are Dr. Stephen Dilly, Codexis President and Chief Executive Officer; Kevin Norrett, Chief Operating Officer; and Sri Ryali, Chief Financial Officer. During this call, management will be making a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including our guidance for 2023 revenue, product revenues and gross margin on product revenues as well as our strategies and prospects for revenue growth and successful execution of current and future programs and partnerships, including our ECO Synthesis platform and pharmaceutical manufacturing business. 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, November 2, 2023.

A lab worker in a white coat working with cell samples in a biopharmaceutical facility.

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 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.

Stephen Dilly: Thank you, Carrie, and thanks, everyone for joining. We approached the end of 2023 in a position of strength. We have a core pharmaceutical manufacturing business that generates cash, a potentially game changing technology in ECO Synthesis platform, and importantly for financial resources to execute on our plans. In financing our enhanced strategic focus in July, we've worked very hard to put ourselves in a position of financial security, so that we now have a path to potential positive cash flow around the end of 2026 with current financial resources. Let me briefly recap how we get that. It starts with a strong balance sheet. As you'll recall, over the last two years, we received a windfall of roughly $135 million in product revenue from the sale of CDX-616 to Pfizer for the manufacture of PAXLOVID.

This was the result of our quick and meticulous execution supplied metric tons of products in support of the global pandemic. CDX-616 still represent the largest single commercial success to Codexis to date. And the extraordinary revenues that generated a central to the strong balance sheet we have today, with approximately $75 million in cash as of September 30. On top of that strong foundation, we've taken steps to dramatically reduce our cash burn by over 50% year-on-year. We did this by focusing our efforts on programs that will generate the greatest value, streamlining our organization to the right side for go-forward plan and consolidating operations to a single facility. We've also been working hard to return our core pharmaceutical manufacturing business with growth trajectory.

And we're very pleased the progress and excited for the future growth potential. The cash generated by our pharma manufacturing business, combined with reduced cash burn and our strong balance sheet creates the opportunity to invest in our ECO Synthesis technology to bring it to commercialization within our existing resources. The first element of the ECO Synthesis platform, the double stranded RNA ligase should stocks generate revenue next year, followed by anticipated early commercial licenses in 2025 and the rollout of the complete ECO Synthesis platform in 2026. Putting all these pieces together, cash balance, reduced burn, growth in pharmaceutical manufacturing and the exciting commercial potential of ECO Synthesis platform gives us a path for potential positive cash flow around the end of 2026 which is within reach of our existing cash runway.

We are rapidly advancing the ECO Synthesis technology. Many of our team members just returned from presenting on our technical progress at the TIDES Europe meeting. Our confidence in the revenue potential of this opportunity is increasing as we continue our conversations with potential partners and experts. As an adjunct to those conversations, we're in the process of forming a strategic advisory board to make sure that we have the best possible understanding of the existing and future landscape so that the ECO Synthesis platform is tailored to meet the real needs of the market. We are truly delighted and honored to welcome John Maraganore as our Inaugural External SAB Member. As Founder and Chief Executive Officer of Alnylam Pharmaceuticals, John pioneered the translation of RNAi from a laboratory tool into an entirely new class of medicine.

Alongside his participation in our strategic advisory board, we also look forward to hearing John's perspective on the RNAi therapeutics landscape during our upcoming ECO Synthesis focused virtual KOL event in December. Before I hand it over to Kevin to outline that event, let me briefly recap the reasons for our enthusiasm about the ECO Synthesis platform. Moving aside three. Growth developers are continuing to evolve pipelines of innovative RNAi therapeutics for large disease indications like Alzheimer's and hypertension, and there is a projected wave of coming demand. The current manufacturing standards phosphoramidite chemistry, is dependable, well established and will no doubt continue to play an important role in the landscape. However, at commercial scale, it also requires enormous capital investment extensively time at high volumes of toxic solvent like acetonitrile.

For reference, a leading contract manufacturing organization recently invested $725 million to build a phosphoramidite chemistry plant with the capacity to manufacture about 1000 kilos of RNAi annually. Our market research indicates that demand is expected to grow to approximately 30,000 kilos annually by around the end of the decade, it would take billions of dollars and many more of these pumps to meet that capacity. Most companies don't have the resources necessary to make that kind of manufacturing investment, particularly given the realities of today's broader capital markets. That's where an elegant enzymatic solution like the ECO Synthesis platform comes in. Today, we're closing in on an aqueous based working process designed to complement phosphoramidite chemistry and vastly reduce the level of capital investment required for large scale production.

As with any disruptive technology, it will be naive to think that Codexis will command the entire market with our platform. So we're thinking critically about where exactly our technology fits within the existing manufacturing landscape. In many cases, that might look like augmenting the chemical approach with a double stranded RNA ligase, which can stitch together short strands of RNA that have been chemically synthesized. This enables much more efficient use of existing facilities. And we currently have collaborations with a few key RNAi players in this space. In other cases, the ECO Synthesis platform can be used to synthesize the complete siRNA. And sometimes the best approach will be a combination of the ECO Synthesis, platform ligation and even chemistry.

That strategic optionality and flexibility is one of the beauties of our platform, and underscores why ECO Synthesis has such promising potential to play critical role in meeting future demand for siRNA. Now, while continuing to refine and perfect the technical piece is important, we also need to pay full attention for real life barriers to adoption of our platform. Put bluntly, why will innovators trust our technology to deliver their valuable siRNA assets when they have a seemingly reliable alternative in phosphoramidite chemistry. But those already developing RNAi therapeutics, it's about demonstrating the levels of purity we can produce and the ease of adoption we can facilitate. For those who aren't, we need to emphasize how the ECO Synthesis platform opens the door for smaller companies to develop RNAi therapeutics for large indication they couldn't otherwise pursue.

We are well aware that these questions will be top of mind for drug developers and manufacturers as key decision makers weigh their options. So it's incumbent on us to help our customers in the investment community understand the need for an enzymatic solution. We think our December virtual KOL event will play a critical role in this ongoing market education process. To cover additional detail on that, and our recent business development efforts, I'll pass it over to Kevin, who has just returned from the TIDES Europe. Kevin?

Kevin Norrett: Thanks, Steven. As mentioned, I was just in Amsterdam at the TIDES Europe meeting where I was energized by the high levels of interest we were seeing from potential customers and collaborators. Continued engagement with key players and decision makers has only reinforced my conviction that there is a very real need for our enzymatic solution. And with that a significant revenue opportunity for Codexis. Shifting to slide four, we look forward to sharing more detail on our recent technical progress in the coming months, and the December virtual KOL event even mentioned will be a terrific opportunity to hear directly from those in the RNAi space, who would benefit from this technology. In addition to welcoming John Maraganore to our SAB, we look forward to his participation in this event, where he will share his perspective on the growing importance of RNAi therapeutics as a class, today's manufacturing landscape and the need for innovation is RNAi Demand growth.

The agenda will also feature discussions around the ECO Synthesis commercial opportunities, and a status update on our anticipated milestones, as well as a technical overview of the platform from Stefan Lutz, our Senior Vice President of Research. We believe this event will be a highly valuable resource for education around what we see as the major growth driver for Codexis. And we hope you'll plan to join us virtually in December. On slide five, I'd like to quickly recap our anticipated key milestones. As we approach the end of 2023, we are nearing the demonstration of grand scale synthesis with our ECO Synthesis technology. We will take a deeper dive into the significance of this key technological milestone during our December event, but at a high level, it means we plan to demonstrate the prepared to scale manufacture of an oligonucleotide composed of the modified nucleotide building blocks typically used in RNAi therapies.

And we plan to do this all under process like conditions. This proof point represents the first step from an R&D project to something with potential commercial applications, and it will enable us to enter pre commercial testing with select customers next year, followed by early commercial licenses of the technology anticipated in 2025. During those phases, we will collect valuable feedback to inform any necessary tweaks or modifications before the plan full commercial launch in 2026. In parallel to that progress, we also plan to make our engineered double stranded RNA ligase widely available for customers in the second half of 2024. In addition to providing a near term RNA synthesis market entry point for us, this product gets our foot in the door with many of the customers currently using phosphoramidite chemistry, but requiring ligation based approaches for longer sequences.

This is a meaningful first step in educating customers on the benefits of incorporating enzymatic solutions as a complement to their existing manufacturing process. Before I turn the call over to Sri to discuss our financial results for the quarter, let me provide an update on our business development activities following our strategic pivot in July. We are in active discussions with Nestle to restructure our collaboration whereby they continue to develop CDX-7108 and Codexis retains an economic interest in this program, but is no longer sharing in the clinical development and commercialization costs. We suspect a potential deal would follow the traditional path for Phase 1 molecule with an upfront payment, clinical milestones and sales face world.

We are also in active negotiations with other potential partners to monetize assets within the segments of our life sciences portfolio, where we’ll be no longer be focused, such as genomics and PCR based diagnostics This is consistent with our previously known strategy to leverage partners with broader channel reach and accelerate by you to Codexis. We anticipate that we'll be able to execute one or more of these deals by the end of this year or early next year, and we look forward to keeping you updated on that progress. With that, I'll turn the call over to Sri.

Sri Ryali: Thanks, Kevin. Good afternoon, everyone. Moving to slide six, released our full third quarter financial results. The press release earlier this afternoon is available on our Investor Relations a website where I call out a few highlights from the quarter. Let me first share some thoughts on our financial position. As Stephen noted, our strong balance sheet today reflects the benefits of a roughly $135 million windfall related to our CDX-616 sales to Pfizer for taxable good between 2021 and 2022. This injection of cash significantly bolstered our financial position and is reflected in our current cash balance for $74.6 million as of September 30. As part of the restructuring announced in July, we focused our money and our people on the priority programs with the highest potential to create value.

And we took decisive action to reduce headcount and consolidate facilities. These decisions lowered our projected cash burn by more than half. We now expect annual burn of roughly $20 million to $30 million over the next few years. This along with the anticipated return to growth of our pharmaceutical manufacturing business in 2024 and expected commercial launch of ECO Synthesis platform is projected to fund our planned operations to positive cash flow, which we expect around the end of 2026. This is a good position to be in. Now, let me provide some brief comments on our Q3 results. During our July 20 call we guided that Q3 product revenue would be our lowest quarter, given the inherent lumpiness of the pharmaceutical manufacturing business, which is driven by timing of customer orders.

That is exactly in line with what we saw this quarter. Total revenues excluding enzyme sales related to PAXLOVID were $9.3 million for the third quarter of 2023 compared to $21.5 million from the prior year. Product revenues excluding sales related to PAXLOVID were $5.4 million from third quarter, compared to $15.1 million for the prior year. The decline is largely due to timing of customer orders, including specific customer building pre-launch inventory in the third quarter of 2022 ahead of the anticipated approval of a pharmaceutical product. However, we expect Q4 product revenues to be more in line with Q1 and Q2 of this year, and we are competent and reiterating our full year 2023 product revenue guidance $30 million to $35 million, With the PAXLOVID windfall now behind us, 2023 has been a recent year for the pharmaceutical manufacturing business.

As we approach the end of this year, we are increasingly confident that this business is on a path to return to sustained growth beginning in 2024. And we plan to provide additional detail during our full year 2023 financial results call. Now turning to R&D revenues, we reported $3.9 million in Q3 compared to $6.4 million last year. This decrease is driven by the completion of work on the Takeda partner programs and the winding down of our Biotherapeutics programs following our decision to exit the space. As a reminder, our Biotherapeutics R&D revenues reflect the reimbursement for approximately 50% of our costs. So while the decision to exit Biotherapeutics will result in lower R&D revenues, removing these costs actually improves their bottom line by reducing overall cash burn.

We continue to expect 2023 R&D revenues the in the range of $21 million to $24 million. Product gross margin excluding enzyme sales related to PAXLOVID is 58% this quarter compared to 55% in the third quarter of 2022. We continue to expect 2023 project -- product gross margin to be in the range of 55% to 65%. Briefly turning to expenses, R&D expenses for the third quarter of 2023 were $13.7 million, compared to $21.8 million last year, SG&A expenses were $12.3 million, compared to $13.5 million in the third quarter of 2022. Compared to both the prior year and last quarter, you can see reductions across R&D and SG&A expenditures resulting from our financial discipline. You can expect to see a continued benefit of the decisive actions we've taken in the fourth quarter continued lower expenses.

You'll notice this quarter that our Q3 GAAP expenses included large one-time charges. These primarily related to the restructuring we announced in July. We booked a $3.1 million charge related to the reduction in force and a $10 million noncash impairment charge reflecting our decision to exit Biotherapeutics and consolidate our facilities. Finally, as you can see the other income and expense line in the table on the slide, we recorded one-time non-cash experiments related to certain investments we previously made in private life science companies. Shifting to slide seven. To recap, we are in a strong financial position. We’re confident in reiterating our 2023 guidance, and we have laid the foundation for our pharmaceutical manufacturing business to return to sustained growth in 2024.

Looking ahead, we've positioned ourselves well with the potential positive cash flow expected around the end of 2026. And we look forward to providing further guidance during our full year 2023 financial results call. I'll now turn the call back, Stephen.

Stephen Dilly: Thank you, Sri. In closing, I'm incredibly optimistic for the difficult decisions we made a few months ago have propositioned Codexis for long term success. We've streamlined the company and zeroed in on the killer app of our CodeEvolver platform, and we have the resources we need to realize the potentially massive value of our ECO Synthesis technology. Now we're in execution mode, and with a cascade of upcoming milestones, we look forward to keeping you up to date on our progress. With that, we'd be happy to take your questions. Operator?

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