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Edited Transcript of CDXS earnings conference call or presentation 6-Aug-19 8:30pm GMT

Q2 2019 Codexis Inc Earnings Call

San Francisco Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Codexis Inc earnings conference call or presentation Tuesday, August 6, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gordon T. B. Sangster

Codexis, Inc. - Senior VP & CFO

* John J. Nicols

Codexis, Inc. - President, CEO & Director

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Conference Call Participants

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* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* Matthew Gregory Hewitt

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Ryan Frederick Blicker

Cowen and Company, LLC, Research Division - VP of Healthcare

* Steven Schwartz

First Analysis Securities Corporation, Research Division - Analyst

* Swayampakula Ramakanth

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

* Bruce Voss

Lippert/Heilshorn & Associates, Inc. - MD and Principal

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q2 2019 Codexis Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Bruce Voss. Sir, you may begin.

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Bruce Voss, Lippert/Heilshorn & Associates, Inc. - MD and Principal [2]

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Thank you. This is Bruce Voss with LHA. Thank you all for participating in today's Codexis call to discuss second quarter 2019 financial results and business progress. Please note that Codexis has posted an updated pipeline snapshot slide presentation on the Investors section of codexis.com to accompany today's call.

Joining me from Codexis are John Nicols, President and Chief Executive Officer; and Gordon Sangster, the Company's 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. To the extent that statements made by management are not descriptions of historical facts regarding Codexis, they are forward-looking statements reflecting the beliefs and expectations of management as of August 6, 2019.

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 the Company's control and could materially affect actual results. For details about these risks, please see the quarterly news release that accompanies this call as well as the Company's SEC filings. Codexis expressly disclaims any intent or obligation to update forward-looking statements, except as required by law.

Now I'd like to turn the call over to John Nicols. John?

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John J. Nicols, Codexis, Inc. - President, CEO & Director [3]

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Thanks, Bruce. Good afternoon, everyone, and thank you for joining us. The second quarter was another very solid performance for Codexis as we continued to deliver against the critical objectives we established for 2019; expanding our customer base, commercializing installations in pharma manufacturing, adding to and strengthening our CodeEvolver platform licensing network, breaking out in molecular diagnostics and other new industrial verticals, advancing our Novel Biotherapeutics pipeline, bolstering the cash on our debt-free balance sheet, and onboarding critical new human talent. All of these were delivered in this very productive second quarter.

Let me now walk you through some details to highlight our progress, starting with product sales. Product sales were up 68% year-over-year and led the way for us in the second quarter. As usual, enzyme sales to Merck for their manufacturing of the active ingredient in Januvia were a solid 7-digit baseload for our product sales.

Excitingly, in addition, we have generated over $1 million of product sales with another top 25 pharmaceutical customer in the quarter, as they began the manufacture of registration batches for their planned 2020 drug launch following its recent New Drug Application or NDA acceptance by the FDA.

In total, 8 customers purchased over $100,000 of products in the quarter, up from 5 customers in the second quarter last year, reinforcing the accelerating penetration of our Performance Enzymes in real world manufacturing processes. Urovant Sciences was among the leaders for our product sales as they lined up supplies for their planned NDA filing with the FDA in early 2020 for vibegron, a potential treatment for overactive bladder.

Rounding out the list of clients with more than $100,000 in product sales were 2 more top 25 pharma customers each needing batches of Performance Enzymes for their clinical-stage drugs; 2 leading generic pharmaceutical companies; and Tate & Lyle for the manufacture of their better tasting TASTEVA M Stevia sweetener. Product gross margins in the quarter came in at a very strong 56% which lifted the first half product margins to 50%.

R&D revenues for the quarter were predictably down year-over-year due to large comps in the prior year quarter from Tate & Lyle and Nestle Health Science. But excluding these 2 events, R&D revenues were up in excess of 40% year-over-year, and these were spread over a larger customer and industrial base. Six-digit plus R&D revenues were generated in the quarter with Nestle Health Science, Merck, Novartis and 2 other top 25 pharma clients.

Novartis was added to the ranks of CodeEvolver platform licensee, which by the way, is off to a solid start and the tech transfer to upgrade Merck's platform was completed, excellent widening and deepening of adoption in pharma manufacturing in the quarter. Outside pharma, new R&D projects were initiated with Tate & Lyle and 1 other new customer, each in different non-sweetener food ingredient applications.

In molecular diagnostics and molecular biology applications, we broke out with a combined R&D revenue in excess of $750,000 with 2 new clients and 2 separate in new applications. These have been under negotiated since last -- under negotiation since late last year, so it's great to see these materialize in the quarter. And even better that they are on top of continued projections for our next generation sequencing enzymes to deliver significant sales starting later this year, targeting molecular diagnostic applications.

The blossoming of food and molecular biology and diagnostic applications in the quarter show that these markets are finally reaching inflection points for Codexis and the value-creating proteins we can engineer for them. Capstoning the expansion of the customer base here at Codexis, I note that combining products with research revenues, we generated 6-digit sales with 15 different customers in the second quarter, which is a record for the company.

Second half sales are projected to be higher than first half sales as we maintain our full year revenue guidance of between $69 million and $72 million. New or significantly larger second half sales contributors on top of our solid first half base include revenues recognized from the Novartis CodeEvolver license and expected low single-digit million-dollar milestone achievement from the backend of the GSK CodeEvolver license, growth of sales to Tate & Lyle for TASTEVA M, plus growth of sales in molecular biology and diagnostics applications.

In the Novel Biotherapeutics segment, there are not a lot of specifics to provide today though progress is well on track with our 2019 plans. Nestle Health Science is lining up for CDX-6114's first phenylketonuria patient trials and the potential for a significant milestone to be earned by Codexis in 2020 If that is successful.

And our pipeline of early stage enzyme therapy candidates continue to move ahead nicely in the quarter, including several recently generating positive preclinical proof of concept data readouts; more to come on the pipeline as we move to deliver on our core goal of achieving partnerable status for at least 2 of these programs by year-end.

Before turning over the call to Gordon, I'd like to review our updated Codexis 2019 pipeline snapshot posted today to our website. As you can see on Slide 2, we've added 9 net new projects to the pipeline during this past year; 13 new projects overwhelmed the 4 projects that dropped off the list due to inactivity over the past 2 years.

The number of commercial installations grew by 2 from 9 to 11 over the last year, the ultimate fruits of our sales cycle when our R&D engine is no longer needed and we can generate sustained revenues and margins. Two new commercial installations this past year were enzymes for Tate & Lyle's TASTEVA M sweetener and for KYORIN’s urinary incontinence drug Beova.

And on Slide 4, you can see a 58% increase in the number of projects in our pipeline over the past 2 years and a doubling of the number of projects from 26 to 52 over the past 3 years. At the more detailed level, as shown on slide 4, we are successfully expanding our pipeline across multiple industries and applications in parallel.

For example, we have more than doubled the number of late-stage Phase II or Phase III projects over the last 3 years to 15 Codexis developed Performance Enzymes. Similarly, the number of Performance Enzyme projects in other industries has increased to 12 across 3 different industrial verticals.

Finally, the number of projects that Codexis is self-funding in our pipeline has doubled over the past 3 years from 6 to 12. Notably, these programs have the prospect for generally larger economic rewards to Codexis than partner-funded projects. And it is here that I'm pleased to note our expanded balance sheet capacity, which we can leverage to smartly invest in great opportunities.

I'd like to extend a special thanks to Casdin Capital, which in June, added to its ownership position in Codexis with a $50 million equity investment. I'm delighted to say that this private placement was completed very cost effectively without related expenses other than the standard legal fees.

Let me now turn the call over to Gordon to provide more details on our Q2 financial results. Gordon?

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Gordon T. B. Sangster, Codexis, Inc. - Senior VP & CFO [4]

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Thanks, John. Total revenues for the second quarter of 2019 were $12.3 million compared with $13.5 million in Q2 of 2018. Second quarter 2019 revenue included $10.6 million from the Performance Enzymes segment and $1.7 million from the Novel Biotherapeutics segment.

Product revenue for the second quarter of 2019 increased by 68%, $6.2 million from $3.7 million a year ago with the increase due to demand for enzymes for both generic and branded pharmaceutical products. R&D revenue for the 2019 second quarter was $6.1 million versus $9.8 million in Q2 of 2018.

As John mentioned, the decrease was primarily due to both completion of services in the prior year's Q2 to Tate & Lyle for their sweetener product, which is now transitioned to product revenue. This decrease was partially offset by the revenue recognition of a software license fee from Merck.

R&D revenue for the second quarter of 2019 included $4.3 million from the Performance Enzymes segment and $1.7 million from the Novel Biotherapeutics segment. Gross margin on product revenue for the second quarter of 2019 was 56%, up from 30% a year ago with the increase due to product mix.

Turning to operating expenses, R&D expenses for the second quarter of 2019 were $8.3 million and included $5.1 million from the Performance Enzymes segment and $2.9 million from the Novel Biotherapeutics segment. The increase in operating expenses from $7.4 million in the prior year period was primarily due to higher expenses related to headcount, allocation of occupancy-related costs and lab supplies, partially offset by lower outside services.

SG&A expenses in Q2 of 2019 were $7.9 million which included $2.1 million from the Performance Enzymes segment, $0.6 million from the Novel Biotherapeutics segment and the remaining portion is included in $5.1 million in corporate overhead and depreciation expense. The increase from $7.4 million a year ago was primarily due to an increase in costs associated with facilities and headcount, which were partially offset by lower stock compensation.

The net loss for the second quarter of 2019 was $6.5 million of $0.12 per share, which compares with a net loss for the second quarter of 2018 of $3.7 million or $0.07 per share. On a non-GAAP basis, excluding non-cash depreciation and stock-based compensation expense, the adjusted net loss for the second quarter of 2019 was $4.1 million, or $0.08 per share versus a non-GAAP adjusted net loss a year ago of $1 million or $0.02 per share.

Turning to the year-to-date financial results, total revenues for the first half of 2019 were $27.9 million, up slightly from the first half of 2018. This tracks well against the guidance we announced earlier this year, of the 40%, 60% split for revenues between the first half of the year and the second half. R&D revenues were $13.7 million and consisted of $6.4 million from the Performance Enzymes segment and $7.2 million from the Novel Biotherapeutics segment.

Gross margin on product revenues for the first 6 months of 2019 was 50%, an increase from 35% from the year ago period due to product mix. R&D expenses for the first half of 2019 were $16.3 million and SG&A expenses were also $16.3 million.

We reported net loss for the first half of 2019 of $11.6 million or $0.21 per share, which compares with a year ago of $8.4 million or $0.17 per share. On a non-GAAP basis, the net loss for the first 6 months of 2019 was $6.9 million or $0.13 per share versus non-GAAP net loss for the first half of 2018 of $3.5 million or $0.07 per share.

Cash and cash equivalents as of June 30, 2019, were $93.4 million, up from $53 million as of December 31, 2018. This increase includes proceeds from the $50 million private placement we completed in June.

Today, we are reaffirming the 2019 financial guidance we introduced on our conference call in March. We expect total revenues for the year to be between $69 million and $72 million, which represents growth of 14% to 19% over 2018. We expect 40% of the second half revenues to fall in Q3 and 60% to fall in Q4.

We expect product sales to range from $26 million to $29 million, we expect gross margin on product sales to be between 48% and 52%, and we expect total operating expenses to be approximately $72 million. I'm pleased to report that the first 6 months of 2019 were tracking well against all of these financial metrics.

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John J. Nicols, Codexis, Inc. - President, CEO & Director [5]

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Thanks, Gordon. I'm sure all of our investors and analysts have read the tandem press releases we issued this afternoon, which included the announcement of Gordon's plan to retire. I want to add a deep and heartfelt thank you from all of us at Codexis, Gordon, and particularly from me personally for all you have done for the Company since you joined us as CFO 5 years ago. You will be missed and your colleagues at Codexis wish you all the best in your retirement.

At the same time, we welcome Ross Taylor as our new CFO effective August 19. Ross brings to Codexis more than 20 years of healthcare financial leadership experience, most recently as CFO of Abaxis, which is now part of Zoetis. Given his extensive industry experience and equity capital markets background, I am confident he will seamlessly step in to help Codexis continue to grow and succeed.

Additionally, his significant analytical strengths and strategic approach refined across a diverse set of businesses and industry sectors position him to add significant value as we expand across a growing set of markets and partnerships. We look forward to Ross' arrival and to get him up to speed and impactful quickly and effectively. Gordon will help facilitate the transition through the end of August.

Now let me close this call, like usual, by highlighting our strategic objectives to drive our near and longer-term growth. Our business strategy begins with a relentless focus on our CodeEvolver protein engineering platform technology. We are delighted with the increased recognition our technology is garnering from global top 25 pharma companies and by a growing customer base that spans multiple verticals.

Proprietary artificial intelligence competencies are at the core of our ability to discover proteins that meet customer needs at an ever accelerating pace. Together with other cutting edge synthetic biology practiced by the dynamic scientific teams at Codexis; CodeEvolver is a powerful, constantly improving platform that rapidly creates novel high-performing proteins. In parallel, continuous business process improvements are accelerating our ability to monetize those proteins. We are affirming our belief that the revenue-generating capabilities of CodeEvolver in the high growth synthetic biology segment are unparalleled.

We will be highlighting the protein engineering capabilities of our CodeEvolver platform in a Company-sponsored scientific Symposium in October. I'm thrilled to announce our guest speaker will be Dr. Frances Arnold, who is the Linus Pauling Professor of Chemical Engineering, Bioengineering and Biochemistry at the California Institute of Technology. You may recall that Dr. Arnold received the 2018 Nobel Prize in chemistry for her pioneering work in the directed evolution of enzymes.

We have been building our protein discovery and commercialization business steadily and relentlessly. Our updated product pipeline shows our parallel expansion over a broadening group of customers across a growing list of industries.

In Novel Biotherapeutics, we are further validating the ability of CodeEvolver to create differentiated, patentable new drugs and we will be bringing at least 2 programs to partnerable status by year-end 2019.

With our significantly strengthened balance sheet featuring more than $90 million in cash at quarter close, we are extremely well positioned to capitalize on a variety of high value growth opportunities afforded by our talented Codexis team and the versatility of our CodeEvolver technology.

With that overview, I'd like to open up the call for questions, operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Brandon Couillard with Jefferies.

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John J. Nicols, Codexis, Inc. - President, CEO & Director [2]

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Before Brandon jumps on -- I apologize, while we're waiting. I'd like to alert view of our busy investor -- investment conference schedule this fall. We'll be presenting at the Cantor Fitzgerald Global Healthcare Conference being held October 2 through 4 in New York; the Stephens Nashville 2019 Investment Conference being held November 19 through 20; and the Stifel Healthcare Conference being held November 19 through 21 in New York; and finally, the Craig-Hallum Conference being held in New York November 12. Webcast of our presentations at these conferences will be posted to the Investor Section of codexis.com.

Okay, operator, we're ready for the first question.

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Operator [3]

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Brandon Couillard, your line is now open.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [4]

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First off, Gordon, it has been a pleasure working with you. Had no idea you were considering retirement, but wish you the best.

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Gordon T. B. Sangster, Codexis, Inc. - Senior VP & CFO [5]

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Great. Thanks a lot, Brandon.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [6]

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John, would be great if you could -- to the extent you're willing and able to, would love to get some more detail on the 2 new customer partnered programs in the molecular diagnostics segment, if you could elaborate kind of what the application set is and perhaps the potential size of the opportunity, and maybe the time lines for I guess these becoming much bigger sort of product revenue-generating endeavors?

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John J. Nicols, Codexis, Inc. - President, CEO & Director [7]

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Sure. Yes, we're really happy that we've secured these 2 new projects with these 2 new clients. The enzymes that we are engineering right now with our CodeEvolver platform are not targeting the enzymes that are needed for next generation sequencing workflows. These are over and above that particular application, which we continue to see strong -- strengthen and that we've talked about many times in the past. So these are newer targets. They're both very customized. They're more niche in terms of the potential applicability and one of them is targeting a different class of diagnostic, not genomic diagnostic.

We're all familiar with using next-gen sequencing or polymerase chain reaction. These are diagnostics of other types of biomarkers in human biology. We're excited -- we're working with one of the great leaders in this space and the progress of that R&D project is proceeding quite well. And there could be multiple targets that this partnership could go after. In other words, more than 1 particular biomarker could benefit by more than 1 Codexis enzyme.

The second application is more of a molecular biology application. It's also a niche type of enzyme and it's going to enable this particular class of clients to manufacture their products more efficiently and we see this as a growth segment for the Company and we're partnered up with a leader in that space as well. So that's a little more color about these 2 new growth applications for the Company Brandon.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [8]

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Appreciate that. And on the back of the cash and capital raise, should we expect you to really accelerate the biotherapeutic development activity, kind of where do you see the pipeline progressing kind of over the next 12-months now that you have that funding back?

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John J. Nicols, Codexis, Inc. - President, CEO & Director [9]

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Yes, I think clearly, it gives us optionality to do so. But quite frankly, we're driving that pipeline as hard and as fast as we can. We're working on 5 programs in parallel to the Nestle led PKU program that we've already out-licensed to Nestle in the beginning of this year. And we're driving those as hard as we can. Now those programs, as they move through their early discovery and preclinical development cycle, will require more capital as they continue to be successful, but those are relatively modest capital spends and we'll keep you posted on how those unfold. It's not going to add to a lot of our costs this year for example, although it's a piece of why we continue to uphold higher operating expense outlook for the rest of this year than we've so far been spending this year.

Next year, the spending associated with that pipeline will go up naturally, with the successful advancement of those assets in our pipeline. But I'd say, not only does the option -- the cash, the additional cash in our balance sheet enables us to drive the pipeline effectively and give us a lot of runway for that type therapeutics pipeline. It also enables us to take some smart bets on developing Performance Enzymes without customer partnered money. We did that with the early days of our Stevia program before we ever showed the enzymes that we believed we could discover. To Tate & Lyle and others, we have done significant proof of concept work on our own account and we think that was a key element for us to drive a much more attractive commercialization deal with Tate & Lyle. So we look to do that as well to help accelerate our growth in Performance Enzymes too.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [10]

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Lastly, a follow-up for Gordon. If we just look at the back half of the year, revenue guidance implies R&D revs more or less double in the back half compared to the first half of the year. Can you just sort of speak to the level of confidence and visibility you have on that ramp in the second half?

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Gordon T. B. Sangster, Codexis, Inc. - Senior VP & CFO [11]

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Yes, we've got a pretty good visibility on that. Brandon. Part of it is, we haven't recognized any revenue yet from the Novartis CodeEvolver license. So that will kick in, in the second half of the year and we've got other projects that we expect to be able to complete by the end of the year, which will help us to reach the guidance that we just announced or confirmed.

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Operator [12]

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And our next question comes from Matt Hewitt with Craig-Hallum Capital.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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I'd like to congratulate you on your retirement Gordon and best wishes as you move on and enjoy your -- a little bit more freedom.

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Gordon T. B. Sangster, Codexis, Inc. - Senior VP & CFO [14]

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Thank you, Matthew.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Absolutely. Sticking with the pipeline a little bit, first question, last quarter you had 3 6-figure industrial customers that came on. I'm curious if there was any follow-on with those customers or how that vertical is kind of shaping up and how we should be thinking about that going forward?

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John J. Nicols, Codexis, Inc. - President, CEO & Director [16]

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Yes, all 3 of those customers grew in the second quarter and the project work in the R&D chapter continues to advance well. In the prepared remarks today, I gave a little more definition of what those 3 projects were and 2 of them are these new diagnostic marque biology application, applications which I detailed based on Brandon's question. The third one was another food application and it's not really a classic food application. It's kind of a near food application. So last quarter, we spoke to it as a new industrial sector. This time, it's really closely aligned with the food space. So we put it in there, noted that it's not a sweetener. It's another food use for clinics is enzymes. So that's where those 3 are and between the 3 of them, there was well over $1 million of revenue that hit the P&L in the second quarter for those 3 new growing projects and applications.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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The other, I guess, follow-up question would be regarding the 2 new -- it was the Top 20 pharma customers, and I think you gave us some details in the prepared remarks regarding those. Was is, one is stepping up ahead of an NDA early next year, the one recently received an NDA, did I get those right? And any additional color that you can provide on those would be helpful.

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John J. Nicols, Codexis, Inc. - President, CEO & Director [18]

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Yes, I spoke to actually 2 unnamed Top 25 pharma companies in both the product area and in the R&D revenue area and those are 4 different Top 25 companies just for your information. So in the R&D revenue area, one of the projects was a dedicated project team with a leading actually Top 10 pharma company referred to in the past and they are working a parallel process for their pipeline of drug processes.

Looking at my list here, the other Top 25 drug company in the R&D revenue is a company we haven't done a lot of business with historically and we're really excited to have gotten started with that particular Top 25 pharma company. And in the second quarter, we actually did a whole stack of screens, those are usually not very, very high revenue, not very costly to the client, but it shows that this client really gets it, and they were looking at a lot of different drug processes and early-stage projects with Codexis and we're hopeful that those translate into deeper protein engineering projects with that particular Top 25 pharma company.

In the product area, you got it close, Urovant is the company that is ahead of the NDA filing next year. We did -- in addition, we did over $1 million of product sales to another Top 25 drug company, they've already gotten acceptance for their NDA. So this client is lining up for their launch next year.

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Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [19]

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That's great. And maybe one last one, how many teams are you currently working for the R&D process group right now. So I'm trying to remember what the number was last quarter, but if you could give us that number for Q2? I've got it somewhere in my notes, I'm sure.

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John J. Nicols, Codexis, Inc. - President, CEO & Director [20]

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Yes, right now we're operating maybe 16 to 18 different parallel protein engineering teams

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Operator [21]

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And our next question comes from Doug Schenkel with Cowen.

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Ryan Frederick Blicker, Cowen and Company, LLC, Research Division - VP of Healthcare [22]

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This is Ryan on for Doug. Thanks for taking my questions. Congrats to Gordon on retirement and congrats to Ross on the new job. Maybe just following up on first on Brandon's question earlier on the R&D revenue guidance and the step-up in Q4. This would seem to suggest to us that you expect another new strategic deal in Q4, is that correct? And if so how much visibility do you have on that at this point?

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Gordon T. B. Sangster, Codexis, Inc. - Senior VP & CFO [23]

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We've got pretty good visibility on the back half of the year. As I said, the main thing would the Novartis CodeEvolver license. We haven't recognized any revenue yet, but that will start in the third quarter and ramp up in Q4 and we're looking at a variety of projects, some of them John alluded to right now in terms of these new verticals that we're talking about. But there are -- there is the possibility of other deals as well in the second half.

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Ryan Frederick Blicker, Cowen and Company, LLC, Research Division - VP of Healthcare [24]

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Great. And then I apologize if I missed this, but are you still on track to launch the polymerase for your NGS customers late this year and any update you can provide on overall NGS enzyme revenue in 2019?

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John J. Nicols, Codexis, Inc. - President, CEO & Director [25]

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Yes, we still expect to deliver material sales in the NGS enzymes arena. Those would be focused on the DNA ligase, which is already launched, that are out in the market. The polymerase is getting buttoned up for beta trialing very shortly. So absolutely this will be in the hands of customers and will be set up for launch before year-end. So we're still doing really good work there. We're really excited. We're getting encouraged by our clients. And it's looking to be a really good target segment for the company, not only for DNA ligase and polymerase, we also see opportunities for other enzymes that are beneficial in the workflows for running next-gen sequencing workflows.

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Operator [26]

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And our next question comes from RK from H.C. Wainwright.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [27]

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Gordon, you will certainly be missed and I wish you all the best in your retirement and hopefully, you will have a better time off Codexis. On the pipeline. I believe. John, you stated that there is one new project other than Tate & Lyle that got included into this pipeline. Could you give us a little bit more color on the opportunity? And it's probably of becoming a meaningful revenue line soon.

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John J. Nicols, Codexis, Inc. - President, CEO & Director [28]

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I just want to make sure I'm answering the question, RK. So are you asking about the -- a new Tate & Lyle project that was initiated that I referred to my prepared remarks?

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [29]

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Yes.

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John J. Nicols, Codexis, Inc. - President, CEO & Director [30]

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Yes. So it's early -- it's an early start, so probability of success in early R&D is always lower. But as we advance through the CodeEvolver protein engineering process the odds of creating an enzyme liberate value and justifies the investment by Tate & Lyle to install it commercially grows.

So Tate & Lyle is a power user of our technology. They know what we can do. It's been proven how successfully several times on very impactful projects. So they usually -- these guys know how to point our technology, which is really the state of the relationship with them. So generally speaking, a project directed with Tate & Lyle has a little higher prospect of ultimately commercializing given their knowledge of wielding the technology. But it's still early, I would say like both of the other 2 successful commercial projects with Tate & Lyle, if things go well from the beginning, which as I said just started in 2Q to commercialization can take place -- can all be accomplished in 2 years and this is no -- this project also has that prospect.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [31]

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And then on the generics business, you stated that there were 2 additional projects over the last 12 months. How meaningful is this segment when -- and how much of a sense does it make for you to go and get more generics projects on board?

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John J. Nicols, Codexis, Inc. - President, CEO & Director [32]

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The -- looking at the pipeline in total, we have 6 commercial sustaining products for the generic industry, we have 5 pre-commercial. Those 6 sustaining revenue businesses are, in total, a lot smaller than the one success with Merck, for example. So they are nice pieces of business, they're generally smaller in their revenue scope, and noting to the pre-commercial side of the pipeline, it's pretty rare that Codexis would spend its own money to develop enzyme targeting a generic process, the generic drug process.

You can see we have done that in one case. So that project is encouraging to us, but it's the anomaly we usually drive the customer to fund those programs. So -- anyway, so it's a nice segment, it's stable to growing and I think we do better business with patent holders in the drug manufacturing world, on average, but we continue to support and grow in this sector.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [33]

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Okay. And then my last question is in Novel Biotherapeutics, so you are saying that the CDX-6114 trial is expected to start in 2020. So what is left or what needs to get done still before the study can get started?

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John J. Nicols, Codexis, Inc. - President, CEO & Director [34]

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Yes, so this program is now under the direct control on Nestle. So under the out-licensing partnering arrangement we have Nestle, we're informed but not involved any longer. And to be precise, what I mentioned in the prepared remarks was that we have an opportunity to earn a milestone in 2020 from the first trial conducted with phenylketonuria or PKU patients which Nestle is lining up.

So it's basically a marker in your models to say that next year if things continue to go well with CDX-6114 for PKU that there is another milestone on the horizon next year, not this year. And we're very close to Nestle both in how they're running that program and in partnering projects that we have ongoing with Nestle. So we're fully confident that they're driving this -- the CDX-6114 product as assertively and as aggressively as we would hope and as we would. So we're very pleased with the way they're running the program.

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Operator [35]

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(Operator Instructions) Our next question comes from Steve Schwartz with First Analysis.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [36]

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Let me wish congratulations to Gordon.

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Gordon T. B. Sangster, Codexis, Inc. - Senior VP & CFO [37]

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Thank you, Steve.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [38]

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And John, given the complexity in the life-term of these licensing deals, if you let Gordon keep his cell phone, I'll be glad to harass him well through 2020 with questions on those licensing deals. But -- and for the more serious matters, with respect to the pipeline, you have listed Codexis self-funded pre-commercial project in Food Ingredients. Is that in fact what you're referring to in this non-sweetener food application or is that something completely different?

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John J. Nicols, Codexis, Inc. - President, CEO & Director [39]

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That's actually something completely different, Steve. Thanks for highlighting that. When I spoke in prepared remarks and I forget which of the analysts asked the question. I was referring to a customer-funded project which generated revenue for us in the second quarter. So that's 1 of the 3 in the customer-partnered line. This one in the self-funded is an enzyme that we are developing with an R&D team targeting an application that we're quite excited about. And we're using our own funds for that. Ultimately, we will seek a partner because our channel to market is obviously very limited as an enzyme company. So we're going to develop the asset to a point where we have a compelling proof of concept and then we will go out and we will speak to clients and pitch them on the value that it can create and ideally create a competition for a partner to take it to market.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [40]

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And so a project like this, does it spawn itself from the work you're already doing in that immediate area through like a Tate & Lyle or through these other customer partnered programs or has something like that coming about?

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John J. Nicols, Codexis, Inc. - President, CEO & Director [41]

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No, it doesn't at all. Actually, it can't, if we're privy to ideas and project concepts in our partnership discussions, those would likely be bound by confidentialities that would prohibit us to work on our own. These are in fact projects that we identify with our own market research or with our own frontline business development team where they see an opportunity for an improved enzyme, maybe an enzyme that's already being used by clients that has deficiencies in today's or tomorrow's markets or we see another application where a new enzyme can deliver value where enzymes aren't used. So these are projects that we conceive of with our own intelligence and then we do proof-of-concept work using CodeEvolver. We like this model very much. It's proven successful with Stevia and we think it can prove successful in other segments and opportunities as well.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [42]

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Okay, and then sticking with the pipeline snapshot, RK had asked about the generic opportunities for generic drugs. And certainly, it's a big area on the pipeline. What direction does it go from here, where you have the FDA passing through a higher volume of ANDAs, right and the pricing gets more competitive on generics, which is favorable to your -- what you do. But at the same time, it seems like the life cycle of the generics themselves and the market share for any given company's generic seems to be shrinking. Is it all in all, the market dynamics favorable to you or against you in this situation?

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John J. Nicols, Codexis, Inc. - President, CEO & Director [43]

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I think it's more challenging. I would argue that the lifecycle of the successful generic drug is actually not shrinking over time that these drugs can get locked in for a very long periods of time. But you're right about the complexity of market share because many, many generic companies gun for the same generic drug. And so it's hard for us to position ourselves, probably impossible for us to position ourselves against all of these companies trying to grab a piece of the market as it goes generic. So we're selective in our partnerships and where we've had success, I might say it's -- it is not a very large part of our R&D utilization today creating new proteins for generic drugs, but it continues to hold up as a good solid target for us that will generate great returns on investment like all of our projects will.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [44]

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And then my last question is, just with respect to R&D expense. It seems in the first half of the year, you've been consistent in around $8 million, roughly speaking. What does the second half of the year look like for that expense? And then, even if you can generally touch on 2020 with some of the activities, where should we be modeling this expense at?

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Gordon T. B. Sangster, Codexis, Inc. - Senior VP & CFO [45]

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Yes, we'd expect R&D expense to ramp up in the second half slightly. We're going to have the full 6 months, so some of the hedge that we've added in the first half of the year and also just advancing some of these programs. So I would expect that to get back to our $72 million guidance in total OpEx for the year, roughly split evenly between R&D and G&A.

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Operator [46]

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Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to John Nicols President and CEO for any closing remarks.

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John J. Nicols, Codexis, Inc. - President, CEO & Director [47]

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Okay. Thank you, everyone, for your questions. Congratulations, Gordon, for your last, call it the earnings call of your career. We're excited about our many developments over the first half of this year and we look forward to providing ongoing progress updates to you. In the meantime, everyone, have a great day.

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Operator [48]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program and you may all disconnect. Everyone have a great day.