Yahoo Finance Codexis, Inc. (NASDAQ:CDXS) Q4 2023 Earnings Call Transcript
Codexis, Inc. (NASDAQ:CDXS) Q4 2023 Earnings Call Transcript February 28, 2024
Codexis, Inc. beats earnings expectations. Reported EPS is $-0.1, expectations were $-0.16. CDXS isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Codexis Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] Please note that this call 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; Sri Ryali, Chief Financial Officer; and Stefan Lutz, SVP of Research. 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 2024 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. 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 28, 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 such as required by law. And now I'll turn the call over to Stephen.
Stephen Dilly: Thank you, Carrie, and thanks, everyone, for joining. Seven months ago, we took decisive action to reduce our cash burn by more than 50% and execute on a clear prioritized strategy. We ended 2023 strongly with clear indications that the strategic decisions we made last year are translating into real momentum. This was illustrated by the series of exciting and validating announcements we made in December, specifically the achievement of ground-scale synthesis with our ECO Synthesis manufacturing platform, the completion of an exclusive licensing agreement with Aldevron for our Codex HiCap RNA polymerase and our purchase agreement with Nestle for CDX-7108. We've continued that upward trajectory with a couple of positive updates already under our belt in 2024.
First, driven by the extremely encouraging technical progress we're making with the ECO Synthesis manufacturing platform that Stefan Lutz will describe later in this call, we announced plans to initiate the construction schedule for our ECO Synthesis Innovation Lab. We expect that this facility will be a hugely valuable resource to support the technical and commercial advancement of our ECO Synthesis manufacturing platform. Additionally, the Innovation Lab is intended to enable us to provide sufficient GLP-grade siRNA directly to innovators to support preclinical development of their product candidates. As Kevin will describe, this gives us access to a critical part of the growing SiRNA ecosystem. Furthermore, we anticipate that the learnings from the ECO Synthesis lab will enable us to move to in-house full-scale GMP siRNA production when the time is right.
Now while the business case for acceleration of the ECO Synthesis Innovation Lab is compelling, we made sure to secure the financial resources first by executing on a very carefully designed strategic debt financing with Innovatus Capital Partners. Sri will describe the financial details in his comments, but the punch line is that the Innovatus deal fully funds the construction and operation of our ECO Synthesis Innovation Lab several years and strengthens our balance sheet and increases our operational flexibility through our projected runway to cash flow positivity around the end of 2026. On the heels of that announcement, we were also delighted to welcome two additional members to our Strategic Advisory Board, further broadening this group's scope of relevant expertise to help guide our strategic direction.
Finally, we added more strength to our balance sheet just over the last few days when we announced the completion of an exclusive out license for a noncore asset this time with Roche for our newly engineered double-stranded DNA ligase. As you can see, we've done exactly what we said we're going to do and even more right on the time lines we laid out. As a result, we now have projected runway through positive cash flow expected around the end of 2026, an innovation engine with an anticipated billion-dollar-plus market potential in our ECO Synthesis manufacturing platform and an adjacent growing core pharmaceutical manufacturing business that generates cash and boosts our relevant commercial reach. Before I pass it off to Stefan, and then Kevin to review our recent technical and commercial progress, let me share some thoughts on how we view the road ahead.
Moving to Slide 3. Our path to success starts with our long-standing pharmaceutical manufacturing business. We've been working hard to return this core business to an upward trajectory. And today, we're pleased to highlight anticipated 2024 product revenue growth of at least 10% from 2023. Underpinned by our CodeEvolver directed evolution platform, the value of the technical expertise, credibility and commercial relationships we developed through this business is critical. Furthermore, the cash our pharmaceutical manufacturing business generates is an invaluable element of supporting our runway to breakeven and positive cash flow. That said, we believe our ECO Synthesis manufacturing platform to enable the commercial scale manufacturer of RNAi therapeutics has true breakout potential to transform the value trajectory of Codexis.
The great thing about Codexis is the synergy of the experience and commercial infrastructure of our pharmaceutical manufacturing business with the emerging opportunity of the ECO Synthesis manufacturing platform. A beautiful example of that synergy is how we're approaching the commercialization of our double-stranded RNA ligase program, which is an important stepping stone on the way to fully enzymatic siRNA synthesis. To recap, the RNA ligase is designed to allow innovators to build full-length siRNA from several shorter fragments. That's important because both the cost and impurity profile of phosphoramidite chemistry-built molecule increases with the length of construct. It's a nice idea, but in order to turn it into a real commercial opportunity, you have to be able to build an enzyme optimized for the specific reaction being driven and rapidly scale the manufacturing and supply to fit in with the requirements and schedule of the customer.
We believe Codexis is uniquely equipped to meet that challenge because we've been doing something extremely similar for a decade or more through our pharmaceutical manufacturing business. Look for some exciting news flow on our ecoRNA ligase program in the second quarter. And now I'd like to pass the call over to Stefan Lutz, our Senior Vice President of Research, to describe some of our exciting progress on the ECO Synthesis manufacturing platform. Stefan?
Stefan Lutz: Thank you, Stephen. I'd like to use my time today to briefly recap our recent progress on the ECO Synthesis manufacturing platform and outline what you should expect on the technical front in the coming months. Shifting to Slide 4. As we announced in December, we achieved gram-scale synthesis with our ECO Synthesis manufacturing platform. This was a critical technical milestone, providing proof of concept for the platform's capability of manufacturing and preparative scale, oligonucleotides composed of modified nucleotide building blocks typically used in RNAi therapeutics under process-like conditions. Our enzyme engineering teams have made tremendous progress in transforming native enzymes into high-performance biocatalysts that together offer a scalable process solution for siRNA manufacturing.
In addition, there are two more reasons why hitting this gram-scale benchmark is important. Firstly, it has enabled our scientists to initiate an in-depth assessment of the impurity profile for oligonucleotides produced with the ECO Synthesis platform. Secondly, it has provided a first data set on process-related parameters, informing early models of the manufacturing process and laying the foundation for broader platform development and process optimization efforts. The last two decades of experience have taught us that the solution to a difficult challenge sometimes lies in evolving the enzyme and sometimes in tweaking the reaction conditions. Experimental testing and validation of the ECO Synthesis platform allows us to refine our models and also enables us to leverage complementary and sometimes synergistic effects of enzyme engineering and process engineering.
It also sets the stage for the ECO Synthesis Innovation Lab, which takes these efforts to the next level by giving us a venue to further push scale and process development capabilities. Kevin will speak more to the value of this facility on the commercial side, but we expect that the data-driven insights we gain will give us critical information to drive robust conversations with potential early access customers. Since achieving gram-scale synthesis, we've continued to push the ECO Synthesis manufacturing platform with a particular focus on synthesizing longer strands of siRNA sequences. While we plan to share further technical updates at the TIDES U.S. meeting in May, we've been very pleased with the performance of the ECO Synthesis manufacturing platform, which has been easily exceeding the sequence length previously achieved by completing enzymatic RNA synthesis technologies.
Based on this progress, the May TIDES conference will offer an opportunity to talk about the linear synthesis of full-length, clinically relevant siRNA that incorporates the different nucleotide modifications, most frequently found in approved therapeutic assets today. We plan to do this having used our ECO Synthesis manufacturing platform from the start of oligo all the way through to the full-length product. When you take a step back, the progress we've made with the ECO Synthesis platform over the past year seems quite remarkable. Yet this overnight success might actually be 20 years in the making. Such rapid technical advancement could not have been possible without our extensive history of engineering technically complex enzymes for a variety of pharma and life sciences applications.
Today, we're writing the book of enzymatic RNA manufacturing as we go. And within less than a year since unveiling our technology in last year's TIDES U.S. meeting, we are on the cusp of presenting an enzymatic synthesis of real siRNA therapeutic assets. Beyond the ability to manufacture RNA oligonucleotides, our ECO Synthesis product roadmap includes the introduction of innovative new approaches and solutions for biocatalytic production of key reagents such as NQPs and starter oligos as well as their underlying processes. As you can see on Slide 5, to help Codexis' strategy in developing the ECO Synthesis technology, we were pleased to recently announce the appointment of Professor Masad Damha and Dr. Jim Lalonde to the company's Strategic Advisory Board.
Joining John Maraganore, the Founder and former CEO of Alnylam Pharmaceuticals. The Board's expertise across oligonucleotide synthesis and manufacturing provides critical insights to inform the continued development of our RNA manufacturing platform. While further process optimization and refinement of our ECO Synthesis manufacturing platform lies ahead, we are highly encouraged by our progress to date and look forward to sharing further updates throughout the year. Kevin, over to you.
Kevin Norrett: Thanks, Stefan. Before we provide an overview of our Pharmaceutical Manufacturing business and our commercial progress with the ECO Synthesis manufacturing platform, let me recap some of the recent business development announcements Stephen mentioned. Starting on Slide 6. During our restructuring last year, we told you that our plan was to focus on our foundational revenue-generating biocatalysis business for pharmaceutical manufacturing and to develop the potentially game-changing ECO Synthesis manufacturing platform. We also committed to monetizing products in our portfolio by leveraging partners with broader commercial reach. Since then, as Stephen noted, we have completed an exciting series of deals and announcements, and I view our consistent execution as confirmation that we are focusing our efforts on the right assets.
Our Codex HiCap RNA polymerase is a great example. Offering improved capping efficiency and reduced double-stranded RNA contamination, this enzyme represents a meaningful step up from the wild-type variant available on the market today. For Aldevron, this product is compelling from both a scientific and commercial perspective and they can maximize its value given their existing footprint in the mRNA manufacturing arena. From our standpoint, Aldevron offered strong terms and a rapid path to manufacturing a GMP version of this enzyme. Given Aldevron's leadership in mRNA manufacturing and the evolving RNA manufacturing landscape, this is a valuable relationship to cultivate. We look forward to building a long-term partnership with Aldevron in the broader Danaher family of companies.
As seen on Slide 7, we also announced the Nestle Health Science's purchase of CDX-7108, which followed our discontinuation of investment in biotherapeutics last July. Putting CDX-7108 in the hands of Nestle allowed us to significantly reduce our cash burn going forward, while providing an upfront payment of $5 million and the potential for additional payments upon reaching development milestones and eventual commercial royalties. Finally, we announced an exclusive global out-license agreement with Roche for our newly engineered double-stranded DNA ligase, where we'll receive mid-single-digit million combined upfront and technical milestone payments. Importantly, returns on this deal are a healthy multiple over what it costs to develop this enzyme.
These examples demonstrate our ability to find partners who can extend our commercial reach and to monetize high-value assets that are noncore to our business. Before I shift to covering our ECO Synthesis manufacturing platform and upcoming milestones, I'd like to take a moment to share more about our foundational pharmaceutical manufacturing business. Shifting to Slide 8. When a customer approaches us about a potential enzyme project, the first step is to determine whether we have an off-the-shelf engineered enzyme that will fit their needs or whether a particular enzyme requires evolution to optimize it for the customer's API manufacturing process. Over the last 10 years, we have generated thousands of enzyme variants across commonly used enzyme classes, which gives us the ability to identify existing variants that can be quickly manufactured in kilogram quantities to support full clinical development plans.
When a customer requires some evolution of the selected enzyme, this fee-for-service business can usually be completed in less than six months and sometimes even in a few weeks. Once the enzyme meets the customer requirements, we generate gram-level quantities to support the customers' process and formulation work for use in clinical trials. As the product enters the clinic, we can quickly scale the enzyme to kilogram quantities. While enzyme evolution fee-for-service is recognized as R&D revenue, our ultimate goal is to provide a customized enzyme product to support their future clinical trials and eventual commercial launch. These are our product revenues. The process from enzyme variant selection to potential evolution and finally, the kilogram quantity production can take several years as the customer's product moves through clinical trial basis.
Therefore, to continue driving long-term product revenue growth, we must fill the funnel with new enzyme variant screening programs and clinical stage products where one of our enzymes for enzyme classes can be used to replace chemical steps and reduce overall costs. Over the years, we have also had experiences where an existing customer comes to us to develop an enzymatic route for a drug that is already commercially approved. In order to drive growth in all these areas, we have dedicated business development and key account management personnel. As a result, we've already seen an increase in new screening programs with new customers in the mid-sized pharma segment. On Slide 9, as I just mentioned, we remain focused on building the pipeline to sustain annual product revenue growth throughout the decade.
That said, much of our expected product revenue growth for the next three years is based upon enzymes that have already transitioned out of R&D and are moving to kilogram scale to support further clinical trials. Typically, we refer to these as named programs, meaning the customer has disclosed the drug candidate's name and target indication to Codexis. This usually occurs when the drug candidate reaches Phase 2 or early Phase 3 clinical trials. Once we understand the drug candidate indication, we can better forecast the future enzyme production needs for late-stage clinical development and a potential commercial launch. As you can see on this slide, we are currently selling custom engineered enzymes to pharmaceutical manufacturers for 12 of these new products.
While this number of named programs fluctuates from year-to-year as not all clinical programs are successful, our goal is to maintain a consistent number of pipeline programs to sustain future product revenue growth. While we expect annual product revenue growth to be sustainable, all of these factors contribute to why quarter-over-quarter product revenue tends to be unpredictable. When we provide guidance at the start of each year, we typically have visibility into somewhere between 60% to 70% of our product revenues through a combination of binding and nonbinding customer forecast as well as our understanding of named programs. Maintaining this visibility is why we need to continue our efforts across business development and key account management.
Keep in mind that customers, which are primarily procurement and manufacturing leaders, will make changes to their forecast of enzyme needs when they see changes in product demand or when they stockpile to avoid drug shortages. When you look at historical quarterly product revenues, there is no consistent trend or clear seasonality to the ebbs and flows of this business. As a result, our sense of future demand comes down to active customer communication and overall market model. As a reminder, we currently sell custom engineered enzymes for 16 commercial drugs across large indications, including cancer, diabetes and neurological disorders. More than 50% of our product revenues come from three enzymes, which we are selling to four large pharma customers, i.e., the Big 3.
If our pipeline of named programs continues to be successful in clinical development, we expect the Big 3 to become the Big 6 or 7 driving the majority of the product revenues in the future. Turning to our ECO Synthesis manufacturing platform on Slide 10. As Stefan mentioned, we are looking forward to an important presentation at the TIDES U.S. meeting in May. Between the expected demonstration of a full-length enzymatically synthesized siRNA and the build-out of the ECO Synthesis Innovation Lab, we anticipate that our interactions with potential customers will rapidly shift from theoretical conversations to concrete demonstrations of our capabilities, and we remain on track for our first early access customers in the second half of this year.
Ideally, one of these customers will translate into an early commercial license in 2025. Technical progress that Stefan and his team presented at TIDES EU in November has already allowed us to begin conversations about access to the platform with several large pharma and large CDMO customers. In addition, we anticipate the Innovation Lab will enable us to provide sufficient GLP-grade siRNA directly to innovators, which supports preclinical development of their product candidates. Having the ability to license the ECO Synthesis manufacturing platform to large pharma and large CDMO customers, along with the ability to provide a complete solution for smaller pharma customers enhances our ability to win market share from different segments. And I'm really excited because the ECO Synthesis Innovation Lab provides us the blueprint for the potential future production of GMP-grade siRNA.
Finally, I'm thrilled that we anticipate offering a near-term solution to our future potential ECO Synthesis manufacturing platform customers with our double-stranded ecoRNA ligase, which we plan to make available for customers in the second half of this year. The ability to provide customers with a double-stranded RNA ligase solution allows them to build full-length siRNA from several shorter fragments that can be joined together. This directly reduces the costs and impurities from the phosphoramidite chemistry-built molecules of increasing lengths. Recall that we already have multiple customized double-stranded RNA ligase programs ongoing with major players in this space. The important takeaway from today is that we have many ways to engage customers and win with the progress we have made with our enzymatic approaches to RNAi manufacturing.
With that, I'll turn the call over to Sri to discuss our financial results and 2024 guidance.
Sri Ryali: Thank you, Kevin. Good afternoon, everyone. Before we dive into the fourth quarter and full year 2023 financials, I'd like to reiterate Stephen's commentary on the recent loan agreement with Innovatus on Slide 11, between the rapid technical progress we've made with the ECO Synthesis manufacturing platform and the increased commercial engagement we've seen, this is the right time to accelerate our technology's value creation. Importantly, the agreement with Innovatus achieves each of the key financing goals we highlighted during our conference call a few weeks ago. We estimate that the cost to build out and operate the ECO Synthesis Innovation Lab for the next few years will be approximately $10 million. This means that most of the proceeds from this financing will remain on our balance sheet.
This facility will put us in the best position possible to drive rapid uptake of our ECO Synthesis manufacturing platform, and we're pleased to have secured the capital to get it up and running for the next few years. Moving to Slide 12. We released our fourth quarter and full year 2023 financial results press release earlier this afternoon, which is available on our Investor Relations website. Our results are in line with the 8-K pre-announcement we issued in January, and I'd like to call out a few highlights, starting with the fourth quarter. Total revenues, excluding enzyme sales related to PAXLOVID were $18.4 million for the fourth quarter of 2023 compared to $13 million from the prior year. Product revenues, excluding enzyme sales related to PAXLOVID, were $9.9 million for the fourth quarter compared to $5.9 million in the prior year.
Turning to R&D revenues. We reported $8.5 million in Q4 compared to $7.1 million last year. Product gross margin, excluding enzyme sales related to PAXLOVID, was 71% this quarter compared to 44% in the fourth quarter of 2022. Briefly turning to expenses. R&D expenses for the fourth quarter of 2023 were $11.2 million compared to $19.7 million last year. SG&A expenses were $12.2 million compared to $12.3 million in the fourth quarter of 2022. This was our first quarter post reduction in force and excluding impairment and restructuring charges, you can see that expenses are down year-over-year and operating losses improved significantly. This was also our lowest quarter of cash burn, consistent with our expectations following the decision to streamline our portfolio and consolidate facilities last year.
Now let me review the key elements of our full year 2023 financial results. Total revenues for fiscal year 2023, excluding enzyme sales related to PAXLOVID, were $62 million compared to $63.2 million in 2022. Full year 2023 product revenues, excluding enzyme sales related PAXLOVID, were $34.8 million compared to $41.3 million from the prior year. Before shifting to 2024 guidance, I want to share a closer look at our 2023 revenues. On Slide 13, this graph shows the distribution of our 2023 product revenue by major categories. In 2023, of the $34.8 million in product revenue, excluding PAXLOVID, roughly 50% came from the Big 3 commercial pharma manufacturing products that Kevin referenced. Outside of that, approximately 3% came from sales of enzyme we supply for other commercially approved products, 25% was for programs that we currently supply in clinical trials, 5% was for generics, 11% came from food and feed and 6% was from life sciences and other programs.
We built a nice pharmaceutical manufacturing pipeline with our enzymes currently supplying the 12 named programs that Kevin referenced. As a result, looking ahead, we expect a reduced concentration in our 2024 product revenue base. Now turning to guidance on Slide 14. Excluding revenue related to PAXLOVID, we expect product revenues to be in the range of $38 million to $42 million, indicating our expectation of at least approximately 10% year-over-year growth at the low end of this range. Excluding the benefit in 2023 from accelerating deferred revenue and milestones due to exiting the food and feed business, which was approximately $3.9 million, our model would actually indicate 2024 product sales growth of more than 20% versus 2023 at the low end of our guidance range.
To help with modeling, based on our current visibility to the timing of customer orders, we expect our revenues will be weighted towards the second half of the year, with Q2 anticipated to be our lowest quarter of the year. This is the opposite of what we saw in 2023, where our revenues were weighted towards the first half of the year. We'll provide additional detail on anticipated quarterly revenue distribution as we advance throughout the year. Moving to Slide 15. We expect R&D revenues to be in the range of $18 million to $22 million, which includes roughly $7 million from recent business development deals with Roche and Aldevron. While R&D revenues are down year-over-year, it's important to note that 2023 R&D revenues included $6.1 million for biotherapeutics business and $7 million in noncash revenue related to Pfizer applying a portion of their retainer fee credit to a new program.
Excluding these items, we are actually projecting an increase in R&D revenues of approximately 28% year-over-year at the low end for our core business. We are projecting roughly an equivalent amount for business development transactions and R&D revenues for 2023 and 2024. Shifting to Slide 16. When you take our product and R&D revenue guidance together, our 2024 total revenue guidance equates to a range of $56 million to $64 million. This range excludes revenue from converged sales related to PAXLOVID. Gross margin on product revenue is expected to be in the range of 58% to 63%. Including our anticipated build-out of the ECO Synthesis Innovation Lab, we continue to expect that our existing cash and cash equivalents, combined with our future expectations for product revenues, R&D revenues and expense management will be sufficient to fund our planned operations and cash flow break even around the end of 2026.
And now I'll turn the call back to Stephen.
Stephen Dilly: Thank you, Sri, and thank you to Stefan and Kevin, for those exciting updates. There are lots of companies out there are either all innovation or all execution. We've built a well-oiled organization as well. With a greatly reduced burn rate, a growing base business grounded in solid customers and a disruptive platform with enormous potential upside, Codexis has all the components in place to become a breakout story, and I encourage you to stay tuned for an exciting year ahead. Now I'll be happy to take your questions. Operator?
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