Good day, ladies and gentlemen and welcome to the Codexis’ First Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conclude a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I’d now like to hand the meeting over to Jody Cain. Please go ahead.

This is Jody Cain with LHA. Thank you for participating in today’s call to discuss 2016 first quarter financial results and business progress. Joining me from Codexis are John Nicols, President and Chief Executive Officer; and Gordon Sangster, the Company’s Chief Financial Officer. During today’s call, management will be making a number of forward-looking statements. These forward-looking statements include 2016 financial guidance including total revenues and gross margin as a percentage of total revenues, key assumptions relating to the Company’s August 2015 CodeEvolver license agreement with Merck, including the timing of recognizing revenue for the second technology transfer milestone of $8 million in 2016, and the expectation that Merck will ask Codexis to perform more research services for Merck in 2016, and 2017 beyond services currently required in the license agreement and the expectation that the technology transfer process will finish in 2016. Key assumptions relating to the Company’s July 2014 CodeEvolver license agreement with GSK, including receiving the associated $5.7 million milestone payment in the second quarter. The Company’s potential to receive additional milestone payments and royalties in the future based on GSK’s successful application of the license CodeEvolver technology. The Company’s expectation that it will see growth in its core biocatalysis R&D services and product business is in 2016, the Company’s expectation that it will expand its role in the discovery and development of new biologic drugs, work in new adjacency industry outside the pharma and food in 2016, maintain a healthy cash balance in 2016, and enter into a third CodeEvolver transaction in 2017 or sooner. The Company’s expectation that it will prevail in its litigation against EnzymeWorks, the Company’s plan to continue to invest in the evaluation of its oral enzyme therapeutic program for the potential treatment of PKU and to invest in new R&D therapeutic assets. The Company’s expectation that it will continue to work on a second project which would lead through industry client, the Company’s belief that its CodeEvolver platform technology can create a stream of new therapeutic assets across a range of therapeutic modalities and the Company’s plan to drive toward future sustained profitability. These forward-looking statements are based on assumptions and are subject to risks and uncertainties that can cause actual results to differ significantly from those projected during the call. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Please refer to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2016 where some of the important risk factors that can cause actual results to differ materially from the forward-looking statements made on this call. The content of this call contains time-sensitive information that is accurate only as of today, May 9, 2016, except as required by law, Codexis disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. Now, I’d like to turn the call over to John Nicols. John?

Thanks, Jody. Good afternoon everyone and thank you for joining us. I’m delighted to be reporting a strong start to 2016 and another quarter of excellent financial and operational performance at Codexis. Our revenues reached $8 million up 18% from the prior year. We reiterate our previously provided financial guidance measures for 2016 and are pleased to show strength during the first quarter in both core business areas, delivering a 61% increase in biocatalyst R&D revenue together with a solid 22% increase in biocatalyst products sales. Gordon will provide more detail on the financial highlights shortly. So now I’ll provide some business highlights starting with our code CodeEvolver platform licensing. Last week we proudly announced the successful completion of our first full transfer of the CodeEvolver protein engineering platform technology under a licensing agreement. In less than two years and ahead of schedule, our team at Codexis worked with GSK to transfer our enzyme libraries and kits, developed an on-site laboratory at a GSK facility in Pennsylvania and fully trained GSK personnel on CodeEvolver operation. We satisfied GSK at each Wave of the tech transfer and have cemented in our processes for tech transfer that are crucial to continue the success of our CodeEvolver platform licensing business approach. With the completion of the third and final Wave of the technology transfer with GSK, we earned $7.5 million milestone payment which we will record during the second quarter. With the technology transferred to GSK now behind us, we move into the next chapter of our licensing agreement. GSK, now has fully functional in-house capabilities to develop its own enzymes with our world-class CodeEvolver platform technology seamlessly installed inside their R&D operations. Forward, the agreement brings us future revenue opportunities with the potential to receive numerous additional milestone payments, based on GSK’s…

Thanks, John. As John stated we are reporting a strong showing in the first quarter of 2016 from our core biocatalyst businesses. Total revenues were $8 million, up 18% from the prior year. Biocatalyst R&D revenues comprised $3.5 million of this, up 61% from the first quarter of 2015 and included a milestone payment from our collaboration with the major biopharmaceutical company. Biocatalyst product sales were $3.7 million, up 22% over the prior year. It’s good to see our product sales start the year supporting our prior stated growth expectations of 20% in 2016 versus 2015. Strength in enzyme cells to Merck, another major pharmaceutical company, our leading product sales both in the first quarter and outlook for the year and enable us to hold our 20% annual product sales growth expectations for 2016. Revenue from our revenue sharing arrangement for argatroban with Exela in Q1 2016 was $722,000. It’s important to note that we achieved a remarkable 38% sales growth over the prior year of Q1 from our core business when we exclude the revenue sharing decline with Exela. Product gross margin is a percentage of total revenues for the first quarter of 2016 was 69%. This is down from the 2015 first quarter due to a shift in biocatalyst product mix. We expect that gross margin on total revenues will return to higher levels in the coming quarters. R&D expenses were $5.7 million for the first quarter of 2016, up 7% from the prior year period, with increase due primarily to incremental consulting fees, relating to the evaluation of new drug development target. SG&A expenses for the first quarter of 2016 of $6.8 million increased 22%. This was a result of incremental consulting fees relating to the exploration of an additional market for our platform technology, as well…

Thanks for the financial review Gordon. We are excited about our execution and strong quarterly results that further strengthen our competitive position. We are affirming our outlook for another year of solid growth with contributions across all key sectors. We are sharing our optimism today by affirming our outlook for 2016 to be another year of growth with favorable margins. Our strategy is to capitalize on the multitude of high value applications afforded us through our world leading CodeEvolver technology platform by growing core biocatalysts R&D and product business, pursuing additional CodeEvolver licensing opportunities, entering adjacent markets, and developing our own therapeutic candidates. With these comments, I’d like to open the call for questions. Operator?

Thank you. [Operator Instructions]

While we’re waiting for our first question, I’d like to mention that we will be participating in three investor conferences over the next few months and we hope you are able to join us. First on May 25, we will present at the 17th Annual B. Riley Investor Conference being held in Los Angeles. Second, we will be holding one-on-one meetings at the Craig-Hallum Institutional Investor Conference on June 1 in Minneapolis. And finally, we will be presenting on June 10, at the Jeffrey’s 2016 Healthcare Conference being held in New York. A webcast of the B. Riley presentation will be available on our website for those of you unable to attend. Okay, operator, we’re ready for the first question.

Thank you. Our first question comes from the line of Matt Tiampo from Craig-Hallum.

Good afternoon gentlemen and congrats on the solid start to the year.

Thanks, Matt.

Maybe we can just start out. In terms of the second milestone payment which you’ve received from your biopharma partner in Q1, can you just – John, maybe just a little bit more sense on what the milestone was accomplished on year-end and what perhaps the future deliverables and then potential further milestones look like with that program?

Sure. So we broke the original R&D project into two phases both of which we’ve accomplished. The first was the smaller proof of concept work which we recognized as revenue last year. And the second was a larger set of R&D work that we undertook at the end of last year though beginning of this year, which exceeded the performance criteria that the partner of biopharmaceutical companies was looking for from the protein engineering work that we were providing to them for their preclinical development asset, and so we’re very pleased with the that. There is the potential for additional R&D service work and a potential additional milestone to be earned under that arrangement. But it’s at the client’s option and we hope to give you and all other investors an update on that, as we unfold the rest of this year.

Great. So maybe second. You mentioned in the release prioritizing your next therapeutic drug candidates. What does that pipeline look like? How many assets are we talking about? How – I assume it’s pretty early in a process in terms of identifying and refining the enzyme, but deep is that bench?

We see – Matt, we see a wide applicability of CodeEvolver to create novel therapeutic candidates. So really we refer, both Gordon and I referred to some consultancy work that we did to basically prioritize the universe of potential targets and to come up with a rigorous screen for selecting those key targets that we would go after next. We plan to put in place the R&D capacity to go after a few of those in 2016. But there’d still be a bench behind that, a potential follow – additional projects that we could work on for the foreseeable future thereafter.

Great. And then, do you have an update for us on PKU and where you’re at with that project and what…

At this point no additional – yes, no additional color commentary except that we continue to advance our drug candidate for PKU, the oral form of an enzyme replacement therapy that we hope to ultimately continue to advance forward going forward.

Okay, cool. Maybe just last one from me. What’s the status of your major food customer and how the expectations or how that product leveraging throughout this year for the lead product. And how it levers in through out this year changed at all as we got into Q1.

Want to handle that Gordon?

Sure. Now we hope we’ll be able to talk about that more in the next few weeks, Matt. But I think overall we are still expecting product revenue growth of 20% to 25%. So we’ll be able to update you more on that, I think probably next quarter.

Great, thank you.

Okay. Thanks, Matt.

Thank you. And our next question comes from the line of Kevin DeGeeter from Ladenburg

Hi, thank you for taking my questions. This is Jay Colby on the line for Kevin.

Hi, Jay.

Hi, Jay.

How are you guys? I guess that to start out – I was wondering if you can provide an update on the EnzymeWorks litigation process.

Yes, there’s really no new news to provide our investors as it’s very early in the process of working the litigation here in Northern California. We of course as we announced in February and then reinforced in our call in early March, we remained firmly behind the litigation, we feel like the actions that we’ve encountered our EnzymeWorks are inappropriate. Clearly infringe many of our patents we’ve chosen to sue EnzymeWorks on ten different patents. And as soon as there’s anything relevant that comes out of the proceedings, we’ll be sure to provide updates to you and our other investors in a timely fashion.

Okay, thank you. And then I was wondering if you could comment on the general trends and pricing of new biocatalyst product contract. Is there any downward pressure from certain new entrants?

To address latter question, first no, we’ve actually gotten better and better over the last two or three years as the Company as refocused back on to biocatalysis as its core business. We’ve gotten better and better at selecting projects where there’s more value that can be created by the successful creation of a novel protein with CodeEvolver. So the more we can target a process that can have a larger cost savings, the less pressure we’ll have on the pricing of the product that should that process a new enzyme ultimately commercialized and we’ve gotten better at that. So we don’t see pressure on our product margins. As a matter of fact, generally our product margins have been increasing nicely over the last few years and we hope to at least keep that stable or potentially you can increase that further incrementally.

Okay, great. That’s helpful. And then the gross margins just whatever a little color. I was wondering if you could comment on maybe what was impacting in a little more detail on the sales mix that impact that.

Yes, it was simply the sales mix Jay from some older products that John – I think the agreements were put in place more than two or three years ago. As John said, we were looking for higher margins on newer agreements. But some of these date back, they’re major revenue sources for us, but the margins are slightly less than some of the newer agreements.

Okay, thank you. And then I guess lastly from me, can you provide any sort of high level process development with the initiation in enzymatic process at Merck, where are the Januvia franchise?

Okay. Jay, maybe you can restate that question I didn’t quite follow what you’re looking for.

Sorry. On the last call you mentioned that Merck was going to be implementing the enzymatic process into their – more of their Januvia manufacturing. I was wondering if you can provide any descriptive on that so far.

It’s progressing well and products in our enzyme product sales to Merck for their Januvia manufacturing is the key part of our growing product revenues both in the first quarter and the outlook for the year. So the uptake by Merck for our enzyme as they’re increasing overall, the process is gone very, very well for us so far.

Okay, great. That’s it from me. Congratulations on the strong quarter.

Thanks.

Thanks, Jay.

Thank you. And our next question comes from the line of RK from H.C. Wainwright.

Thank you. Good afternoon, I just have few questions. The first one, that is on the GSK license agreement. Now that the tech transfer is done, how should we think about future revenues from this relationship both in terms of timing and also how would you be disbursing additional information regarding potential milestones, you gave at that range, but I’m just trying to figure out how do we think about it in terms of timing and in terms of what could be the real numbers.

Sure. So first RK, it’s a good question. Now that we’re finished with that chance for with GSK, that’s indeed how our discussion with business with GSK will unfold in the future. So first the CodeEvolver technology agreement enables and provides Codexis with a continuous communication for the very long foreseeable future under this agreement to understand where GSK is developing novel enzymes and what the status of those enzyme developments are and thereafter how those novel enzymes that will be creating with the platform license. How those will commercialize and ultimately get installed inside their drug manufacturing processes. So from that conversation we look on the raw data that Codexis will have to understand how milestone revenues might unfold for the foreseeable future. And in the middle of that conversation we’ll be discussing with GSK, the materiality of many of these milestones and how they can and should comfortably for both sides be disclosed to our investors. So as you know at this point we haven’t had any disclosures like that because the state of the enzyme developments are too early to generate back-end milestone payments to Codexis as of this time. And we continue to believe that it’s unlikely that any of those back-end payments could materialize in 2016. But we’re hopeful that over time this could become a very meaningful and significant and growing piece of Codexis revenue. Hopefully that helps you understand how we’re going forward.

Yes, yes, that additional color is helpful. Regarding the biopharma collaboration, is it possible for you to discuss what the license fee was that you brought and how many more milestones that are available for you to receive. And again if you can us give a little bit of how to time these milestones and what are the hurdles that you need to overcome to get those.

Hey, RK. So first, the magnitude of the success fee that we’ve recorded as a milestone payment in the first quarter was in the range of a $0.5 million to $1 million. And there is – I think Matt Tiampo asked a similar question. We see the prospect of potentially another milestone payment/R&D service revenues, as part of the R&D chapter with our biopharmaceuticals partner, and that’s not far more clear yet, but we hope to deliver and update on that in the foreseeable future. From that point forward we would expect that the arrangement will switch to a back end arrangement where our revenues thereafter would be governed by the successful development of the partners’ business from that point.

Okay, that’s helpful. And then on the food industry what sorts of food industry areas are such sectors does CodeEvolver enzymes get to be utilized. And if we compare the magnitude of the relationship in food industry against pharma – biopharma, how should we think about it? If it’s about the same – same aptitude or lesser? How do you think about that relationship?

Sure. First, first part of your question, we’re really not at liberty to disclose any of the developments that we’ve been working on now with two clients for three different projects. And today I disclosed that we’re working on some internally developed R&D that could bring us into a whole four area. But we’re very careful to disclose those until the right time and for the first three it’s governed by our confidentiality arrangements with our partners. On the latter part of your question, we’ve been consistent in showing general enthusiasm for the commercial prospects for success in the food industry especially as compared to the pharmaceutical industry because the time from successful protein engineering R&D chapter to commercial uptake can be much, much quicker because there’s much less regulatory oversight and rigidity in the food industry than there is in the pharmaceutical industry. And furthermore on top of that, we are finding that in the food industry we’re able to target applications where the ultimate product revenues would be – could be significantly larger than what we’re used to generating for successful enzymes in the small molecule drug arena. So both quicker to market and potentially larger product volume for commercial success make us continue to invest in and be encouraged by our prospects in the food industry.

Okay. One question for Gordon regarding cost lines and how they would trend over the next three quarters and especially the gross margin you had at 69% in the first quarter but you continue to say that your guidance could be 80% to 85%. So is it going to get a little bit choppy or is it on that range from here. How should we think about that?

I think the chop is probably good work, but I they will be very high in Q2 when we book the GSK milestone and then assuming we get the mile the Merck milestone in the fourth quarter to be conservative that also would be a very high quarter. The quarter that doesn’t include a milestone payment Q3 margins would be lower than Q’s two or four. So it’s really the timing, milestone payments are going to drive obviously the margin percent.

Okay, perfect. Thank you gentlemen.

[indiscernible].

Thank you. And our next question comes from the line of Steve Schwartz from First Analysis.

Hi, good afternoon gentlemen.

Hey, Steve, how you’re doing?

All right. Well, so I feel like I’d be out of place if I didn’t ask about biopharma milestones. So just like everybody before me, can you tell us when exactly you recorded the first and how much that was for, you did mention in answering Matt’s question that it was in 2015.

It was either in the third or the fourth quarter, Steve. To be honest I don’t recall which…

Q4.

As Gordon says Q4 and it was smaller than the milestone we recorded in this first quarter.

Okay, so less than $0.5 million since you gave a range of – yes, yes, okay. So that one and then I think with respect to food and respecting that you can’t get into a lot of details, I’ll ask yet another question to just try and get some color on this one. Are the projects you’re working on, do they fall more in a category of current of foods or legacy foods? Is there’s something specific in that regard?

I’m sorry you said legacy foods or…

Yes, it’s a legacy food, the same old G&O, government cheese kind of thing versus trend foods which maybe follow the pattern of like we see in nutraceuticals.

Okay. I mean generally, Steve, our CodeEvolver protein engineering can deliver two general values for the food industry. One is to reduce the cost of an existing you would call it a legacy product. So that’s a prospect. The second area would be enabling the low cost implementation or market rollout of some newer food ingredients for example. And so here we could work with a partner to get their new costs in line to enable them to price their product into the market in such a way that it gets adopted and enable them to be able to make a margin even after paying for our biocatalyst. So I think there’s a combination. I think we’ve been recorded as indicating that our initial largest volume to-date project was for a new food ingredient. So I think that gives you some color to your answer as well, for your question, Steve.

Yes, okay, so it’s a mix. All right. You mentioned with respect to Merck that you brought in two additional teams. How do we think about this from a revenue and/or cost standpoint? Is this an additional FTE revenue or can you tell us more?

Yes. In the CodeEvolver license agreement, first you might recall that we’ve been doing R&D services for Merck for many years and we’ve extended R&D service contracts with Merck multiple times with some publicity. So as we put in place our CodeEvolver platform licensing agreement with Merck, some of that R&D work continued and became part of our CodeEvolver platform agreement. So what we – we mentioned it in the March earnings call and now we’re reinforcing it in this call that we’ve actually put two new project team in place. Those are revenue generating, so in your words, we’re generating FTE type revenues for those additional teams that go over and above the CodeEvolver platform R&D services from Merck.

Okay, and do you expect then that that contributes consistently on a quarterly basis going through and it sounds like that’s already factored into your revenue guidance, is that true?

Yes, I think true on both.

Okay, very good. Thanks, John.

Thanks, Steve.

Thank you. [Operator Instructions] Our next question comes from the line of Kevin Hanrahan from KMH Capital Advisors.

Good afternoon, Gordon. I had a question about the cash. So would it be fair to say that today’s cash after the payment from GSK is higher than it was on March 31?

Yes, I think that’s fair. I mean…

We haven’t got the cash.

We haven’t received the cash yet, but we are expecting…

You haven’t received the cash, but you’re expecting…

Yes. We expect to receive that in the next few weeks, yes.

In the next few weeks. And then you’ll get more cash maybe in Q4 from Merck?

Yes.

So by the end of the year you could have lots of cash which makes me happy. But my question I guess would be for John, can you layout for us the different categories of spending – would you prioritize those for us later it is the question down the road after you get the cash.

Yes. We’re all about organic growth and so we’re investing in technologies to put us into this new food, application or investing to enter a new industrial marketplace, I’ve highlighted that in March and now in May. We’re investing in general R&D to create new novel therapeutic products that we independently own like are oral candidates for PKU and soon to be a few more, so done just rattling off a list of…

Sure, Yes.

Organic uses for the cash.

Right. So mostly organic growth R&D, so you’re not really looking at acquisitions or share buyback, those would be on the back burner if even.

Yes, I would agree.

Okay, that sounds good. But according to new industry can you give us an indication there whether would that be chemicals or some other area?

It’s an exciting new industry and a little tongue in cheek. So we’re being very careful for competitive reasons to disclose at the right time, Kevin.

Okay, we’ll stay tuned for that one, it’s interesting. And your – the biopharma you’re talking, you’ve got the milestone payment from that not the company that last quarter you were talking about that had a blockbuster drug is that correct, John?

No. That’s a different program.

Okay.

So there was no new news on that blockbuster drug we completed that R&D services work at the end of last year and now we’re hopeful that that particular traditional major pharma company, it’s not Merck and Glaxo, it’s not our biopharma partner, but that traditional major pharma company actually goes about the work of installing – proving that enzyme further and installing it ultimately in their manufacture.

Okay, John. Thanks very much for the update. We’ll be listening when you go to these conferences coming up in the next month or so.

Thanks asking the question, Kevin. I appreciate it.

You’re welcome.

Thank you. And that concludes our conference for today. We thank you for your participation and you may now disconnect. Everyone have a good day.