Ladies and gentlemen, thank you for standing by and welcome to the Q4 2019 Codexis, Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Jody Cain. Thank you. Please go ahead.

This is Jody Cain with LHA. Thank you for participating in today's Codexis call to discuss 2019 fourth quarter and full year financial results and business progress. A slide deck to our company management's prepared remarks is available on the investor section of the company's website at codexis.com. Joining me from Codexis are John Nicols, President and Chief Executive Officer; and Ross Taylor, 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 February 27, 2020. 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 the 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. Today's conference call remarks it will include both GAAP and non-GAAP financial results. Codexis believes the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of its business, enables a comparison of financial results between periods where certain items may vary independently of business performance and allow for greater transparency with respect to the key metrics used by management in operating the business. These non-GAAP financial measures are presented solely for the informational and competitive purposes. It should not be regarded as a replacement for corresponding GAAP measures. Reconciliations between GAAP and non-GAAP financial measures can be found at the end of the financial results news release that was issued earlier today. Now, I'd like to turn the call over to John Nicols. John?

Thanks, Jody. Good afternoon, everyone and thank you for joining us. As Jody mentioned, we posted a short slide deck on the investor section of our website to accompany today's call, and I encourage you to follow along. Let's start on Slide 3. 2019 was an excellent year for Codexis, delivering strong financial results and continuing the strategic momentum building for both our Performance Enzymes and Novel Biotherapeutics business segments. Financials were led by an exceptional 24% year-on-year revenue growth delivered by the Performance Enzymes segment. Within Performance Enzymes, pharmaceutical manufacturing was the star in 2019, growing over 37% versus 2018, showing that even the most established of our three growth strategies can deliver step out results. There we landed our third CodeEvolver platform licensing deal with Novartis, recognized nearly $3 million in back end revenues from our first two platform licensees and saw three customers Phase III drugs using our proprietary protein catalyst filed for or receive FDA approvals. 10 pharmaceutical companies added meaningfully to our revenues in 2019, five of which are global top 25 majors that have yet to secure a license to bring our CodeEvolver platform technology in house like three of their peers already have. On top of that, our strategy to penetrate new markets with Performance Enzymes continues to build momentum. Enabled by our enzymes Tate & Lyle's fully commercialized the better tasting Stevia Sweetener is in the hands of the world's leading food and beverage brands, staging for ultimate breakout adoption. In next generation sequencing we partnered our DNA Ligase with Roche, one of the world's leaders in the space and readied our DNA polymerase product to launch into and penetrate that products larger customer base. And finally, we materially advanced to brand new clients, leaders in their spaces into new exciting application…

Thanks John. I'll review our Q4 and full year results and then discuss the 2020 financial guidance we're introducing today. Total revenues for the fourth quarter of 2019 were $18.7 million, up 16% from Q4 of 2018. Revenue for the 2019 quarter included $17.1 million from the Performance Enzymes segment and $1.6 million from the Novel Biotherapeutics segment. Product revenue for the fourth quarter of 2019 was $4.9 million, compared with $7.3 million for the prior year period, with the decrease due to the timing of demand for various enzymes. R&D revenue for the 2019 fourth quarter increased 57% to $13.8 million. This increase was primarily due to revenue from the Novartis CodeEvolver agreement we announced today partially offset by lower revenues from Nestle Health Science and Porton. R&D revenue for the fourth quarter of 2019 included $12.2 million from the Performance Enzymes segment and $1.6 million from the Novel Biotherapeutics segment. Gross margin on product revenue for the fourth quarter of 2019 was 30% compared with 67% a year ago, with the decrease due to product mix. Turning to operating expenses, R&D expenses for the fourth quarter of 2019 were $8.9 million. This included $4.5 million from the Performance Enzymes segment and $4.0 million from the Novel Biotherapeutics segment, plus $0.4 million allocated to corporate expense. The increase in R&D expenses from $7.5 million a year ago was primarily due to higher outside service fees, higher headcount, higher allocation of occupancy related costs, and increases in lab supplies, partially offset by lower consultant fees and stock based compensation. SG&A expenses in Q4 of 2019 were $7.3 million, which included $2.0 million from the Performance Enzymes segment and $0.5 million from the Novel Biotherapeutics segment. The remaining portion of SG&A expenses of $4.9 million is included in corporate overhead expense…

Thanks Ross. I like to now take a few minutes to discuss the business fundamentals that have enabled our sustained top line momentum, starting with Performance Enzymes on Slide 7. This is a new relatively dense slide, but this scorecard for Performance Enzymes momentum is highly instructive and helpful in communicating our business model. Furthermore, it underpins the confidence we have for continuing to sustain future double digit revenue growth over the medium and long term. Partner funded R&D projects are where it starts. Those projects add to the pre-commercial project pool. In June 2016, we had 11 active pre-commercial projects in our pipeline. Three years later, we nearly tripled that to 31 active projects. Notably that growth covers the fact that some projects drop off the list because they either become inactive or advanced to the commercial stage the latter of course being the goal. Growth of commercial projects in the pipeline naturally lags R&D projects. From mid 2016 to mid-2019, the total number of commercial projects grew by two from nine to 11. Having 31 pre-commercial projects now to advance versus 11 three years ago bodes well for accelerating the growth of commercialization milestones. Also, an increasing percentage of our projects are targeting industrial factors that should reach commercial stage more quickly than those targeting pharmaceutical manufacturing, especially those projects in the clinical stage. Once a project reaches commercialization revenues become more sustaining or recurring. Our product revenues plus sustaining sources within our R&D revenues, i.e. back ends from our CodeEvolver licensees and other commercialized licensing deals contributed $33.5 million of revenue in 2019, which is up 30% on a compounded annual basis over the last three years. Notably sustaining revenues contributed 58% of the Performance Enzymes segments total revenues in 2019 compared to 34% in 2016. The…

Thank you. [Operator Instructions]

While we're waiting for our first question, I'd like to alert you to our participation in a couple of upcoming investment conferences. We will be presenting at both the Cowen and Company Healthcare Conference next Tuesday, March 3 in Boston. And we'll be at the ROTH Conference on Tuesday, March 17 in Dana Point, California. Webcast for our presentations at these conferences will be posted to the investor section of codexis.com. Okay, operator, we're ready for the first question.

All right, our next question is from Matt Hewitt with Craig-Hallum. Your line is now open.

Good afternoon, a couple for me. First, on the product revenues, a little bit late, it sounds like that's a timing situation. And you kind of helped us a little bit as far as the guidance for the year first half versus second half, is that almost entirely related to those three products in the market already. And it's just waiting for those, I guess, secondary orders to come in or are there some other items at work that are kind of delaying the reorders?

The decline from last year's – thanks Matt. The decline that we're showing in the guidance range for product sales versus the actuals for last year, that difference is less than the headwind associated with the inventory builds for those three recently launched or about to be approved drugs with Kyorin, Urovant, and Allergan. So outside of those three, there's some modest growth and the rest of the product portfolio. And I gave you some commentary about Stevia. Stevia is not quite yet at a point where its growth will be a significant contributor to year-on-year growth. It may happen towards the end of the year, but prudent forecasting says it's likely to take the rest of this year for Tate & Lyle to successfully get the adoption with the larger brands and ultimately build their need for our enzymes. So that hasn't been as much of a contributor in the short-term as we would have hoped for, but as the commentary also added, we expect that to start to take off as we get into 2021 and later.

Okay, great. And then I guess you gave us a lot of new information today. But regarding the lysosomal storage disorder opportunity, should we be expecting – is there going to be some type of an upfront licensing fee that would hit here in the – it sounds like almost first quarter, maybe second quarter? And how should we be thinking about the magnitude of that?

Yeah, we're not going to comment on the magnitude at this point. All the commentary was clear that we expect this deal to close very soon. And the structure that you outline is a reasonable expectation, some measure of upfront milestones and R&D program fees that would probably accrue to Codexis. And that will have an impact on our 2020 revenues. And we built that into our guidance.

Okay.

And Matt, just one comment that also Matt, I think depending on the structure of the deal, various terms of the agreement that can also impact how revenues are recognized, and when you're especially under 606, so just keep that in mind also.

Okay, and then maybe one last one then I'll hop back into queue. You commented on some new industrial sectors, and I realize you might not want to give specifics, but could you please help us out with size of those markets or any additional color that kind of helps formulate at least a little bit of an idea of what you're talking about there? Thank you.

Yeah. Most of the commentary focused on of course, outside of pharma manufacturing focused on food and life sciences and those were building market for enzymes. And we believe those are great targets and can be material product sales areas for the company. Outside of those three sectors, we're talking to many customers. We have good prospects, they were all relatively early so far, they haven't generated material revenues in 2019 and before, but we expect that to continue to move in the direction. If you go back a couple of years, we didn't talk about life sciences. We just talked about MDx, molecular diagnostics. If you go back three years, we didn't even talk about molecular diagnostics. If you go back four years, we didn't even talk about food. So that's how we layer it out is we kind of bring these stories forward as we actually land a partnership that brings material R&D funding into the company and whatever permissions we can get from those partners we'd love to share with our investor base. Certainly we'll be able to talk about the industrial sectors we bring in material revenues. Hopefully that helps.

Understood. Thank you.

Thanks Matt.

Thank you. Our next question comes from Doug Schenkel of Cowen. Your line is now open.

Hi, this is Ryan on for Doug. Thanks for taking my questions. Can you provide an update on how the situation with coronavirus is impacting your business today if at all? I believe you have one CMO in Switzerland and another in Italy. Have there been any material disruptions? And then can you also provide an update on Porton and overall Asia exposure? Are there any revenue headwinds and guidance for that? Thank you.

Yeah, yeah, like everyone in the world, we're watching very closely the developments of the coronavirus. Its impacts on Codexis have been nil to date. Thankfully, we haven't had any issues associated with our supply chain partners to date. We have very limited potential exposure to the Asian markets. More, it's our customers' impacts that could affect us. But we don't see those unfolding at this point either. Ross, anything you would add?

No, I think John covered all the details there, I think. Yeah, I think based on the activities we've seen from all of our customers, so far changes no changes, but clearly, we're keeping our pulse on the situation.

And, Ryan, you asked about Porton, we're keeping close to our partner. Of course, that's a relatively standalone partnership. We've set them up with screening capabilities and they've been screening our protein catalysts against their processed CMO opportunities in pharma. They took an extended shut down and I understand that they're back up. I'm sure that this is a pretty important development for them to be watching. But we don't have – we see revenues with Porton in 2020, not much being built into our guidance, but potential for upside, if they're able to advance some of their projects to more material stages that may require additional enzyme manufacturing from us or may require some enzyme evolution services to be provided to them for improving some enzymes. But those are those are largely built as upsides and they wouldn't be particularly large. They'd just be great signs of progress between Porton and Codexis in that partnership.

Excellent and then in terms of progress on the therapeutics pipeline assets, just to make sure I understand, is the ramping OpEx in 2020 entirely driven by increased spending on existing assets as these assets progress, or are you also building up further your discovery capabilities to add even more shots on goal with new pipeline assets over the next couple of years?

It's – the vast majority is associated with third party spending for GMP manufacturing, process development, toxicology, regulatory alignment, stuff like that. That's by far the largest category, but we are adding some headcount modestly to that area. We did a significant build out of headcount in that area over the last 18 months. But as we get a new project, like we shared with Nestle, in the January announcement, the extension of the strategic collaboration agreement led to a new program coming into our pipeline that would be just a modest additional R&D headcount.

Got it and then one more quick one, you mentioned nearly 3 million in back end revenues from CodeEvolver licensees in 2019, do you expect that to grow in 2020 and beyond? Thank you.

I think it will be about that level, if not a little bit lower Ryan.

I think from there, it's set up to grow. But we got a lot of visibility to 2020. And I agree with Ross's comments where we're not likely to generate as quite as much in 2020. But the programs that are advancing within Merck and GSKs pipeline are exciting. The program where we generated the milestone last year with GSK is advancing as best we know. And that program could lead to a significant stream of additional larger milestones over the coming three to five years if GSK continues to advance that, so that sets up for growth in that just one program quite well. And then as – I think it's a really good question. We published the detail in our prepared remarks. But we'll cover here. One of the items that came out of the back end from the Merck deal was the development of this multi-enzyme cascade for their fast-track HIV drug. The active ingredient is called Islatravir here. We shared a press release on that late last year. There is an amazing article about the development of that process in Science Magazine. And that's become a benchmark of how to best apply protein catalysis for the world to now study. But in the short run, Merck is really moving forward with that program and we're set up to be the supplier of enzymes. Again, there's a multi-enzyme cascade here, and that could be very nice material clinical orders for Codexis in 2020 and carrying into 2021.

Thank you. And our next question comes from Brandon Couillard with Jefferies. Your line is now open.

Thanks. This is Matt on for Brandon today. Just a quick one, following up on the Roche deal in December, curious how your conversations are going with others in the space, wondering if this deal could serve as a potential catalyst to secure other similar deals within the molecular diagnostics space? And then any color you can provide on discussions you're having with clients on additional biomarker activity?

Sure, great question and absolutely, the deal we made with Roche, one of the very top leaders in next gen sequencing for them to acquire a license to access our DNA Ligase was a watershed deal for us. I referenced a team of Codexis employees at the AGBT conference just this week. They just returned some of them and there was a lot of interest from players at that key conference. And of course, we're now pointing most of our efforts in the sequencing space to promote our second product, the DNA polymerase. So the publicity and the ability to attract a great partner like Roche for the first product is certainly creating some wind in our sails for the second product and we're quite excited about that in 2020 and beyond. Second question, I didn't get –

Just on any discussions with other clients on any additional biomarker activity or things like that?

Sure, broadly biomarker, the development – last year we started a really exciting program with a currently unnamed partner. It generated over $1 million of R&D revenues last year. I referenced it, but didn't spend much time on it in the prepared remarks. That program is advancing well. And broadly speaking, those are new novel enzymes that are being designed to enable potentially a range of different biomarkers to be assessed in human circulation. And I can't say much more, the partnership is going well. We're hopeful that that partnership continues to advance as we start 2020. It is currently continuing in motion, and that it reaches a milestone point where we could say more about what Codexis and that partner are doing. Thanks for the good question.

Thanks. And then I guess one quick maybe for Ross. If we just look at the product gross margins, 51% in '18, 47% last year and then the midpoint of the '20 guidance implies another slight decline year-over-year, can you help us better understand what's kind of driving that decline, is it simply mix or is there anything additional to call out there? Thanks.

Right and I think John actually addressed some of this in his prepared remarks and some of the Q&A already, but that's really driven by new mix, we expect Merck sitting within product, which is a lower margin product will likely be a bigger portion of the mix in 2020 than it was in 2019. And that's the primary driver of that anticipated decline in gross margin.

Super, thanks.

Thank you.

Thank you. Our next question comes from Sean Lee with H.C. Wainwright. Your line is now open.

Good afternoon, John and Ross and congratulations on a successful year and thanks for taking my questions. So my first question is on the revenue guidance. So based on the total revenue guidance you provided as well as the very conservative product revenues, based on calculations, you expect the R&D and licensing revenues to increase between 31% and 46% next year? So could you provide a little bit more color on which specific areas do you expect the majority of this increase to come from?

I'll start and John can maybe add some additional color. But given our expectations of moving our pipeline forward in the Novel Biotherapeutics segment, I think a lot of the growth in the R&D revenue will come from that area. But at the same time, we have a lot of activity, a lot of projects in Performance Enzymes and we should also see good growth in Performance Enzymes R&D revenue, but on a percentage basis, it likely will be faster in Novel Biotherapeutics.

I see, thanks for the time. And for the 6512 program you mentioned that the company expects to disclose more about – more details around mid-2020. So what can we expect from that disclosure?

Yeah, it's a promise. We just disclosed that it is past an investment gate decision. And so we have nominated it now as a development candidate. And therefore, we're prepared to invest the relatively sizable amount of expense to do the IND enabling work to carry it into clinical trials next year. So with that we don't want to stay silent on what it is. So give us a little bit of time, we'll share with you what the disease is, we'll share with you what's going on, are there solutions for patients in that disease or not yet, we'll share some insight into prevalence data, we'll share some data that we generated that helps to make the justifications decision. In other words the preclinical research data that drove our confidence that we're going to generate the return on at least the IND enabling investment and hopefully clinical investments down the road. So yeah, that kind of paints the high level overview that we'll make sure we provide on CDX-6512 for the inborn error of amino acid metabolism disorder sometime midyear.

That's good to hear. My final question is on the 6114 program, with the first study nearing completion and that's why you're preparing to set up a larger study to come in the next couple of months. Do you have any insight into whether we'll see any data disclosures on the program in the near term?

I don't have that clarity from our partner and as you know the partner is running that. They have provided information about the study designs on clinicalgov.org, sorry, clinicaltrials.gov. So both of these trials are now posted there and so it's up to them. Of course, if they go from one gate to the next, the data from the prior gate was sufficient to make that jump to spend more money and develop more clinical data. So it's always good. But yeah, I will encourage Nestle to provide that data. We'll share the impact of that kind of data, especially scientific forums can generate for them and for us, but it's hard for us to promise it, especially when we have no control over it.

I see her that's all I have. Thanks again for taking my questions.

Thanks Sean.

Thank you. [Operator Instructions] Our next question comes from Joe Munda with First Analysis. Your line is now open.

Good afternoon guys. Real quick, a lot of my questions were answered, but I wanted to touch on CapEx, what was it for the quarter and for the year and then looking out to 2020, how should we think about capacity and potentials for expansion there and CapEx spend in 2010? Thanks.

Sure Joe. Let's see, CapEx for the entire year was about $4 million just under 4 million. And it was just under $0.5 million in Q4. And in the upcoming year, we are doing an expansion of our pilot plant, so our CapEx is likely to be at least several million dollars higher than it was here in 2019.

Okay, and what does the – I guess, what does that equate to as far as capacity, the expansion of that pilot plant, is it some – is it 25%, 30% increase?

And maybe I'll cover that. The pilot plant is mostly used to do process development for ultimately a much larger scale manufacturing of enzyme Joe, so it's a core asset to develop the processes because CodeEvolver generates protein molecules at extremely small high throughput scale, and ultimately when they look good in high throughput the next step, if our products are the partnered products look good is to build a robust large scale process to fit with the manufacturing needs of the ultimate market. And so the pilot plant here in Redwood City, California, which is what Ross referred to, is crucial for that development of the new processes for new products. And so it'll enable us to do more new process development and it's going to enable higher automation, which are significant benefits for development. There's some percentage, it's a minority percentage of – use of that pilot plant to actually manufacture very small volume enzymes for commercial purposes, but that's pretty minor. Because as you know the vast majority of our product sales are enzymes of course and they're manufactured in third CMO partnerships. One of the other analysts referred to our two primary ones, one in Austria and one in Italy. And their capacity to produce enzymes is very significantly above our current capacity to pull. Our current needs to pull from that capacity. So we don't see product manufacturing limitations anywhere in the near future to be a key factor for the growth of our revenues, products or otherwise more as just development cycles as we try to describe, especially in the performance engine slide. Hopefully that's helpful color.

Yeah, it was. Thank you.

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 for any closing remarks.

Okay, thanks. Thanks, everyone for your questions. We have another exciting year ahead here at Codexis. We look forward to sharing updates and news across many developments we're working on to deliver throughout this year. Everyone, have a great day. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.