Welcome to Codexis' First Quarter 2021 Earnings Conference Call. At this time, all participants will be in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this event is being recorded. And I would now like to turn the conference over to Stephanie Marks from Argot Partners. Please go ahead.

Thank you, operator. With me today, are John Nicols, Codexis' President and Chief Executive Officer; and Ross Taylor, Codexis' 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 beliefs and expectations of management as of this statement date May 6, 2021. You should not place undue reliance on the 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. In particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic. This means that results could change at any point in time and the currently contemplated impact of the virus on the company's operations, financial results and outlook is the best estimate based on available information. 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. And now, I'll turn the call over to John.

Thank you, Stephanie. Good afternoon everyone. I'm very pleased to present a strong first quarter 2021 results for Codexis. With the company's growth drivers continuing to accelerate, we began the year with even stronger momentum than we anticipated. Total revenue grew by 23%, compared to a year ago and with a growing list of commercializing enzymes, product revenue grew by 101% year-over-year. With our sales mix continuing to shift toward higher-margin products, we also delivered impressive product gross margins of 59%, up from 50% a year ago. Our focus on high-growth opportunities is bearing fruit. This quarter, we had 15 customers, who contributed over $100,000 in revenue and we had five customers, who contributed over $1 million in revenue. In our sustainable manufacturing segment, on top of a strong base of product sales to Merck for Januvia manufacturing and to Allergan and Urovant for their commercial products, we have an exciting list of late-stage clinical development installations, driving product revenue growth in 2021. In the Life Science Tools market, we're off to a strong start with expanding adoption for our own broadly marketed RNA and DNA polymerases, coupled with a strong quarter for R&D revenues for customer-partnered programs, including several that were initiated in the first quarter. And finally, in our Biotherapeutics segment, we steadily advanced our pipeline assets in the quarter and completed key IND-enabling activities that set up our second drug candidate to enter clinical trials later this year. Ross will provide more details on the first quarter results and guidance shortly. But first, I'll provide detailed updates across each of the businesses. Starting with our Performance Enzymes reporting segment, we are growing the business and focusing on two distinct markets. The first being sustainable manufacturing. This is where we built Codexis' enzyme engineering leadership over the past…

Thanks, John and good afternoon, everyone. We delivered strong first quarter 2021 results. Total revenues for the first quarter of 2021 were $18 million, up 23% compared to the prior year period. On a segment basis $14.2 million in revenue was from our Performance Enzymes segment and $3.8 million was from our Novel Biotherapeutics segment. This compares with $10.9 million and $3.8 million for Performance Enzymes and Novel Biotherapeutics, respectively for the prior year period. Product revenue for the first quarter of 2021 was $10.2 million above the high end of our expected range for the quarter and up 100% compared to $5.1 million for the prior year period. The major contributors were increased sales to Merck, Allergan and Urovant as well as strength in generics and contribution from a new product than another top 10 big pharma company has in late-stage clinical development. R&D revenues were $7.8 million in Q1 down from $9.6 million last year. The decrease was largely driven by lower revenue contribution from Novartis as we wind down the tech transfer process for the Novartis CodeEvolver agreement. Gross margin on product revenue for the first quarter of 2021 also came in above the high end of our expected range as it was 59% compared with 50% in the first quarter of 2020. The increase was due to a favorable shift in product mix. Turning to operating expenses. Our R&D expenses for the first quarter of 2021 were $11.6 million up from $11 million in the prior year period. The R&D expense increases were primarily due to increased compensation resulting from higher headcount and higher cost for lab supplies and depreciation. These items were partially offset by lower biotherapeutics, preclinical development and regulatory expenses. SG&A expenses in Q1 of 2021 were $11.4 million compared to $9 million…

Thanks Ross. Let me close out our prepared remarks in the context of our goals for this year. As both Ross and I have shared today Codexis has started off 2021 with strength financially. We have also made excellent progress across the critical strategic objectives that will drive the continued step out growth for the company in the medium and longer term as well. From widening our pharmaceutical and industrial installations in our sustainable manufacturing segment to excellent early customer adoption of our newly launched RNA and DNA polymerases in Life Science Tools to advancing our second biotherapeutic product toward clinical trials, we plan to check all the boxes on this list in 2021. We are on track to continue delivering on the catalyst that will accelerate the company's growth ambitions. We're so excited by the nearly limitless possibilities for enzymes as a product class. We have only begun to scratch the surface of how Codexis enzymes can make a difference for the health of people and the planet. Now, we'd be happy to take your questions. Operator?

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions]

While we're waiting for the first question, I want to let you all know that on May 26th, I'll be speaking on the plenary panel session kicking off the 2021 SynBioBeta Biopharma Conference. We invite you to listen into what will be a very dynamic discussion there. In addition, we will be presenting and attending multiple investor conferences in May and June. We will issue press releases with those details as we approach the event dates. We look forward to virtually seeing many of you at those.

Our first question today comes from Brandon Couillard of Jefferies. Please proceed with your question.

Thanks. Good afternoon. John I appreciate all the detail around the progress on some of the life science programs. For the HiFi DNA polymerase, you talked about dozens of potential customers trialing for using their NGS kits. Can you just talk about what that evaluation process looks like in terms of length and remind us sort of how you see the magnitude of the potential opportunity for the DNA polymerase let's say over the next two three years?

Yes. Thanks Brandon. So, first question just the continued time line for sales development for our HiFi DNA polymerase. So, trialing is critical of course. So, in small scale the customers are testing. Our master mix with our DNA polymerase in their amplification step of their particular next-gen sequencing workflow. There are many different next-gen sequencing workflows that various customers use for various applications. So, this is a critical step. I'd say typically a customer trialing effort would take in the range of three to six months. Some of them have been underway for some period of time. So, some of those are -- some of those customer prospects today are well in motion. But some of those just recently started it. So, we should expect to see some results from these trials as we move through the summer. And if the customers validate the performance attributes and benefits that we've seen then we'd start to move towards sales-based discussions. So, should layer in some first commercial sales as we move through the summer. We should start to see a ramp in that product as we move towards -- through the end of the year and should set us up extremely well for year-on-year growth in 2022 versus 2021. This is a really meaningful product in the world of molecular biology and diagnostics. Pretty much any company in the world that's running a next-generation sequencing machine will require a DNA polymerase to run their workflow. We see this as probably one of if not the largest category of enzymes used in the diagnostic -- the genomic diagnostic environment. And so, if we're successful at penetrating this market like we expect and hope, this could be one of the largest products in our portfolio over the next three years or so. And today, our largest product exceeds $10 million per year. So we could definitely see with success -- continued success a pathway to $10 million plus sales in this product.

Great. And then just a clarification Ross. Did I hear you right in terms of your revenue outlook for the year, I think you suggested 2Q revenues similar to the first quarter. Is that true for both product and R&D revenues specifically?

Yeah. Good question, Brandon. I think with products, I would think the mix of products versus R&D will be pretty similar to what we saw in Q1. I'd expect very nice growth in product revenue in Q2. I think R&D revenue is likely to be down from Q2 last year. Keep in mind we had a large lump of revenues come in from Takeda in Q2 last year which certainly makes a tough comparison there.

Okay. And then lastly product gross margins continue to make good progress. Can you just talk about the longer-term runway there over the next few years, especially as the mix shift towards some of these newer products? Where do you think product gross margins over time could ultimately go to?

Yeah. I'll take a stab at answering that Brandon. Yeah I think we -- given our guidance we expect to see a nice step-up in gross margins in 2021. I think that trend will likely continue over the next several years. I'm not sure it would necessarily continue with the pace of improvement that we're seeing in 2021 versus 2020. But I think you should see some improvement in our product gross margin over time. As we've discussed in the past, much of that is really driven by a shift in the product mix towards the higher-margin products. In terms of trying to predict a peak or where that eventually levels out, I'm not sure we really want to go there at this point Brandon, but certainly we see the trend over the next few years is positive.

Okay. Thank you.

Thanks.

The next question is from Doug Schenkel of Cowen. Please proceed with your question.

Hi, good afternoon. This is Kyle on for Doug. Thanks for taking the questions. I just wanted to start with early last week Tate & Lyle had responded to some media speculation that they were exploring the sale of its food and beverage solutions and primary products businesses. If this plan were to come to fruition would there be any impact on the relationship that Codexis has with Tate & Lyle?

Hey, Kyle thanks. I'll field that one. So there were some rumors that were put out there about some potential significant restructuring for one of our top customers Tate & Lyle as you've highlighted. What we saw was the potential for Tate & Lyle to spin out its primary products division, the primary products division are more of the commodity bulk products like high-fructose corn syrup as one of their big primary products that that would be the division that would spin out. So that would leave with Tate & Lyle a focus on their food and beverage solutions division. Our business with Tate & Lyle is focused on the food and beverage division. The enzymes that we've developed for TASTEVA M and the enzymes we developed for DOLCIA PRIMA Allulose are both new products in their food and beverage solutions division. These are all unqualified rumors at this point. Honestly, if the business that we have with Tate & Lyle spins out into a new co, we would be a very important supplier to that new co. But the way we see it today is the -- our products would stay as key products for Tate & Lyle. And we would see it as net beneficial, if Tate & Lyle were to spin out the primary products division that would make Tate & Lyle more focused on kind of the higher value food and beverage products that remain as Tate & Lyle and we become a very important and growing supplier to Tate & Lyle for that division.

Thank you. That's really helpful. And maybe just one more. Regarding your wholly owned pipeline biotherapeutics assets both oral biologics and gene therapies have all these gated into the preclinical stage from discovery? And how many preclinical stages are there? And what sort of timing should we expect? Thank you.

Sure. So the -- everything is in preclinical development at Codexis today -- in Codexis' biotherapeutic pipeline today with the exception of CDX-6114, the enzyme replacement therapy that we developed for phenylketonuria disease. That is now in the clinical stage. It is the only product that we've discovered with CodeEvolver in our history that is in the clinical stage. That clinical stage program is being run by Nestlé' today Nestlé Health Science. We have formally out-licensed that product to Nestlé' Health Science. And just real quick, we didn't address it in the prepared remarks. The CDX-6114 program is in really good shape under Nestlé Health Science's control. They are working on the solid dose formulation upgrades to stage for a critical multiple ascending dose study that they expect to run and read out in 2022. So it's not a big event. That product doesn't have a big event in 2021, but it will be set up for a pretty critical clinical development program readout in 2022. Other than that all of our programs, all 11 of our programs are in the preclinical stage. And we've separated preclinical into three chapters just to give a little bit of color on that. First is the discovery stage. Here in the discovery stage Codexis is using CodeEvolver to generate usually tens of thousands of different enzyme variants or protein variants to assess against the target attributes for this particular disease. CodeEvolver is generating a lot of these variants. We're testing those variants, we're changing the molecular structure of those variants. The research stage that we call preclinical research, we're starting to hone in on the best variants from our discovery chapter from CodeEvolver and we're increasingly doing animal research, we're doing preclinical trials in relevant animal models to get much more translatable results from the candidates that we elevate from the discovery chapter. The end of the preclinical research chapter for us is, where we've identified the lead candidate. The candidate that we're going to invest in all of the IND-enabling work that sets Codexis up to do clinical trials thereafter. Today, we have one program in the IND-enabling chapter. That's one of our co-owned oral biologic programs with Nestlé' Health Science, CDX-7108. In the prepared remarks we shared that we've done the preclinical toxicology work. That's critical in this IND-enabling stage. We've done all the GMP manufacturing that of course sets up to be able to do clinical trials later. And we're approaching an IND with the FDA in the third quarter and we should see our second program with 7108 in the clinic before the year is over. So hopefully that gave you a nice feel for how we define the various critical chapters of drug discovery and early development. And I'm not -- I think I answered all your questions there, but if you had others please by all means. Q – Kyle Boucher: That’s great. That’s clear thought, thank you.

Thank you, Kyle.

The next question is from Jacob Johnson of Stephens. Please proceed with your question.

Hey, thanks. Good afternoon. Maybe just one for Ross and I apologize, if I missed this in the comment -- prepared comments but really strong start to the year in the first quarter. I think better than the cadence you had expressed last quarter. Was there any pull forward in the quarter, or just maybe can you just comment on what came in better-than-expected in this first quarter?

Right. I think really it was just the timing of some of the orders. Some came in earlier than we expected. Maybe a few things that were not necessarily expected as well but it was really more of a timing issue. I wouldn't say it was a pull-forward effort on our part certainly. But I think the timing of orders was just different than what we originally expected. As you know our business is very lumpy on a quarterly basis it can be difficult to predict for a number of reasons. But we're certainly pleased that you'll start the year off strong but we don't see any need or to change our guidance at this point.

Got it. Thanks for that Ross. Maybe for John you talked some about the DNA polymerase, but it's something we've heard recently is just about the need for better enzymes. And I think maybe just more supply of enzymes for mRNA manufacturing. I know you touched on some of the initial trialing but can you just talk about one the outlook for the RNA polymerase? And then are there other kind of enzyme type products you could launch for that end market?

Yes thanks Jacob. Yes we're very encouraged by the beginning of penetration for our HiCap RNA polymerase. We shared some data in the deck that we provided today for the first time. It shows the capping efficiency benefits that our RNA polymerase provides versus incumbent RNA polymerases. We see the RNA polymerase as the key enzyme for RNA manufacturing. Indeed there are others. We would see them as less gravitas less potential. But -- so we're very focused primarily on RNA polymerase as it relates to messenger RNA manufacturing. That's to speak just to messenger RNA manufacturing which we think we're well positioned to really benefit from in the world -- in the growing world of messenger RNAs. But broadly speaking, we're just seeing a tremendous amount of opportunity to bring engineer to enzymes into Life Science Tools. In general, the DNA polymerase the RNA polymerase we've spoken to now in the Q&A, as well as in the prepared remarks progress with Roche on the DNA ligase our first enzyme into the space. We highlighted with more color today than in the past a growing list of customer partnered enzyme developments. These are niche enzymes that have particular benefit for a given customer and they are given application less broad market based but more specific to what a given company is trying to do with their portfolio. And we've had a tremendous growth in this type of project customer partner projects in Life Science Tools and it actually generated some very meaningful sales for us in the first quarter. So we're just seeing a tremendous amount of opportunity, not only for the enzymes that we've given you and our investors a fair amount of color on but also others that we have earlier in the development cycle and/or that we're partnering with customers these days. So it continues to be a very, very dynamic exciting space for Codexis.

Got it. Thanks for all the color, John. I will leave it there.

Thank you, Jacob.

The next question is from Matt Hewitt of Craig-Hallum Capital Group. Please proceed with your question.

Good afternoon. Thanks for taking question. Just a couple for me. First on the RNA polymerase orders that you received in the first quarter, how should we think about the way that those will ramp? Is it -- they take an initial batch kind of get started and things should progress and accelerate from there, or much like maybe prestocking for drug development where you take -- they maybe take a bigger upfront get launched so there's maybe a lull and then things pick up a quarter or two later?

Yes Matt sure. Thanks for the good question. I'd say more of the former. Early orders are smaller. Most of that is working to fit our RNA polymerase into their particular recipe for manufacturing their particular messenger RNA. As we move forward with these customers then they will start to apply it in kind of clinical stage batches in other programs within their development pipeline. So the first approach for a given customer is to get it trialed and validated and installed in one particular messenger RNA, either vaccine or a therapeutic agent and then it dominoes into – or we hope for it to domino into other messenger RNA programs within their pipeline. These are all development stage programs at this point. As we've shared in the past, we're not installed in the two big commercial stage messenger RNA programs for COVID-19 vaccines, so it's all development stage. Orders will come, as the customer starts to make more materials for follow-on clinical batches and so we'll see some lumpiness but we'll see generally growth in the number of customers and then growth in the number of programs within each customers that are applying our RNA polymerase. And so we're very encouraged to see us get in, start to break through first commercial sales, start to break into new customers, as we've kicked off 2021. So we're very much on the track that I just outlined that we hope to be on as we move through the year.

Got it. And then maybe one separate question. As you're looking at these products, is there a difference, or are there efficiencies that can be garnered when you're working on trial batches and then you move up to a commercial batch, will that have an impact on gross margins as you move up to those larger batches? Thank you.

Yes. Typically when we start with – working with a customer in the clinical stage, we generally have above-average gross margins for those sales, they're smaller revenue, they're higher gross margins. And as we move through towards commercialization for the customer, the margins will come down some from these high bases. But generally, we see RNA polymerase, our HiCap RNA polymerase being accretive to our gross margins. So we would expect that versus our historical product margins. This will be lifting up at least incrementally from what we've been able to deliver for the company even after we – even after the application matures and some of the pricing comes down a little bit.

Okay. Great. Thank you.

Thank you.

The next question is from Swayampakula Ramakanth of H.C. Wainwright. Mr. Ramakanth, your line is open.

Sorry. Good afternoon, John. Really quick two questions. The first one is on the RNA polymerase. It's nice to see that that business picking up steam. When would you think the RNA polymerase revenue line becomes meaningful? And I know you answered this – I think you answered this question to a certain extent but probably I didn't catch the full bit. When folks are trialing your DNA polymerase is there – how long of a period of time do they trial it far, or does it depend on the project?

Sure. And your second question was again related to RNA polymerase or DNA polymerase or...

Sorry DNA polymerase. Yes one is – the first one RNA polymerase and then DNA polymerase.

Okay sure. So yes, good questions both. For RNA polymerase, I was detailing it a little bit for Matt Hewitt, that the first is to penetrate a customer get a commercial sale installation into one of their clinical stage programs and then expand the number of their assets in their pipeline that use our RNA polymerase and in parallel to work new customers similarly. So we've already broken into a couple of customers with first commercial sales which is great. The reality is these are fairly small orders in the clinical stage in general. And so they'll ramp and the number of customers should grow from what we've been able to deliver in the beginning of this year. So meaningful revenues are probably, especially as we continue to grow like Ross said towards the high end of our $36 million to $39 million product revenues this year, meaningful revenues for this product are – that move that dial aren't going to happen until 2022 and thereafter. But really it's all about penetration now. It's all about widening in the customer base. It's all about widening the installations within each customer, which really just set us up for hitting the potential for this product over time. But really the direct question, meaningful revenues for RNA polymerase is 2022 plus but a lot of milestones of progress in 2021. The sales progression for DNA polymerase, as you heard today, we've got our high-five DNA polymerase is in dozens of customer trialing right now. And typically, its three to six months to go through a fully qualified trial and to engage into a sales-based negotiation, assuming the trial results validate the kind of performance benefits that we see. If the customer sees that then they would -- towards the end of that, three to six months they'll start to talk to us about, supply conditions, and pricing, and timing, and stuff like that. So that's generally, how we see the sales progression for or actually for all of the Life Science Tool enzymes it's that kind of a timeframe.

Okay. Thanks for that. And then, just trying to see, if you have any commentary on your ongoing relationship with Porton Pharma? And any update you can provide us?

Yes. Sure. Yeah, we haven't spoken a lot about Porton in a while, but really they've turned into a terrific partner for Codexis. They have become very proficient at working with the pharmaceutical manufacturing chemists, at Codexis to understand how to apply, all of the different enzyme catalysts that we've developed over two decades. They have the ability to rapidly screen in China, without the assistance of Codexis, the enzymes that we've developed. And we've seen them work many different projects with their much larger frankly customer base in the pharmaceutical manufacturing world, given the size that they are as a CMO. They both -- work with both, large pharma customers and a growing list of small pharma customers which helps us to expand our reach into the sustainable manufacturing of pharmaceutical ingredients. And like us, it takes multiple years for an early progress with the customer process to translate into meaningful product sales. But they're very nicely on that track. They're adding to our ability to penetrate this wide market. They're great partners. They've learned a lot. We've really, really picked a great partner with Porton so hang on. And we'll start to overtime showcase installations that have meaningful product sales that flow through Porton overtime.

Thank you. Thanks for that.

Yeah. My pleasure. Thank you, Ramakanth.

I'm showing there are no further questions. I'll turn the call back to John Nicols, for closing remarks.

Okay. Well, thank you everybody for joining us today. We look forward to continuing to update you on all of the progress at Codexis going forward. Thanks very much. And have a great evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.