Welcome to the Codexis Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this event is being recorded. And now I'll turn the call over to Brendan Strong from Argot Partners. Please go ahead.

Thank you, operator. With me today are John Nicols, Codexis' President and CEO; Ross Taylor, Codexis' Chief Financial Officer; and Dr. Stephen Dilly, current Board Member and incoming President and CEO of Codexis. 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 2022 revenues, product revenues and gross margin on product revenues, prospects for our Life Sciences Tools, food sector and Biotherapeutics product businesses and our expectations regarding the sales of one of our proprietary enzymes to Pfizer for the manufacture of their COVID-19 antiviral therapeutic, PAXLOVID. 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, August 4, 2022. 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' annual report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2022, and on Form 10-Q filed with the SEC on May 9, 2022, including under the caption Risk Factors and in Codexis' other periodic reports filed with the SEC. Codexis expressly disclaims any intent or obligation to update these forward-looking statements, except as required by law. I'll now turn the call over to John.

Thank you, Brendan. Good afternoon, everyone. First, it's great to spend this time with all of you today. Those who have been following us for a while know that for the last five-plus years, we have been on a very strong, sustained growth trajectory with a remarkable track record of financial and strategic execution. Our confidence and optimism for our business remains steadfast, as you will hear us reiterate many times on today's call. At the same time, as we outlined a few weeks ago, our R&D revenue is not building as quickly as we originally anticipated, which led to our first significant downward guidance revision in recent memory. As always, you know us as transparent and clear communicators. And we wanted to make sure that today, we proactively provide you with key insights into those bumps in the road and how we are managing them. Still know that the fundamental strengths of Codexis are unwavering and will continue to enable us to deliver significant and sustained long-term growth, benefiting our customers and shareholders alike. Let's get into the results for the quarter, starting with slide 3. We are proud of our second quarter product revenue and first half of 2022 revenues overall. You can see this positive trend on the right-hand side of Slide 3, stemming from growth not only within pharma manufacturing, but also in other verticals like food and nutrition. With total year-over-year revenue growth of 51% for the quarter and year-over-year product revenue growth of 135%, we are executing on our goals to expand product adoption, ramp up commercialization and establish new offerings. In the second quarter, our base of customers generating significant revenue remained strong and wide with 18 customers who contributed over $100,000 in revenue, six of which contributed over $1 million in revenue.…

Thanks, John, and good afternoon, everyone. Let me dive into our second quarter 2022 financial results, which are summarized on Slide 11. Total revenues for the second quarter of 2022 were $38.4 million, an increase of 51% from the prior-year period. On a segment basis, $36.5 million in revenue was from the Performance Enzymes segment and $1.9 million was from Biotherapeutics. This compares to $21.6 million and $3.9 million for the Performance Enzymes and Biotherapeutics, respectively, for the prior-year period. Product revenues for the second quarter of 2022 were $34.6 million compared to $14.7 million in the second quarter of 2021. The increase was largely due to higher enzyme sales to Pfizer for PAXLOVID as well as strong sales to other key pharma manufacturing customers. R&D revenues were $3.8 million compared to $10.7 million last year. The decrease was driven by a mix of fewer new deals being signed in 2022 and lower-than-anticipated revenue from existing customers. Product gross margin for the second quarter of 2022 was 67% compared to 71% in the second quarter of 2021. The change was largely driven by changes in product mix, variations in prices for volume sold, namely for enzyme related to PAXLOVID and higher shipping costs. Turning to operating expenses. Our R&D expenses for the second quarter of 2022 were $19.1 million compared to $12.8 million in the second quarter of 2021. The increase was primarily driven by increases in costs associated with higher headcount and salaries as well as higher expenses for facilities, lab supplies and outside services. SG&A expenses for the second quarter of 2022 were $10.7 million compared to $12.8 million in the second quarter of 2021. The decrease was primarily driven by a decrease in legal fees, mostly due to the settlement of a trademark dispute and lower allocable…

Thanks, Ross. As we near the end of our prepared remarks, I'd like to reiterate our 2022 corporate goals and catalysts, as outlined on Slide 14. In Sustainable Manufacturing, the headline over the past year has been our execution of exceptionally high-volume enzyme sales to Pfizer for their manufacture of PAXLOVID. In parallel, we are driving widened adoption and product commercializations with other pharma manufacturing customers, and we are encouraged by the accelerated uptake we are seeing in the food and industrial verticals as well. With that in mind, we are well positioned to continue to drive double-digit growth for our non-Pfizer product sales in the coming quarters as we continue to strengthen the diversity of Codexis' business. In life science tools, we are focused on driving increased adoption and product sales for our three commercial enzymes, advancing and adding to our R&D partnerships and building long-term value from our synergistic inorganic investments with Molecular Assemblies and seqWell. Finally, we're advancing and monetizing our pipeline of high-value assets and partnerships in Biotherapeutics. We look forward to reporting data from the Phase 1 clinical trial of CDX-7108 early next year as well as our continued progress to bring an increasing number of partnered and self-funded assets successfully into early clinical development stage over time. In closing, I am sure you have read a few weeks ago that I am stepping down as President and CEO of Codexis in the coming days for family reasons. My wife, Marcy has suffered from a debilitating post viral infectious disorder for decades now. And after 30-plus years of her supporting my demanding and deeply gratifying career, it's time for me to focus the majority of my attention on her health. Second only to my family, my involvement in Codexis has been the most rewarding endeavor of my life and the capstone of my 35-year career. I am incredibly proud to have had the opportunity to lead Codexis over this past decade. Codexis is stronger and better positioned than ever with an incredibly talented team in place, I am grateful to the entire Codexis team for their dedication, hard work and collaborative spirit and for helping us become such an exciting company to work for and with. We are only seeing the beginning of the long-term benefits that Codexis, its team and technology can bring to our world. Our future is in excellent hands with Dr. Stephen Dilly. I've been thrilled to get to know Stephen as a member of Codexis' Board over these past two years. He is a proven leader with a successful two times CEO track record amongst many other significant accomplishments. He is uniquely poised to hit the ground running for Codexis, and I look forward to supporting Codexis' ongoing success as a continuing member of the Board and as a strategic advisor over the next few years. Now I'll turn the call over to Stephen to say a few words.

Good afternoon, everyone. First, I want to thank John for his leadership over the past decade. I look forward to building upon the strong foundation that he's laid. I know many of you are probably curious about my plans for Codexis' future. I plan to spend my initial months learning the core business from the inside as I continue formulating my broader vision for Codexis. As a Board member over the past two years, I'm coming into this role, having participated actively in the company's recent strategic decisions, so you can expect continuity near-term. I'm honored that the board selected for this role and look forward to getting to know each of you months ahead. Back to you, John.

Thank you, Stephen. I have no doubt that the business will continue to flourish under your capable leadership. Now we'd be happy to take your questions. Operator?

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brandon Couillard with Jefferies. Please proceed with your questions.

Thanks. This is Matt on for Brandon. And John, I just want to send you my best. It's been a pleasure working with you over the years. Maybe first one first, Stephen, I appreciate the comments there. Can you just talk about kind of high level, what attracted you to see that as the CEO knowing you've been on the board here for a few years? And then curious to get just some of your initial thoughts around what you see as some of the most exciting areas of the portfolio today. And then also your familiarity with the biotherapeutics pipeline and kind of philosophically how you're thinking about areas of -- that area of the business versus, the product side? Thanks.

Yes, thanks. First of all, I'd actually say this is my fifth CEO role. So I'm a bit of a glutton for punishment. So it was really when John and I started talking about Codexis and his personal circumstances, I really did wish I could do something about it. And serendipity just played into our hands that allowed me to step in. And what was really exciting was looking at this core technology CodeEvolver at all the different ways that it can play out to add value. And as you commented, one of the areas that I'm most familiar with is the Biotherapeutics pipeline, which I think is significantly underappreciated but also the ability to get into different parts of the value chain, for instance, pharmaceutical manufacturing. And when you look at an opportunity like this, the big question to ask is, how can I help? How is Dilly the right person to put into this role? And I think that partly it's because I've become familiar with the company as a Board member, and I'm in a good position to maintain some continuity. But also I'm a bit complementary in my skill sets. I'm much more thinking from a market focus. I'm much more thinking about the drug product at the end of the process rather than the enzyme at the start of the process. So I think there's a lot of ways that the mind meld and thank goodness, John's going to be around as an advisor through at least the medium-term future. We can really synergistically add value. So I couldn't be more excited than I am right now.

Thanks. That's helpful. And then on the pipeline, another nice year, growth year on the commercial side adding five products versus last year. Can you just talk a little bit about where some of those newer programs are in their ramps? Are they all contributing meaningful revenues to Codexis today and kind of where those could go over the next year or two? Thank you.

Yes, hey, thanks Matt. This is John. First, thanks for your nice comments in the beginning. I really appreciate it. Yes, the pipeline -- the momentum in the pipeline continues to be very exciting for Codexis. Once again, 20% plus growth in the number of pipeline assets and nicely spread across the entire set of sectors that we've been building up at Codexis. Many of these are very early, these commercial products at 22 commercial products are very early in their market adoption, especially in the food and life sciences area. And just to highlight, I look back four years ago at our pipeline snapshot and you guys could do that, too. We had only one commercial product in the food space. Today, we have three. We had zero commercialized products in the life science area. Today, we have five. Clearly, these are very, very early in their commercial adoption. So there's a lot of headroom for revenue growth, especially in these newer market areas like food and life sciences. But it's also exciting to see the traction and the sustained success that we've had building commercial successes out of our pharmaceutical manufacturing pipeline. Similarly, looked back at the numbers four years ago, we only had two commercialized products back then. The story of JANUVIA, which we've been talking about for many years, plus only one other in the patented arena. And most of our business development has been focusing on getting Codexis enzymes installed in clinical stage programs. At that time, four years ago, we had 14 Phase 2, Phase 3 installations. Of those 14, seven of those have had turned into commercial products. And that's despite the reality that many, many Phase 2, Phase 3 programs do not advance to full approvals with the FDA. So really exciting to see the traction and the build-out of what used to be only three commercial products in those sectors to now -- not including the generic space now 17. So it's really working. It's really working well, and there's a lot of headroom for revenue growth from these fairly recently commercialized installations.

Super, I will leave it there. Thank you.

Thanks, Matt.

Thank you. Our next question come from the line of Steven Mah with Cowen. Please proceed with your questions.

Great, thanks for the questions. And a warm welcome to Stephen and John, best wishes to you and your family.

Thanks from both of us.

All right, two questions on the Life Science tools enzyme business. One, can you update us on the Roche T4 DNA-Ligase license agreement? And the second part, can you give us any color on the size of the Molecular Assemblies milestone payment, expected demand from Molecular Assemblies and remind us of the margin profile of this optimized TdT enzyme. And the reason I ask that is that given that it was such a tour to force to engineer the TdT enzyme or margins or are you going to be charging more because of that versus other life science tools enzymes?

Yes, Cole, great question. So first on your first question was about progress with Roche, our T4 DNA ligase for next-gen sequencing library prep. So several years ago, we transferred the technology to Roche. And through the pandemic, they've been building up their capabilities to manufacture that enzyme in-house. And they've been installing it into next-generation library prep kits. So really, they've been working downstream to get their products to have our T4 DNA ligase installed. So not a lot to report. Just to refresh everybody's memory, given that we've enabled Roche to be able to manufacture the enzyme, our ultimate revenues will show up in the form of royalties on their product sales, not our product sales. So stay tuned for more progress as Roche continues to work downstream to improve their library prep using our DNA ligase. Yes, thanks for highlighting and asking a question on the Molecular Assemblies partnership. We're super excited about the progress, both that we've done and our partner Molecular Assemblies has done. We put out a press release just a couple of days ago that showed that we've notched off another key milestone to enable Molecular Assemblies to commercially launch their oligonucleotide and gene synthesis into the market, which that press release says they expect next year, which is great. We finalized the way we're supplying the enzyme and to cut to the chase pretty quick. We expect at least a typical gross margin on those product sales probably enhanced. And we have to be careful because really, the pricing for this product, we don't want to overprice it and affect their cost of goods, making oligonucleotides that would be something that would get in the way of their ability to commercialize downstream. So we've landed on a really good model. We're going to charge a very fair price for the enzyme product supply. We're also -- I noted in the prepared remarks that the agreement allows us to generate royalties on their product sales. And those are modest low single-digit royalties. But then also, we're as the second largest shareholder, we're set up to benefit from their downstream success, which we're very encouraged and hopeful and we're supporting them to do so. Leveraging this, like you said, I appreciate your phrase toward the force effort to create the world's best TdT enzyme, which they have accessed in this agreement exclusively to enhance their competitiveness. So really a terrific set of developments, and we look forward to sharing how well they're doing. And of course, they'll do that as well over time.

Got it. And then any color on the milestone payments from Molecular Assemblies like the timing of revenue recognition of that and magnitude?

The milestones opportunities that I referred to in my prepared remarks are forward-looking possible milestones. So I think we'll just wait to share those news as they unfold. There's no -- I think maybe Ross can speak to any kind of milestone R&D revenue that's -- that we've generated from the consummation of this commercial supply agreement.

Yes, Steve, it's Ross. Yes, you may see us record one milestone here in the back half of the year that might be in the neighborhood of seven digits, but we'll report on that later.

Okay. I appreciate it. And then my last question, it's going to be on PAXLOVID. I listened to the Pfizer earnings call, and they called out that they improved the manufacturing process for PAXLOVID reducing the lead time, improving the yield. So they don't need as much API to produce the same amount of finished goods. My question is, was this the reason that they pulled back on the PAXLOVID manufacturing enzyme orders? And are you a victim of your own success in optimizing enzymes so well? And could this potentially happen with any of your existing or future API manufacturing partners? I'm thinking about JANUVIA or the generic Sitagliptin players you're talking to. How should we think about any sort of risk around that, if any.

Yes, I'll jump in. We can't speak for Pfizer. We saw in the transcript as well that they made -- they were asked the question about our enzyme agreement with them. And their answer was mostly about API manufacturing, not about enzymes. So I encourage you to look carefully at the words that they used in answering the question. But we're not a victim of our own success here because we did not engineer this enzyme. This was an enzyme that was available off the shelf. And we provided it to them early in their development stage. And ultimately, as you know, got our enzyme installed in their manufacturing recipe, which has led to the significant, very significant sales that we're generating this year. So I think that's -- those are specific to your questions.

Yes, okay. Yes, thanks for clarifying that. Okay, thanks. I don't have anything else.

Okay, thanks Steve.

Thank you. Our next question comes from the line of Matt Hewitt with Craig-Hallum. Please proceed with your questions.

Good afternoon. And just to reiterate what the others have said. John, it's been a pleasure working with you the last few years, and welcome, Stephen. We look forward to working with you as well. Maybe first up, given the current inflationary environment, the success that you've had with Pfizer and others, I'm just curious if you're seeing more interest, more demand for your enzymes as a result, because of the cost reductions that you can make and bringing products to market faster through your enzymes?

Yes, I think we continue to have nice wins in our sales on adoption for manufacturing processes. Inflationary pressures definitely put more attention to supply chain efficiencies for our customers and enzymes are a great tool to reduce cost, sometimes in a stepwise fashion. Also, I'd highlight that our success story with Pfizer on PAXLOVID has highlighted just how quickly and to what magnitude Codexis' technology and products can generate that kind of value. And that's being noticed across the industry. Finally, I'd just add that not only have we -- are we -- do we continue to work with all of the largest pharmaceutical companies. We continue to spread to smaller biotech companies to help them see the value that enzymes can bring to their manufacturing recipes. And I think that's having some fruit as well. All of it happens over time, but nice wins in our sales that will continue for the very, very medium and long-term that we continue to exploit here.

Got it. And then regarding the partnering kind of the shift that you talked about with your internal candidates, maybe shifting more towards partnering a little bit earlier. Is that something that you anticipate happening here in the back half of the year? Or is it a function of kind of needing to build up the interested parties, and so it's more of a '23 event?

Yes, I think that takes time. You can see our first half R&D revenues were just north of $8 million. Ross shared our full-year outlook is $20 million to $25 million. So clearly, we expect some lift in the second half versus the first half. But I think our efforts, as we shifted earlier in the year as the macro and capital market environment started to impact the way we pull and use all the levers that we have to grow as a company. We're going to really be building that R&D revenue wave more next year versus the short run, like in the next five months. So look for us to build out the R&D revenues from where we land this year. Obviously, a key question for us, a key focus for us is driving the outlook for 2023. Not only do we expect to deliver on a nice sizable year-on-year growth next year in R&D revenues. We just have a terrific momentum in product sales, excluding Pfizer that we're very encouraged about, and we're driving double-digit sales from roughly 36 ex-Pfizer last year to 40, maybe more this year as we finish this year. We've had a five-year compounded growth rate in product sales before the Pfizer opportunity ever happened of 22%. We've reported -- we shared all this momentum in our pipeline, the first question from Matt at Jefferies. We've just brought a lot of new commercial products on stream over these last few years, and they're very early in their revenue ramps. So we're very encouraged about all these growth drivers for 2023 and beyond. That encourages us to continue to drive medium and long-term growth as a company.

That's great. And if I could sneak one more in regarding Molecular Assemblies. You guys have been fairly public as far as your relationship and you buying in, your ownership of the company. And I'm curious if you have started to develop a pipeline of potential candidates, has Molecular Assemblies had customers reaching out even before this contract was formalized, wanting to be first movers to use the product as it became available.

Yes, yes and that's actually a key component of Molecular Assemblies as press releases recently, also highlighted in the press release that we co-issued earlier this week. They're putting forward now that they are finalizing their pilot manufacturing capabilities, they're putting forward what they call, I think, the key customer campaign to tap into the early interest from many different parties in many different DNA synthesis marketplaces. So that's really the key focus for them is to validate with real customers, their ability to generate longer strands of high-quality DNA quicker than traditional approaches.

Got it, thank you.

Thank you, Matt.

Thank you. Our final question will come from the line of R.K with H.C. Wainwright. Please proceed with your questions.

Thank you. John, it's been a great pleasure and also really appreciate how you've grown Codexis from where it was, I believe, about six years ago when I first met you at the 2015 JPM. Good luck. And I very much hope and wish your wife and yourself good health.

Thank you.

Welcome aboard, Stephen. So I have a couple of quick questions. One is on the relationship that you have been building with some of these generic companies that are planning to manufacture Sitagliptin. When it's said and done, would the revenue run rate be similar to what you have been achieving with the branded JANUVIA?

Yes, do you want to take one at a time, R.K.? Do you want to add to that question.

Okay. So that is -- the second one is on Tate & Lyle. Just trying to understand our lease out, if the relationship is going to get any deeper beyond the Stevia that you have had for a while now.

Yes, let me take those in turn. We've provided some really terrific qualitative update on our progress to get our enzymes installed in generic Sitagliptin processes. Noting that today, the market is still under Merck's exclusive domain worldwide. So it's a positioning of many generic companies to ultimately enter what will become a large generic market. And we announced last year that we had established a generic partnership with an Indian company named Almelo, and that's been advancing. But we -- today, we announced that we have four other supply agreements. These are substantial agreements with four other leading generic companies that we've put in place to date. And we've had a tremendous amount of sampling activity. So we expect additional agreements with other generic companies as well. So really getting our enzymes installed into tomorrow's ultimate generic market, which is very encouraging. This is critical for us to be able to try to maintain or maybe even grow our sales in that generic market versus what we've been doing with Merck. So I can't really answer -- we can't really answer at this point what kind of revenue run rate we're going to have with generic companies as compared to Merck. We have to wait until that generic market unfolds in the coming future. Tate & Lyle has been a tremendous partnership. Not only do we have one of our commercial enzymes installed in the manufacture of the better-tasting Stevia product with, which Tate & Lyle has launched and is growing and is buying more and more of our enzyme for. But we also have commercial enzyme installed in another one of Tate & Lyle's recently launched sweeteners. It's a product called DOLCIA PRIMA and it's a more bulky kind of sweetener, it's also low caloric, not non-caloric, which is also growing. So both of these commercial enzyme installations with Tate & Lyle are doing well. We continue to showcase that quarter-to-quarter. Our revenues are growing to Tate & Lyle and more broadly in the food space. So given the success that we've had with Tate & Lyle, we continue to have many discussions with Tate & Lyle, and I'm hopeful that we can showcase other commercial breakthroughs beyond these two with Tate & Lyle over time.

Thank you. Thank you for taking the questions and good luck.

Thank you too, R.K.

Thank you. We have reached the end of our question-and-answer session. I'll now turn the call back over to John Nicols for any closing remarks.

Yes, thank you, everybody again, for joining us today. We look forward to continuing to update you on our progress, as Stephen takes the helm of the company. Have a great evening.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.