Q4 2019 Earnings Call

Ladies and gentlemen, thank you for standing by welcome to the Q4 2019 could access Inc. earnings conference call. At this time all participants are in listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you recall.

For any further assistance. Please press Star then zero.

I'd now like to hand, the conference over to your speaker today Ms. Jody Cain. Thank you. Please go ahead.

This is Jody Cain with really change. Thank you for participating in today's call. That's what's called to discuss 2019 fourth quarter and full year financial results and since its progress.

Slide deck to accompany management's prepared remarks is available on the Investor section of the company's website at codecs is dot com joining me from crude exits or 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 nature 95 to the extent the statements made by management or not descriptions of historical facts regarding code, Texas. There are forward looking statements, reflecting the beliefs and expectations of management as of February 27, 2020.

You should not place undue reliance on forward looking statements because they involve known and unknown risks uncertainties and other factors that are in some cases beyond the company's controls and could materially affect actual results for details itself. These risks. Please see the quarterly news release that accompanies this call.

This was the company's FCC filings.

Yes, that's that's expressly disclaims any intention or obligation to update forward looking statements, except as required by law.

Today's conference call.

Remarks, well includes both GAAP and non-GAAP financial results, who DOCSIS believes the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of this business enables a comparison of financial results between periods, where certain items may vary independently.

This is 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 information and comparative purposes and should not be regarded as it was placements for corresponding GAAP measures reconciliations between GAAP and non-GAAP financial measures can be so that's the end of the financial results news release that was issued earlier today.

Okay.

Now I'd like to turn the call over to John Nicols John.

Thanks, Jody good afternoon, everyone. Thank you for joining us.

That's Jody mentioned, we hosted a shortened slide deck on the Investor section of our website to accompany today's call and I encourage you to follow.

Starting on slide three.

2019 was an excellent year for could axis, 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 enzyme segment.

Within performance enzymes pharmaceutical manufacturing was the star in 2019 growing over 37% versus 2018, showing that even the most established of our threed growth strategies can deliver stepped out results.

There we landed our third Codeevolver platform licensing deal with Novartis recognize nearly $3 million in backend revenues from our first two platform licensees and saw three customers phase three drugs using our proprietary protein catalyst filed for <unk>.

Sure well receive FDA approvals.

And 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 Peyton mild fully commercialized better tasting stevia sweetener isn't the hands of the world's leading food and beverage brands staging for ultimate breakout adoption.

And next generation sequencing, we partnered our DNA like gaze with Roche one of the world leaders in the space and readied, our DNA polymerase product launch into and penetrate that products larger customer base.

And finally, we materially advance two brand new clients leaders and their spaces into new exciting application categories for Conexus enzymes.

And on top of these solid developments, we dramatically stepped up the build out of the successful drug discovery and development franchise within Conexus in 2019.

What started about five years ago, Ashley cautious co in the water is now a powerful value creating business segment for the company.

Our first program Cdx 611 for for Phenylketonuria has advanced to be sure become cadets. His first drug candidate to be administered to patients driven by our partner Nestle Health Science.

In addition, the Conexus Therapeutics discovery team has in the space just a few years generated positive preclinical research proof of concept to results and has begun I'd, enabling work for two of our other pipeline programs in 2019.

And finally, the team has generated positive and differentiated preclinical data for the therapeutic candidates in our pipeline that are not designed to be orally administered which are those targeting two lysosomal storage disorders.

Please to report that we're finalizing we're working for finalized an agreement with a new partner involving these candidates. We look forward to communicating the details about new buyer therapeutic partnerships you within the coming months.

Bringing the segments together it is worth noting that our total 2019 revenue growth of 13% was accomplished despite formidable $10 million plus headwinds from the conclusion of major partner funding chapters in both the stevia and PK you projects in the prior.

Yeah.

Cash burn from operations was very manageable, roughly 12, and a half a million dollars far below new equity equity funds raised leaving us with over $90 million of debt free cash the highest yearend balance and the company's history.

All of this success rests on the shoulders of the truly amazing team here in Texas.

We added more colleagues to the hall and labs after taxes in 2019, then than in any year since I joined in 2012, plus we managed a successful and seamless CFO transition.

In parallel the next level of R&D leaders stepped up while we finalized an extended and crucial search process could transition to new executive leadership over our platform technology.

I'm proud to say that in 2019, we were again recognized for the third consecutive year as one of the San Francisco Bay area and Nations best and brightest firms to work for.

Now 160 strong we drive upon deeply held in common core values of integrity innovation and collaboration there is a powerful collective pride for the company that we have recreated over the last six years and we're scaling to handle the continued step out growth that we demand from our cell.

Yes, and no our investors have come to expect from us as well.

More business commentary later, but first let me turn the call over to Ross to go into more details about the financials cost.

Thanks, John.

I'll review, our Q4 and full year results and then discuss the 2020 financial guidance, we are introducing today.

Total revenues for the fourth quarter of 2019 were $18.7 million up 16% from Q4 2018.

Revenue for the 29 King Warner included $17.1 million from the performance ends on stagnant and $1.6 million from the novel Biotherapeutic 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 from the 2019 fourth quarter increased 57% third $13.8 million. This increase was primarily due to revenue from the Novartis Codeevolver agreement, we announced Monday, partially offset by lower revenues from Nestle Health Science important.

R&D revenue for the fourth quarter of 29 keen included $12.2 million from the performance enzymes segment and $1.6 million from the novel Biotherapeutic segment.

Gross margin on product revenue for the fourth quarter of 2019 was 30% compared with 67% a year ago with a decrease due to product next.

Turning to operating expenses R&D expenses for the fourth corner of 29 teamwork $8.9 million. This included $4.5 million from the performance enzymes segment and $4.0 million from the novel Biotherapeutic segment, plus zero point $4 million allocated to corporate expense.

The increase in R&D expenses from $7.5 million a year ago. It was primarily due to higher outside service fees.

Her head count higher allocation of occupancy related costs and increases in lab supplies, partially offset by lower consulting fees and stock based compensation.

<unk> expenses in Q4, 2019 were $7.3 million, which included $2.0 million from the performance ends on segment.

The million dollars from the novel Biotherapeutic segment.

The remaining portion of best DNA expenses of $4.9 million is included in corporate overhead expenses depreciation expense.

The increase in S. Sina expenses from $6.8 million in the prior year period was primarily due to higher facilities costs in headcount, which were partially offset by reductions and allocated occupancy related costs and outside services fees.

The net loss for the fourth quarter, I'm, 2019, zero point $6 million or one cents per share.

This compares with a net loss for the fourth quarter of 2018, a half a million dollars or one cents per share.

Turning to slide four I'll review, our full year 2019 financial results.

Total revenues for 2019 were $68.5 million up 13% from 2080 product revenue was $29.5 million up 15%.

R&D revenue increased 11% $39.0 million and consisted of $28.7 million from the performance ends on segment and $10.3 million from the novel Biotherapeutic segment.

Gross margin on product revenue for 2019 was 47% compared with 51% for the year with the change due to product mix.

R&D expenses for 2019 were $33.9 million and ask DNA expenses were $31.5 million.

We reported a net loss for 2019 of $11.9 million or 21 cents per share, which compares with a net loss for 2018 of $10.9 million or 21 cents per share.

Turning to slide five we reported another outstanding year from the performance enzymes segment revenue growth of 24%, making up 85% of our total revenues in 2019.

In addition income from our performance enzyme segment, almost doubled to $14.7 million from $8 million and prior year.

Moving to our novel Biotherapeutic segment shown on slide five abide therapeutic segment revenues were $10.3 million compared to $13.5 million in 2018.

The Biotherapeutics segment had an operating loss of $5.2 million.

[noise] in 20, Nike compared to income of $2.6 million in 2018.

We expect revenue and income for this segment to remain volatile as it is driven by partnering milestones R&D milestones and R&D fees.

Also we anticipate we will continue to make significant investments in this business.

Turning to the balance sheet cash and cash and equivalents as of December 31, 2019 were $90.5 million up from $53 million as of December 31 of 2018. This increase includes the proceeds from the $50 million private placement we completed in June.

Let me now introduce our financial guidance for 2020, which is outlined on slide six.

We expect total revenues for the year that need to be between 70 $882 million, which represents growth of 14% to 20% over 29 key.

We expect approximately 40% of 2020 revenue to be reported in the first half a year and 60% in the second half of the year.

Within the first half, we expect approximately 40% of revenues being Q1.

80% in Q2.

We expect product sales to range from $25 million to $27 million.

And we expect gross margin on product sales to be between 43% and 47% based on our outlook for product mix.

With that I'll turn the call back to John.

Thanks Ross.

I'd like to to now take a few minutes to discuss the business fundamentals that have enabled our sustained topline momentum starting with performance enzymes on slide seven.

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.

Pardon are 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 growth covers the fact that some projects drop off the list because they either become inactive or advance to the commercial stage the ladder of course being the gold.

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 Milds milestones.

Also an increasing percentage of our projects are targeting industrial sectors that should reach commercial stage more quickly than those targeting pharmaceutical manufacturing, especially those projects and the clinical stage.

Once the project reaches commercialization revenues become more sustaining or recurring.

Our product revenues plus sustaining revenue sources within our R&D revenues I eat backends from our Codeevolver license fees and other commercialize licensing deals contributed $33.5 million of revenue and 2019.

Which is.

Up 30% on a compounded annual basis over the last three years.

Notably sustaining revenues contributed 58% of the performance enzyme segments total revenues in 2019 compared to 34% in 2016.

The other 42% of segment revenues consist of partner funded R&D project revenues and upfront revenues from Codeevolver platform deals.

While these are nonrecurring there of course valuable sources of additional revenue.

No the effect of Codeevolver front end revenues large period to period swings.

Excluding codeevolver front ends the segment's revenues grew at a 28% CAGR over the last three years with them included a much dampened 9% CAGR.

Regarding partner funded R&D project revenues, even though each project itself is nonrecurring we've demonstrated consistent growth in landing new funded projects, noting it's 25% CAGR over the last three years.

Rounding out the scorecard, the remaining metrics focus on pipeline quality.

Here, we highlight the more than doubling of significant revenue generating customers.

And the more than 10% increase in gross profit margin on the products, we sell today versus three years ago.

As I will refer you review with the last slide which focuses on 2020. Some short term circumstances will cause several of these message to say that measures to slow or modestly declined in 2020. Nevertheless, the power and momentum of the performance ends on pipeline will push through over the longer term driving the business.

Well, that's long term double digit revenue growth trajectory.

Let me now shift to slide eight which focuses on the build out of our novel Biotherapeutics pipeline.

As you know.

Oh Therapeutics discovery and development was a very small part of Conexus is activities as recently as just three years ago.

Now the segment as a core part of how we are building value for our future.

That foundation derives from our solid track record of success building the pipeline that is summarized on this slide.

Our novel Biotherapeutics pipeline is now advancing seven programs in parallel up dramatically from where we were three years ago.

Starting with Cdx six woman for for Federal Ketone Urea Nestle Health Science reports to us that their current patient trial is nearing completion, and though efficacy readout are not yet available they inform that no adverse safety events have occurred to date.

In parallel they have lined up to start a multiple ascending dose phase one trial for Cdx 611 for in patients in the coming few months.

We're excited to see the continued clinical progress for Cdx six woman for noting that essentially all of could axis is spending on the program is now behind us.

Nonetheless, conexus is set to potentially generate hundreds of millions of dollars a backend cash flow. If cdx 611 for continues to successfully advance.

The conclusion of the phase one be trial is the next potential milestone event for good axis and that is expected to be assessed around the middle of 2021.

In addition to the already partnered PK you asset the Conexus Therapeutics discovery team has in the space of just a few years also generated positive preclinical proof of concept results for two of our other pipeline programs in 2019.

Importantly, each of these programs has also passed a critical investment justification gate often called the development candidate nomination gate, where the cost and timelines for the preclinical development work to enable initiation of clinical trials is assessed and approved.

These hi, Andy enabling work expenses are significant potentially in the range of $5 million to $10 million per program. So the long term business case, and the differentiating value of the preclinical results results must be dean sufficient to justify the upfront investment.

It's great to see that both Cdx seven 108, and Cdx 5651 to have become development candidates and if all goes well both are destined to start clinical trials in 2021.

Cdx seven 108 is an orally administered <unk> enzyme therapy for an undisclosed disclosed gastrointestinal disorder and watch the subject of our partnering announcement with Nestle Health Science. This January.

Good excess and Nestle health science co own and our co funding that program.

Rounding out the Nestle partnered programs, we were pleased to announce as well in January that Nestle Health Science has agreed to continue funding the discovery of additional new for both parties orally administered bowl biotherapeutic candidates through at least the end of 2021.

Built on the success of both Cdx 611 for and Cdx seven 108, together, we have brainstormed a list of new targets of interest to get access and Nestle Health Science, where both parties see the possibilities for codeevolver to generate differentiated new products for improved humor.

In health, we prioritized one shown at the bottom of the pipeline that will initiate work on that program soon.

Nexus generates partner funded R&D revenues under this strategic collaboration agreement.

Back to Cdx 651, too. It is also an orally administered will enzyme therapy candidate and it is targeting a rare disorder caused by a genetic mutation involved and the metabolism of an essential amino acid.

Like PK you patients. These these patients are unable to process this different amino acid and its accumulation in the body leads to significant health concerns.

Cdx 651 to followed a very similar preclinical research approach and been benefited from much of our Cdx 611 for a preclinical research learnings, allowing it to reach the development candidate at nominations significantly more quickly and a little over two years from initiation.

Good access is self funding the I, India, enabling work for Cdx 6512, and we plan to share more about this program, including the specific disorder and the positive preclinical data we have generated somewhere towards the middle of this year.

And finally, let me provide you more detail on the work in the lysosomal storage disorder area, which I mentioned earlier is leading us to expect an imminent exciting partnering deal announcement first some background lysosomal storage diseases are inherited metabolic diseases that are character.

To rise to buy an abnormal buildup of various toxic materials in the body cells as a result of enzyme deficiencies.

According to the National organization of rare diseases. There are nearly 50 of these disorders altogether and they may affect different parts of the body.

As you can see on our pipeline chart, we've been working on two lysosomal storage disorders, one of which dates back approximately four years. These programs unique within our pipeline are designed to be administered systemically I.E. by injection for infusion into the blood stream.

Our teams have done some terrific work and these lysosomal storage disorder programs highlighted by a recent scientific presentation addressing fabry disease by one of our scientists at the World Symposium in Orlando, a few weeks ago.

Dr. Hallows presentation highlighted our net novel enzyme therapy candidates that exhibited improved preclinical results across a range of relevant parameters, including stability half life activity across various critical oregons, such as the heart kidney and liver as well as predicted for me.

You reduce immune immunogenicity.

We plan to share some of this data in future corporate presentations.

In 2019, we determined that we should partner how work and lysosomal lysosomal storage disorders in order to accelerate and increase the chances of our assets continued development.

During our process, we generated significant interest with multiple strategic partners. We believe a binding agreement is nearing finalization and hence we expect that to be close and announced very soon within the next few months, we'd hope that this partnering deal would be finalized last year and that slippage was a key contributing.

Factor, leading to the slight Miss on our 2019 revenue guidance, we look forward to providing you updates on this exciting development in the near future.

We're super proud of what we've accomplished and earn a novel Biotherapeutic segment and are very encouraged about continued advancements in the pipeline and for significant value of value creation to flow from that in the future.

Now, let me close out our prepared remarks by summarizing the Companys outlook for 2020 by turning to slide nine.

The novel Biotherapeutics segment is expected to lead the company and delivering our new annual revenue guidance target of growing from between 14 and 20%.

Growth a fun partner funded R&D with Nestle developing cdx seven 108, and the new discovery collaboration program plus expected revenues from our anticipated new lysosomal storage disorder partnership more than offset the roughly four to 5 million dollar headwind from not generate.

And any revenues in 2020 from Cdx six formula for.

Strategically we will be driving our pride pipeline forward as assertively as possible and warranted that will require a significant increase in third party spending, especially for driving the two development candidates towards the clinic as a priority this year.

We expect that will add somewhere between two and $3 million per quarter for the segments R&D expenses comparing to last year.

In performance enzymes, we expect a modest decline in revenues in the traditional pharma manufacturing sector to be roughly offset by revenue growth in new verticals.

In R&D revenues for pharmaceutical manufacturing growth at new clients will come close to offsetting the expect or lower revenue from Novartis as we complete the Codeevolver lab license technology transfer successfully in 2020.

Note that while we are advancing prospects for other codeevolver licenses to ultimately be consummated the prospects for such could at best fall into late 2020, and hence we have not included the impact of that possibility in our 2020 guidance calculations.

Products product sales are expected to decline modestly in 2020 to the new guidance range that Ross chair of between 25 and $27 million.

All of that decline plus some can be explained by the short term inventory reductions that are fundamental to new drug launches at your and your event and how our gas.

Fundamentally clients in prelaunch situations have to build their product inventories significantly in advance of launch for regulatory qualification procedures required by improving authorities like the FDA.

2019 was that type of inventory build for all three of these customers who require much less enzyme in 2020 accordingly.

We expect expect this to rebound for all all three clients in 2021 and beyond as they reach steady state in their new markets.

Note that our references last year to a top 25 pharma company, who bought Neely, who bought greater than $1 million worth of product several times was referring to our again.

Product sales to other pharma pipeline projects and clients will grow, but we'll likely but be unable to offset the prior few senses four to 5 million dollar headwind.

Enzyme sales to Merck for Citic, what their manufacturer are expected to be similar in 2020 versus last year. Given those sales are therefore expected to be higher ratio of total sales. There is a possibility that product gross margins could slip slightly versus 2019 to our new newly introduced 2020 guidance range of between.

43% to 47%.

For performance enzymes for other verticals, starting with the food industry. We continued to be encouraged by Tate and Lyle for our enzymes used in the manufacturer of pay Steve at hand.

They are better tasting non caloric stevia sweetener.

Meanwhile has share that they are in the middle of many customer qualification discussions and they are especially focused on getting piece diva and formulated into larger brands products.

Customer responses, the taste and sensory attributes for pay Steve and are very positive and have led to smaller early adopters, having already Kirk commercialized products, using tasty, but him with nutrition bars and other products on groceries shorten store shelves today.

Mile has shared that the adoption timeline for larger customers can be quite long. However, so we do not expect a substantial year on year stevia enzyme revenue growth to be achieved in 2020.

Well this provides only modest near term growth prospects pay Lyle continue to encourage us that their market penetration of pay Steve. The M is tracking to their plan and that they have confidence and pay Steve and ultimate achievement of significant share of the world sweetener markets overtime.

Outside of Stevia in the food sector, we expect growth, especially in partner funded R&D with new clients.

Prospect list in food applications for Conexus continues to be strong.

We expect growth into an exciting list of life science applications to be even stronger than the food arena in 2020 that starts with finalizing the tech transfer of our DNA like gaze with Roche. In addition, we're excited to commercialize our DNA polymerase into next generation sequencing markets in 2012.

Any.

Conexus team was that the AGBT conference in Florida. This week the premier event in the space promoting our product and its differentiation versus incumbents. We continued to see life science markets as a critical growth segment worthy of both self investment in partnership with the right players.

Okay, and expect to continue investment and deal making in this space.

The company continues to fire on all cylinders as we start off another solid year of growth in 2020.

Our operating expenses are expected to grow versus 2019, Accordingly, I already described the largest single factor being increased investments to drive the novel Biotherapeutics pipeline advancements. In addition, we continue to smartly add headcount to be able to handle especially the increase protein engineering demand from all these.

Growth activities, we will also be bringing in some new executive talent to help make great leaders and I scale for continued step out growth that is nearing a points to be announced for new R&D leadership as you heard already.

In closing I want to thank the entire team it could access for their very hard work and dedication leading to our many accomplishments in 2019 and look forward to another highly productive year again in 2020.

With that overview I'd like to open up the call for questions operator.

Thank you as a reminder to ask the question you will need to press Star then one on your Touchtone telephone to withdraw your question press the pound key.

Please stand by what we compile the culinary roster.

But we're waiting for our first question I'd like to alert you to our participation in a couple of upcoming investment conferences, we won't be presenting at both the Cowen and company Health Care Conference next Tuesday March 3rd in Boston, and we'll be at the Roth Conference Roth Conference on Tuesday March 17.

In Dana point, California webcast of our presentations at these conferences will be posted to the investor section of Conexus dotcom.

Okay, operator, we're ready for the first question.

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

Good afternoon, a couple from me first on the product revenues, a little bit light 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 that work that are kinda delaying the.

Reorders.

Yeah. The declined from last years that thanks, Matt a the decline.

That were 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 pure and euro event and allergan. So so outside of those three there's some modest growth and the rest of the product portfolio and and I gave you some commentary about stevia or you know.

TV a 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 a tape mile to successfully get the adoption that 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 too.

To start to take off as we get into 2021 later.

Okay, Great and then I guess, if he gave US a lot of a new information today, but regarding the lysosomal storage disorder opportunity.

Should we be expect is they're gonna 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, though we expect this deal to close very soon.

And and you know the structure that you outlined is you know is a reasonable expectation. Some some measure of upfront milestones and R&D program fees that would probably accrued conexus.

And that will have an impact on our 2020 revenues and weve built that into our guidance.

[laughter].

Just one comment that it also Matt I think.

Depending on the structure of the deal various terms of the agreement that can also impact.

How revenue revenues are recognized.

Especially under six of six so just keep that in mind also.

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

Thank you.

Yeah. Most of the commentary focused on Ah you know of course outside of pharma manufacturing focused on food and life Sciences.

And the 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 you were talking to many customers. We have good prospects there 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. If you molecular diagnostics. If you go back three years, we didnt even talk about molecular diagnostics. If you go back four years, we didnt even talk about <unk>.

Food. So that's how we layered out as you kind of bring these stories forward as we actually landed a partnership.

That brings you know material R&D funding into the company and whatever commissions, we can get from those partners, we love to share with our Investor base, certainly we'll be able to talk about the you know the industrial sector as we bring in material revenues.

That would help others.

Understood. Thank you.

Huh.

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

Hi, This is right on for Doug. Thanks for taking my questions can you provide an update on how the situation with Corona virus is impacting your business today. If at all I believe you have one CMO and Switzerland and another in Italy has there been any material disruption and then can you all to provide an update on important and overall Asia exposure are there any revenue had within guidance for that thank you.

Yeah, Yeah like everyone in the world, we're watching very closely the developments of the Corona virus its impacts on Conexus have been mill to date thankfully.

We haven't had any issues associated with our supply chain partners.

To date.

We have very limited a potential exposure to the Asian markets.

More it's our customers impacts that could affect us on but we don't see those unfolding.

This point I is there.

Bras 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 you know changes, but clearly we're keeping our post on the situation.

And Ryan you asked about ports and we're keeping close to our partner of course, that's a relatively standalone partnership you know, we've set them up with screening capabilities and they've been screening are approaching catalyst against their or their process off their process CMO opportunities and.

Pharma.

They they took an extended shutdown I understand that they're back up.

I'm sure that this is a pretty important development for them to be watching but but we don't have a you know we see a revenues with porton in 2020, not not much being built into our guidance by the potential for upside.

If they're able to advance some of their projects to more material stages that might require additional enzyme manufacturing from us for may require some enzyme evolution services provided to them.

Improving so 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.

Where it connects that partnership.

Excellent and then impressive progress on the therapeutics pipeline assets just to make sure I understand is the ramp in 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 it's it's the vast majority is associated with or third party spending.

For GMP manufacturing process development toxicology regulatory alignment stuff like that that's the that's by far the largest category, but we are we are adding some headcount modestly to that area. We did a significant buildup of head count in that area over the last 18 months.

But as we get a new project like a we shared with net slate.

In the January announcement, the extension of the strategic collaboration agreement led to a new program coming into our pipeline that would lead to just a modest additional R&D headcount.

Got it and then one more quick one you mentioned nearly 3 million in Bakken revenues from Codeevolver license fees in 2019, do you expect that to grow in 2020 and beyond thank you.

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

I think from there it's set up to grow but you know 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 and 2020, but the programs that are advancing within Merck and GSK is pipeline.

Our exciting the program, where we generated the milestone last year with GSK is advancing as a as best we know.

And in that program could lead to a significant stream of additional larger milestones.

Over the coming three to five years of GSK continues to advance that so that sets up for growth in that just one program quite well.

And then you know I've I've missed a really good question, there and we probably should the detailed in our prepared remarks, but we'll cover here one of the one of the items that came out of the backend from the Merck deal was the development of this multi enzyme cascade for their fast track HIV draw.

Doug.

The the active ingredient is called slot sure be era.

We share the press release on that late last year is an amazing article about the development of that process in Science magazine.

And Ah that's that's become a benchmark of how to best apply protein analysis.

For the World to now study, but in the short run Merck is really moving forward that program were set up to be the supplier.

Of enzymes again, there's a multi ends on cascade here.

And that could be very nice material clinical orders for could access in 2020.

And carrying into 2021.

Thank you enter next question comes from brand and we are with Jefferies. Your line is now open.

Thanks. This is Matt on for branded today, just a quick one following up on the Roche deal in December curious on 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 diagnostic space and then any color you can provide on discussions you're having with.

Clients on additional biomarker activity.

Sure Great question, a and absolutely a the deal we've made with Roche one of the very top leaders and Nextgen sequencing.

Two for them to acquire license to access our DNA Ligas was it was a watershed deal for us I referenced.

A team of Conexus employees at the AGBT Conference.

Just this week or they just returned some of them.

And there was a lot of interest from players that that he conference.

And of course, a 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 you know the ability to attract great partner like Roche for the first product certainly, creating some some wind in our sales for the second product and we're quite excited about that.

2020 and beyond.

Second question.

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

Sure a broadly biomarker the development last year, we started a really exciting program with a currently unnamed partner it generated over a million dollars of R&D revenues last year I referenced that but didn't spend much time on it in the prepared remarks.

Oh that program is advancing well and broadly speaking those are 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 of the partnership is going well, we're hopeful that that partnership continues to advance as we started 2020. It is it is currently continuing emotion.

And that it reaches a milestone point, where we can say more about what a good access and that partner.

Thanks for the good question.

Thanks for that I guess, one quick maybe for Ross if we just look at the product gross margins, 51%, 18% to 47% last year. The midpoint of the 20 guidance implies another slight decline year over year give us better understand what's kind of driver that decline is it simply mix or is there anything.

Additionally, the call out there thanks.

I think John actually address some of this in his prepared remarks, and some of the queuing they already but that's really driven by mix we'd expect.

You are Merck sitting within a product, which is a lower margin product will likely be a bigger portion of the mix in 2020. There was in 2019 and that's the primary driver of that.

Anticipated decline in gross margin.

Super Thanks.

Thank you thanks.

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

Oh, good afternoon, Jonathan Ross and congratulations on a successful you 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 D. A fairly conservative product revenues I can based on my calculations, you expect the R&D and licensing revenues to increase between 31, 46% makes you. 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 on John can you maybe at some additional color, but given our expectations of moving our pipeline for Gen novel Biotherapeutics segment, I think a lot of the growth and the R&D revenue will come off 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 enzyme R&D revenue, but on a percentage basis, it likely will be faster and novel by therapeutics.

Oh I see today, thanks for the Huh.

And a 46 five or one two 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 a you know we just disclose that it is past and investment gate decision.

And so we have nominated it now it's a development candidate and and therefore, we're prepared to invest the relatively sizeable.

Amount of expense to do the idea, enabling work to carry it a into clinical trials next year.

So with that you know, we we don't want to stay silent on what it is so.

Give us a little bit at time, we'll share with you what the diseases.

We'll share with you or what's going on to our their solutions for patients and that disease or not yet I will share some insight into prevalence data of will share. Some data that we generated a that that helped to make the justifications no decisions.

In other words, the preclinical research data that that drove our confidence that we're going to generate the return on on at least the idea, enabling investments and hopefully clinical investments down the road. So so yeah that that kinda how to paint. The you know the high level overview that will make sure we provide on cdx expire.

One to four inborn error of amino acid metabolism disorder sometime mid year.

Okay, that's good to hear.

My final questions on the 6.14 program with the first study nearing completion and Nestle 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 I don't have that clarity from our partner and as you know the partner as running that they they have provided a information about the study designs on.

Clinical Gov dot or I'm, sorry, clinical trials dot Gov.

So to both of these trials are now posted there and so it's up to them.

Of course, if they go one get to the next the data from the prior Jade.

Yes.

Was sufficient to make that jump to spend more money and develop more clinical data.

It's always good but yeah I would encourage that site to provide that data will will share you know the impact that kind of data, especially in scientific forums can generate for them and for us, but it's hard for us to the problem I said, especially when we have no control over it.

Oh I see home, that's only <unk>. Thanks again for taking my questions.

Thanks, John.

Thank you and as a reminder to ask a question you will need to press Star then one on your Touchstone telephone to withdraw your question press the pound keep our next question comes from Joe Munda with first analysis. Your line is now open.

Good afternoon, guys, a 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 you know potentials for expansion nearing the end capex spending a in 20. Thanks.

Sure Joe.

Let's see Capex for the entire year was you about $4 million, just under 4 million and it was just under half a million dollars in Q4.

And in the upcoming year, we are doing an expansion of our a pilot plant.

So our capex is likely to be at least several several several million dollars higher than it was here in 2019.

Okay and.

What do the I guess, what does that equate to as far as capacity the expansion of that pilot plant you Hmm is it 25% 30 degrees.

And maybe I'll cover that pilot plant is mostly used to do process development for ultimately much larger scale manufacturing of enzymes show. So so it's a it's a core asset to develop you know the processes because you know codeevolver.

Generates protein molecules at extremely small high throughput scale and ultimately when they look good and high throughput you know the next step if if you know our products are the partnered products look good is two to build the robust large scale process to fit with the manufacturing needs of.

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 will enable us to do more new process development at all it's gonna enable high higher automation.

<unk>, which are significant benefits for development. There is some percentage it's a minority.

Pits percentage of use of that pilot plant actually manufacturer very small volume enzymes for commercial purposes, but that's pretty minor because as you as you know the vast majority of our our product sales are enzymes course, and their manufactured in third and third party CMO.

Partnerships, one or 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 Morris Theres development cycles, as we tried to describe a especially in the performance enzyme.

Slide.

That's helpful color, Yes, there was thank you.

[noise] [noise], thank you and I'm showing no further questions in the queue at this time I 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 at here at Conexus, we look forward to sharing updates and news across many many developments were working on to deliver throughout this year everyone have a great day. Thank you very much.

Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.

[noise].