Q1 2020 Codexis Inc Earnings Call
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Thank you. This is Bruce boss with L.A.J.. Thank you all for participating in today's codecs his call to discuss first quarter 2020 financial results and recent business progress.
Joining me from could access our John Nicols, President and Chief Executive Officer, and Ross Taylor, The company's Chief Financial Officer.
During this call management, and we'll 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 codecs is they are forward looking statements, reflecting the beliefs and expectations of management as of May So.
Vince 2020, you should not place undue reliance on these forward looking statements because they involve known and unknown risks uncertainties and other factors that are in some cases beyond the company's control and could materially affect actual results. In particular, there is significant uncertainty about the duration and impact.
The cold at 19 pandemic. This means that results could change at any 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.
What's the company's FCC filings codecs is expressly disclaims any intention or obligation to update forward looking statements, except as required by law.
Today's conference call remarks will include both GAAP and non-GAAP financial results codecs is believes the non-GAAP financial measures provide investors with useful supplemental information about the financial performance of its business enabled a comparison of financial results between periods, where certain items may vary independently of business.
Performance and allow for greater transparency with respect to key metrics used by management in operating the business.
These non-GAAP financial measures are presented solely for informational and comparative purposes, and should not be regarded as a replacement for corresponding GAAP measures reconciliations between GAAP and non-GAAP financial measures can be found at the end of the financial results news release that was issued earlier today.
Now I'd like to turn the call over to John Nicols John.
And we sincerely hope that you and your families have stayed safe and well in the face of the code that 19 pandemic.
As you will hear today could nexus is indeed, safe and well and while moderately affected in the short term, we are delivering remarkably well as we operate through the effects of the pandemic.
To start note that we entered the pandemic stronger than ever we had a multiyear growth trajectory firmly in place and substantial resources on our debt free balance sheet.
But our pre Corona virus strengths were even more about the organization.
We have a growing super talented team driving more protein discovery capacity than ever before and exploiting an ever improving codeevolver platform technology.
Ensuring that team and their families safety has been primary for us.
Even before the San Francisco Bay area shelter in place orders were initiated the leadership team and I were practicing measures the social distancing and we had formalized and launched our cobot 19 task force, which under the season discipline leadership of Dr., Bob Sato, our long.
Standing head of quality regulatory and analytical has been crucial to lead us through these unprecedented times.
With shelter in place orders issued on March 17, we swiftly and smoothly affected a companywide work from home policy effectively shutting down our research and development operations.
The benefits of being proactive are clear at this point no confirmed cases of covert 19 infection of any of our employees.
And even more cohesive group, who appreciate managements genuine concern for their wellbeing.
And the ensuing they ensuing strengthening of our culture motivated by doing what's best for society and our community.
From there the collective attitudes and force of our organization through the pandemic have been remarkable.
[noise] researchers gathering virtually in teams to define new protein targets for us to pursue.
Supply chain team's doing double time to ensure our products continue to flow for the essential needs a pharmaceutical manufacturing.
Could access teens collaborating with similarly affected customer teens driven to make progress. Despite the inefficiencies new company electronic bullet boards Bulletin boards sharing pictures of quarantine encouragement et cetera.
And delivering against the core strategic goals for the Corporation.
Here are the list makes us equally proud we have delivered better than expected revenues in the first quarter. Despite R&D operations being shortened first by shelter in place, we inked and initiated joint activities for a landmark biotherapeutic partnering deal with Takeda in the middle of the Pan data in the mid.
All of the pandemic.
We collaborated with Novartis, despite their lab operation limitations to get their new Codeevolver lab established and ready to practice.
The enzyme manufacturing and supply chain team has successfully forged remote operational approaches supported by the outstanding continuous operations of our equally competent external manufacturing partners that have effectively ensured that our core product revenue stream remains largely unaffected by.
The pandemic.
And recently, we have started up R&D operations again at limited capacity and then they socially distanced way. So that we are back conducting essential R&D activities in support of our customers and businesses.
In the process of this limited and phased R&D restart we're learning how to modify our rapid protein discovery work flow to ensure a safe social distancing in tandem and that learning will enable us to rent more effectively and safely when local governments relax the district sheltering.
Place ordinances currently in place.
R&D revenues have been most affected since the mid March shelter in place restrictions, but only a portion effectively those R&D revenues that are customer partnered time based project projects.
As these represent a meaningful portion of our total company revenues and given that the magnitude of our R&D restrictions overtime are impossible to accurately predict at this point, we're taking the prudent course of withdrawing our 2020 financial guidance. In contrast, other components of our R&D revenues.
Are expected to be less impacted by operational limitations. In addition, we have been able to mitigate much of the cash flow impact from reduced R&D revenues through intelligently delaying or reducing third party purchases and capital spending.
We had plans to add to our protein engineering and commercialization commercialization capacities in 2020, but the vast majority of those head count additions have been postponed to help preserve cash through the print pandemic.
However, several strategic hiring efforts continued as they are crucial to strengthen us over the long term.
It is and this life that we're pleased to have recently announced the arrival of doctors Stefan loves and call Shany to our executive team.
Stefan brings unprecedented knowledge in protein engineering, and synthetic biology to lead our research team and its highly regarded and well known within our industry.
Carl complements Stefan and the rest of the Conexus team given his broad based technology development scale up and commercial stage experiences. It it's great to have Stefan and Carl join us as we build through and beyond the pandemic.
Similarly, we are excited to have attracted to highly talented and network prospective board members for proxy vote at our annual upcoming annual meeting.
Dr. Alison more is a pharmaceutical development veteran with a career spanning genetic Amgen and now as Chief Technology Officer of Aloe Gene Therapeutics, a pioneering clinical stage company in car T Therapeutics.
Complementing Alison and the rest of our board Dr., Stephen Daily bring substantial clinical stage drug development leadership experience to Conexus, most most notably having recently served as CEO of a immune therapeutics, which has recently received its first ft a drug approval.
Before handing over to Ross to detail our financials, let me summarize our confidence in the ongoing strength of could access at the core of our great Biotechnology company as our talented 160, plus person organization and our success in retaining caring for and igniting them.
They are responding brilliantly and are delivering an exceptional ways as we adjust to the pandemic, we're smartly and selectively attracting new unique talent to make us even stronger and we continue to strengthen and grow the list. The great companies, we proudly serve as collaborative partners we are.
As to whether these uncertain times and are confident to be an even stronger better poised to cut axis on the other side.
With that let me turn the call over to Ross for a view of our financial performance Ross.
Thank you John starting with the Q1 top line.
Total revenues for the first quarter 2020 were $14.7 million and this compares with $15.6 million for Q1 of 2019.
2019 quarter included a $3 million milestone payment from Nestle health science, making for a challenging comparison.
Revenue for the 2020 quarter included $10.9 million from the performance enzymes segment.
$3.8 million from the novel Biotherapeutic segment.
Product revenue for the first quarter of 2020 was $5.1 million on track with our expectations compared with $8 million for the prior year period.
Decreased due to the timing of demand for various enzymes.
Within product sales Merck once again had the strongest showing during Q1.
Again also made a meaningful contribution.
R&D revenue for the 2021st quarter increased 26% to $9.6 million, primarily due to revenue from the Novartis Codeevolver agreement that we announced a year ago as well as the Takeda collaboration that we announced in March.
R&D revenue for the first quarter of 2020 included $5.8 million from the performance and gotten segment and $3.8 million from the novel Biotherapeutic segment.
Gross margin on product revenue for the first quarter of 2020 was 50% compared with 45% a year ago with the increased due to product mix.
Turning to operating expenses R&D expenses for the first quarter 2020 were $11.0 million.
This included $5.7 million from the performance enzymes segment and $4.9 million from the novel Biotherapeutics segment.
Plus zero point $3 million allocated to corporate expense.
The increase in R&D expenses from $8.0 million, a year ago was primarily due to higher outside services fees.
Our salaries and personnel costs associated with higher headcount and higher allocation of occupancy related costs.
[noise] DNA expenses in Q1, or 2020 were $9.0 million, which included $2.3 million from the performance enzymes segment in zero point $6 million from the novel Biotherapeutic segment.
The remaining $6.1 million is included in corporate overhead and depreciation.
The increase in S. DNA expenses from $8.4 million, a year ago was primarily due to higher accounting and outside services fees and higher facilities and headcount expenses, partially offset by lower allocable expenses.
The net the net loss for the first quarter of 2020 was $7.7 million or 13 cents per share and this compares with a net loss for the first quarter of 2019 of $5.1 million or nine cents per share.
Cash and equivalents as of March 31, 2020 $87.3 million.
Importantly, we believe this large cash balance provides ample liquidity to manage through the current code at 19 situation.
In addition, we are continually monitoring the pandemic and its impact on our business such that will we will be able to strategically manage operating expenses and capital expenditures in response to any changes in revenues.
As John mentioned, we have already chosen to delay the majority of previously planned new hires in 2020, we are delaying some of our capital expenditures and we have reduced discretionary operating expenses as well.
With that I'll turn the call back to John.
Thanks, Ross before moving on to questions, Let me take a minute to share our enthusiasm for our new biotherapeutic deal with Takeda and.
And it's essence, we have struck a multi program partnership that leverages, our codeevolver platform to enable improved gene therapy candidates with one of the world's top 10 drug companies.
The deal validates preclinical work, we have advanced on our own against two lysosomal storage disorders, Fabry disease and pump a disease plus brings codecs us into a new therapeutic area targeting a rare blood to factor deficiency.
Takeda also has a time limited option to call in a fourth program at their sole discretion and for a fee selected from a shortlist of reserved indications.
The unique value that queued up codeevolver can deliver for gene therapies is simple.
Improved the protein encoded by the gene delivered to the patient via the gene therapy vector in other words improve the transgene component of the gene therapy system. So that the target sell expressed as a better protein.
Make that protein more stable more expressive more oregon, directed or any combination of those et cetera.
These types of benefits, we have shown preclinically for fabry disease in our recent corporate presentation. The types of protein engineering improvements that only codeevolver can deliver.
We had been promoting the benefits of Codeevolver to uniquely improved gene therapies for the last year more so convincing Takeda of that is a truly gratifying accomplishment for our novel Biotherapeutics team.
We're excited to work to attract other partnerships with other gene therapy companies outside of the limited Takeda partnership list in the future as well.
We received an upfront payment of $8.5 million from Takeda shortly after signing the majority of this payment net of certain fees will be recognized in 2020 with nearly all of the remaining balance to be recognized in 2021 and 2022.
In addition, during the R&D phase we are eligible to receive combined payments of up to $22.3 million as reimbursement for our services and achievement of certain preclinical milestones.
With programs advancing from there we are eligible for additional development and commercialization milestone payments of up to $100 million for each target gene.
On top of those we could receive tiered low to mid single digit royalties on those products net net sales in the market.
Let us now moved quickly to feel that address the specific questions. You may have on your mind.
The fundamentals of our business are strong, we're well positioned to manage through the co. The 19 pandemic given the strength of our team our multifaceted business model, our partnerships with world class companies across a growing list of industries.
The value, creating opportunities afforded by our Codeevolver protein engineering platform and our strong balance sheet.
Some elements may take a little more time to execute given the pandemic, we remain confident in our ability to deliver substantially against all of the strategic objectives. We outlined in our February call. Those include the advancement of our novel Biotherapeutics pipeline, especially our partnership.
Yes, with Nestle Health Science, and Takeda, plus expanding the penetration and deal making across our growing performance enzyme verticals in pharmaceutical manufacturing molecular diagnostics and life science applications, and finally in food and more traditional industrial enzyme sectors.
I want to thank you all for joining us today, and hope you and your family's remain safe and well through these challenging times with that overview I'd like to open up the call for questions operator.
At this time I would like to remind everyone in or is it to ask a question. Please press star one on your telephone keypad again, though the star followed the number one on your telephone keypad.
Your first question well, we're waiting for the first question I'd like to alert you to our participation in several upcoming virtual investment conferences, we will be presenting to you BS Global healthcare conference on May 18.
And the Jefferies Healthcare conference being held June 2nd through the fourth we'll be announcing the details of each conference as we get closer and a webcast of our presentation at the you'd be EPS conference will be posted to the investor section of Codexis Dot com. Okay. Operator, we're ready for the first question.
Your first question comes from the line a brand been like from Jefferies. Your line is open.
Hey, guys. Thanks, good afternoon.
Maybe just start with the to the R&D project deferrals from Cobot 19.
I imagine those are likely to get recouped in future periods right, but.
Is there yeah fixed amount of R&D capacity that you had you think that will not be a gating factor to catching up on any work that might be delayed near term later in the or.
Yeah sure brand and thanks, So yes, Oh, you know the effects of the R&D shut down and now were have the limited start up.
Well, we're still under the strict local shelter in place.
Is really is really delaying our ability to execute against deals that we've struck and deals that we plan to strike a two.
To deliver the kind of growth story that we had previously projected for the company this year.
So a delay and of course, it will be affected by how quickly we can.
I have the shelter in place restrictions relaxed and or lifted which will will govern how quickly. We can go from our current limited R&D capacity to back up to full capacity and we were confident it will be able to get back up to full capacity, even even with practicing some you know enhance some.
Enhance social distancing measures and operational changes to the way, we do protein engineering. So hopefully those address the questions that you had to it.
Yeah, I think you've got something like 41 are so different R&D programs you can she could.
Quantify those you know might the deferred right now is it a relatively small number that we're ultimate talked about.
Yeah, a lot of those programs you know, where we don't need to do anymore. R&D. You know we did the R&D in the past and now we're waiting for for the proteins that we've already engineered to ultimately get taken up and commercial operations. So a good chunk of those 41.
Projects like that are really not not governed by R&D capacity.
So more of the more directly relevant number is how many protein engineering teams pre co bid we had operating so and we've been off quoted as saying we are about 15, maybe up to 16 or more teams that are working on new protein discovery in parallel so from March 17.
Those 15 teams went home and they weren't able to operate the the work flow of course from home.
But now there you know they a portion of them a minority of them have returned to the lab to work on essential projects.
We're instilling you know this new work flow arrangement, which.
It's going to spread us out over why they're distances and make habits workover shifts and weekends.
And ultimately that's gonna enable us to get those 15 teams running again. So so you know right now were roughly two months into I'm not being able to discovered those 15 proteins. Those have been put on pause some of those coming back.
So really the pace with which we can get back to that protein discovery capacity is critical as really the governing factor.
That's really hard to predict because as you well no, but we're confident that that we're going to be able to get the capacity up and running again the team is incredibly supportive.
The kinds of processes that were putting in place or ensuring social distancing and proper safety measures to get the confidence to our team. So you know, it's a multi month period, where those 15 programs or have had the slide sideways. Some of those are generating revenue. Some of those are advancing our own products and not revenue Gen.
Got it Okay. That's helpful and then.
<unk> just tell me if I'm not thinking about this the right way, but given some of your customers are seeing.
Yeah. The same thing everybody else's here right near term pressures with cash generation, they're trying to hold back spend but there's a limit to what they can do.
With with that in mind, you know beyond just those customers navigating through their own lab shutdowns, if they're active or are they asking you at all of a slowdown maybe to delay the timing of when they might have to make a milestone payment or some other you know cash flow to you.
I I ask in part one because I just want to gain a better understanding of what's going on with some of your customers, but that I'm I'm also thinking yeah that that would suggest that this is pretty temporary or at least we hope and if if folks start getting back to work later in the quarter that yeah. This could really just be a timing issue where.
Some of this cash flow to you.
That was expected in Q. to just moves into the second half is is in any color you can provide at a comment on whether I'm thinking about this the right way would be helpful.
Yeah sure.
<unk> yeah. So most of the we called it partner funded time based project work you know that is healthy portion of our our Andy revenue stream.
Had to be pause strike, because we're not generating the products to generate those the deliverable to generate those revenues and so you know we notified our customers of course, they understood because during the same situation.
And but at the same time, they're ready for us to get back to the work that we have been you know working on for these customers for those projects you know since whenever they started so so there's a desire to come back I think there maybe some modest effect of Hey, you guys just starting before.
For us we can't receive your products, but I don't see that being a big factor I, either because we can generate results share those results virtually oh to the R. and D. teams that are working from home the amount of work that a partner has to do to actually work up our product in their labs is is less intensive than the work.
You do in our labs, so I I think I think it's it's really just kind of pause restart the the large majority of those.
Pardon are funded time based projects.
Are under existing agreements. So there there's a obligations for them to you know to take those deliverables and pass for those when we're able to restart and these are extremely well funded partners our ability to catch up is pretty limited you know we're gonna get backup.
You know a full r. and D. capacity again I hope soon.
And when we do we're we're not really going to be able to catch up and and you know doubled down for a period of time, because we we we've always been operating pretty much at our full you know already capacity you know that's what's the latest incrementally had people you know year after year modestly to build that capacity, but.
We've always been running at capacity, so I I wouldn't want you to to believe that we can catch up once we get back to full capacity, but just get back on the track that we used to be on is is the right expectation.
Okay, Alright Super helpful. Thanks, guys <unk>.
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Again, that'd be when you deal with <unk>.
<unk> from me Hallion topic, all your name so thing.
Good afternoon. Thank you for taking the questions and I'm I'm glad to hear that everyone safe unhealthy. The first question for me regarding the shelter in place.
Elective decision that that you made to keep your team safe and healthy or was that part of the government regulations and the reason they ask because I guess, it's been kind of hit or Miss.
A lot of pharma companies met device companies those types of industries have been enabled to work where possible while keeping social distancing. So I'm. Just curious if this was your decision to keep the team save or if this was more of the government regulations.
They have really really good question.
I I think it's it's predominantly the government regulations when when the first shelter and play sort of came out there there was vagaries in there.
That we needed to assess.
You know maybe a very liberal interpretation of the initial orders could have let us continue to operate but we we didn't feel right about that and ultimately we expected that those orders would get clearer and tighter with respect to things like our our these projects coded related are these probably.
For essential business, and they did and and they bore out that our interpretation, which was you know more in favor of ensuring safety and social distancing of our employees was more accurate. So I I think I think I think we landed exactly where we should have and so the real question while we're.
Under these current strict orders in the San Francisco Bay area for the end of May are is it essential businesses that code related and we have some work that is directed towards essential business and our employees are confident in in our guidelines to operate in a safe way given.
The covert 19 risks.
And we were carefully with them to to to stage four and ultimately get their full support for the limited start up in the recent past <unk> hopefully that shed light on your question. Yeah. I know that does thank you and then regarding <unk> I'm curious <unk>.
Brambles to try and find treatments and ultimately vaccines I'm curious if this is creating any opportunities for you to potentially be a solution to either the treatments or vaccines.
Yeah. There there there there are some potential involvement of <unk>. They haven't been central to our go forward growth strategy. We're assessing those I think we'll just leave it as.
You know light, but but on you know previously unforecasted upside may unfold, but I I wouldn't want our investors focused on that at this point in time.
So so we've been thinking about that are scientists have been considering that as they've been working virtual team innovation processes.
But but I I would I would hold back from setting any kind of upside expectation at this point.
[noise] understand alright, thank you and stay safe.
Yeah. Thanks Man you too.
[noise]. Your next question comes from the line Jane's need Britain then <unk>.
Oh, Thank you very much it's it's great seeing how the company has been evolving over the years and I know you've addressed this several times already but I just wanted him in the just the further clarification.
Regarding the enhanced enzymes part of the business and the and the opportunities near you singing at least an acceleration of interest because of the need pressing need to get more accurate gold standard diagnostics. Thank you.
Yeah. The the you know you know how is the world's going to respond to an immediate scale up of diagnostic high fidelity diagnostic techniques to ready to both be able to diagnose the the infection.
Early and then later to to diagnose the antibodies to show immunity. Thereafter. These are crucial global needs and topics you know, we're not a diagnostic development company developer, but we do have the ability to provide inputs to enable.
At her diagnosis of various on various biological samples for for various targets. So so yes. The interest is there.
Like I said to Matt there are ideas there are opportunities.
And they could become you know real you know business prospects for us, but I think it's premature for us to to set it you know any significant expectation on those at this point.
Right.
<unk> acceleration of interest will come from your partner isn't contacts already in place them know they could come back to pretty much it anytime as people realize what the news for World Order is going to look like thing.
Yeah, or or we would introduce something new that we had in promoted in this way. Prior so that's another way that an opportunity can unfold for us.
Thank you.
<unk>.
Present during over the question of this thing, but he's thinking.
Okay, well. Thank you everyone for your questions. We look forward to providing updates as we continue to manage effectively through the pandemic and ultimately ramp r. and d. operations backup once to to today's <unk>. Once today's strict shelter and place for sections are relaxed and lifted we look forward to that and hope it.
Not too far off will continue to stay strong and navigate effectively until then thanks, again and stay safe and well.
Bye-bye.
<unk> Denise conference call. Thank you Bye bye disappearing you may now disconnect.
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