Q4 2021 Zymergen Inc Earnings Call
Okay.
Good day, and thank you for standing by and welcome to the <unk> fourth quarter 2021 financial results call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
<unk> during the session you will need to press star one on your telephone. Please be advised this call is being recorded.
If you require any further assistance please press star zero.
I'd now like to hand, the conference over to your host today, Mike Doolin.
Our communications.
You may begin.
Good afternoon earlier today is Amgen released preliminary financial results for the quarter and full year ending December 31 2021.
If you haven't received this news release or if you'd like to be added to the Companys distribution list. Please send an E mail to investors zymogen Dot com.
Joining me today from Zymogen are Jay Flatley, acting Chief Executive Officer, and <unk> Chief Financial Officer.
Before we begin I would like to remind you that management will make statements. During this call that are forward looking statements within the meaning of the federal securities laws.
Payments involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated.
Additional information regarding these risks and uncertainties appears in the section entitled forward looking statements in the press release Zymogen issued today.
For a more complete list and description. Please see the risk factors section of the company's latest 10-Q and other filings with the Securities and Exchange Commission, including when filed the Form 10-K for 2021.
Except as required by law zymogen disclaims any intention or obligation to update or revise any financial or product pipeline projections or other forward looking statements, whether because of new information future events or otherwise.
This conference call contains time sensitive information and is accurate only as of the live broadcast today March 22022.
In addition.
Please note that the fourth quarter and full year financial results discussed today are preliminary and estimated and are subject to the completion and finalization of Zymogenous financial and accounting closing procedures with that I'll turn the call over to Jack.
Thanks, Mike and good afternoon, everyone.
On today's call I will begin with an update on progress across our program pipeline and review recent developments from our research team.
And with a few milestones you can use to monitor our progress.
We will also share more detailed review of our financials, including our preliminary fourth quarter and full year 2021 results and our forecasted cash burn.
After a lot of hard work by our teams, we exited 2021 and with a clear focus on who we are and what we do.
<unk> as a biotech company that designs and produces molecules microbes and materials for diverse end markets.
Our three year strategic plan was approved by our board in February This plan outlines our core areas of focus as well as the strategies and tactics to build our business at.
At the recent Jpmorgan conference I discussed the nine strategic imperatives that provide the bedrock for this plan.
We are prioritizing three business areas advanced materials drug discovery and automation.
In advanced materials will focus on four end markets agriculture water repelling C <unk>.
Vance polymers and enzymes for health care.
In agriculture, our initial program in nitrogen fixation is delivering evolved microbes to our partner to replace nitrogen fertilizer.
Believes that microbes can meet olive corns nitrogen needs and ultimately be expanded to include other cereal crops and nutrients.
Our partners preparing the Gen. Two stream consortium to plant and this year's field trials and we're already hard at work on the Gen. Three construction for 2023 trials.
Our water repelling <unk> work is focused on our family of molecules that adhere to cellulose and repel water. We are currently making the prototype paper that is being tested by potential partners for various applications, including drinking straws and early tests have indicated excellent water repellent and wet tensile strength, which has the potential to rich.
<unk> the number of <unk> required.
This technology is extensible to other substrates, which may broaden the application to markets, where papers, replacing plastics or new market segments, such as clothing.
In advanced polymers, we believe we found an important adjacent market opportunity to use our <unk> polymer and high performance three D printing applications as you will recall <unk> was the base material for Highland.
This polymer has critical advantages for printing parts that require high tensile strength and improved yield showing approximately twice the strength compared to incumbents.
We have ongoing test with three D printing Oems, who supply the devices and consumables and with end users in defense and aerospace.
We also have interest in development grade material being used for validation and qualification the results of which will inform any future commercialization decisions.
The other active program in our advanced polymer portfolio is our partnership with Sumitomo, which is currently focused on applications for electronics.
As a reminder, sumitomo is exploring the use of <unk> as a cover film on phones.
They will be the single point of commercialization and are sharing equally in development costs.
This program team recently ran a successful 3000 liter fermentation to provide evaluation material and the resulting product had a purity and greater than 99%.
Finally, some updates on our enzyme program, which is initially focused on two components that are critical to produce mrna vaccines, mainly GCE and <unk>.
The global market for enzymatic capping that supports this production is approximately $800 million in 2022.
And although supply is largely caught up with demand the supply chains are not yet resilient.
Our excitement about this market is based on the potential of post COVID-19 mrna therapeutics and vaccines.
We've decided to retain responsibility for manufacturing these enzymes using outside contractors, which we believe will help improve margins in a competitive market.
Discussions are underway with multiple commercial partners and we expect to start sampling materials soon.
Moving onto drug discovery program Leverages, our Medici Gnomic database, which provides access to natural product diversity at an unprecedented scale.
Our powerful machine learning tools allow us to uncover molecular matter that inhibits targets of interest focused initially in oncology, where we think our platform has unique advantages in the market has a consistent record of valuing innovation.
We're active with leading biopharma companies exploring our database against their targets of interest and are in discussions with multiple potential partners to take programs forward.
In October of 2021, we received a grant from the Bill and Melinda Gates Foundation to use our technology to explore 11 high potential therapeutic targets across malaria tuberculosis and COVID-19.
Earlier this month, we announced progress for the first three targets having identified over 200 hits for ETP that performed better than the benchmark molecule at a statin.
We are now moving ATP for malaria into validation testing and <unk> pro for COVID-19 is likely to follow.
Infectious disease is not a targeted area of interest for our internal programs, but this work proves the power of our drug discovery platform and can enable third parties to move these and other hits forward for continued development.
And finally, turning to automation, we're now offering our technology to customers outside the company that are interested in improving the throughput efficiency and reliability of their lab operations.
We have over 20 potential customers in our commercial pipeline and have signed two contracts for system design.
While these initial contracts are small, creating a detailed design for a customer can greatly increase the probability of a future sale.
To support our business, we've implemented a rigorous product development program, which evaluates programs through stringent phase gates.
And to verify all aspects of the market the product and the team resources to fully develop that product to launch this.
This is fully implemented and there are six product programs currently in the pipeline.
If all of these programs proceed without delay or cancellation, we expect to have at least three of these programs in the pilot phase and one in the launch phase by the end of 2022.
Ahead of the process, we have a robust research engine to create a pipeline of new opportunities.
I recently visited members of our research team in Cambridge, Massachusetts, where we were shown over 20, new material innovations that range from oxygen and moisture barrier for food containers to water repellent fabrics to seed coatings. These.
These exciting projects are early proof of concept and will require considerable market review and technology vetting before theyre qualified to enter our pipeline.
However, they demonstrate our research teams ability to quickly move from idea to working material. In fact, this research cycle happened in less than four months.
This approach allows us to gather feedback from stakeholders or even potential customers to make faster smarter decisions about which programs to advance.
As I shared during my recent presentation at the Cowen Health Care Conference. Our goal for the research team has to move five programs into what we call. The waiting room by the end of 2022 ready for entry into our pipeline when resources allow.
We expect to put two to four of those into product development by year end.
I'll wrap up this portion of my remarks with a brief summary of next steps for each business.
In automation, we believe there is a potential to signed commercial contracts during 2022.
However, these are unlikely to generate revenue this year, because we will need to configure. These systems order material build and test our modular components install them and qualify them before we book revenue.
And drug discovery, we're looking for one potential partnership before year end and obviously hopeful for more in 2023.
Lastly in advanced materials. Our 2022 goal is to complete distribution partnerships in both enzymes and three D printing, which would provide both a channel to market and also validation of the technology as.
As we've stated in earlier presentations, we do not expect meaningful revenue in the advanced materials programs. This year.
With that I'll turn it over to Ina to update you on our financials.
Thanks, Jay I will now take you through our preliminary results for the fourth quarter and full year of 2020.
Starting with the fourth quarter total revenue was $3 million.
Primarily from R&D service agreements and collaboration revenue.
This compares to $5 9 million in the same quarter of 2020.
The decrease in revenue was primarily driven by fixed fee contracts completed in 2021 in line with our overall product focused strategy.
For 2020 revenue included milestones on the successful completion of a legacy contract.
R&D service revenue was $2 million in the fourth quarter of 2021 compared to $5 million.
In period of 2020.
Collaboration revenue was $933000 in line with the same period of 2000.
Total operating expenses for the fourth quarter of 2021 was $74 3 million.
An increase of 5% compared to $75 million in the fourth quarter 2020.
Fourth quarter operating expenses decreased 25% compared to $99 3 million.
Third quarter 2021.
Excluding $7 6 million of restructuring charges total operating expenses were $66 7 million.
The fourth quarter.
R&D expenses for the fourth quarter of 2021 with $2 1 million.
Roughly in line with the same period of the prior year.
R&D expenses for the fourth quarter decreased 23% compared to Q3, driven primarily by the slowdown in spending on cancer programs and lower head count as a result of volume reductions enforced.
Sales and marketing expenses for the fourth quarter of 2021 were $4 9 million.
An increase of 18% compared to $4 2 million in the.
The same period of the prior year, and an increase of 23% compared to the third quarter.
This increase compared to the third quarter was primarily driven by the effect of the onetime reversal of accrued performance momentum in the third quarter.
Partially offset by headcount reductions and lower spend on third party advertising public relations and marketing.
The accrual reversal in Q3 had an outsize percentage impact due to the low expense base and sales and marketing.
General and administrative expenses for the fourth quarter of 2021 or $22 1 million.
Up 44% compared to $15 4 million.
In the fourth quarter of 2020.
And up 23% from $17 9 million.
In the third quarter of this year.
The increase versus the third quarter 2021 was primarily driven by an increase in stock compensation costs, and partially offset by head count reductions.
Net loss in the fourth quarter of 2021 with $78 1 million.
Compared to $75 6 million in the fourth quarter of 2020.
$98 2 million.
In the third quarter of 2021.
The net loss of $78 1 million in.
In the fourth quarter of 2021, including $7 6 million.
Restructuring charges related to a portfolio review and cost reduction.
Turning to full year 2021 results.
Total revenue for 2021 was $16 7 million.
Primarily from R&D service agreement and collaboration revenue.
This represents a 26% increase from $13 3 million in 2020.
R&D service revenue was $12 4 million.
An increase of 27% compared to $9 8 million in 2020.
Collaboration revenue was $4 2 million, an increase of 20% compared to $3 5 million in the prior year.
Total operating expenses for 2021 with $364 million.
An increase of 43% compared to 254 million.
In 2020.
The increase in operating expenses was primarily driven by increased resources allocated to product development.
<unk> incurred post acquisition of <unk> therapeutics restructuring charges as well as the costs associated with being a public company.
Excluding $28 $8 million of restructuring charges operating expenses were $335 million for 2021.
R&D expenses for 2021 were $159 million.
75% increase compared to $90 9 million in 2000.
Okay.
Sales and marketing expenses for 2021 with $23 6 million.
Up 27% compared to $18 6 million in 2020.
General and administrative expenses for 2021 were $83 million, an increase of 38% compared to $60 1 million.
In 2020.
Net loss for full year 2021 with $362 million.
Back to $262 million in 2020.
Net loss for full year 2021 included $28 8 million of restructuring charges related to a portfolio review and cost reduction.
We ended the year with $386 million in cash and cash equivalents and $12 million in restricted cash.
Looking ahead to 2022, we continue to expect product revenue to be immaterial. This year and continue to prioritize closely managing expenses.
We expect our first product revenues from commercial sales in 2023, but have potential for a cash upfront fee. If we are successful signing of drug discovery partnership.
In 2021, we incurred $28 8 million of restructuring expenses related to restructuring reductions in force.
On track termination costs long lived asset impairment and restructuring related consulting fees.
These activities began in the third quarter and was substantially completed by the end of the year.
However, certain activities such as lease restructuring will extend into the first half of 2022.
We expect to realize the full effect of our restructuring efforts in 2022.
As such we expect our first quarter 2022, total operating expenses to be in the range of $70 million to $75 million.
Which includes $15 million to $19 million.
Stock based compensation depreciation and amortization expenses.
We expect this to be in line with our go forward total operating expense run rate, excluding any lease termination restructuring charges.
As a result of cost savings related to our restructuring efforts. We believe that we have sufficient cash to fund operations to mid 2023.
However, the quarterly cash flow will be uneven due to capital expenditures on the lease hold improvements in the first three quarters of 2022.
The repayment of our perceptive deck by June 30th.
With that I would like to turn the call back over to Jay for closing comments.
Thank you Ana.
To close I'll leave you with an update on our strategic plan and our CEO search.
As I mentioned earlier in February our board of Directors approved our three year strategic plan, which we had committed to completing in early 2022.
With our focus on a smaller number of programs and reduced cost structure, our new strategic plan charts, our course through 2024 with clear milestones and goals.
Under the new strategic plan, our investments prioritize near term revenue and the development of a solid pipeline of new opportunities by continuing investment in research. We believe this will fuel the creation of distinctive high performing products.
Lastly, we officially launched our search for a permanent CEO in February we believe our business is now set up for long term success, which opens the door to a broader cross section of potential leadership talent I.
I hope it's clear how we are managing the business to create multiple successful products and that we have an engine behind that to create a pipeline of new opportunities with even higher potential with that we'll now open it up for questions operator.
Yes.
And thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw. Your question question <unk>. We please ask that you limit yourself to one question and one follow up again, that's one question and one follow up please standby, while we compile the Q&A roster.
And our first question comes from Steven Mah from Cowen. Your line is now open.
Okay. Thanks, operator.
Yes, Hi, Jay.
Thanks for taking the questions.
I see okay. So.
So on your on your strategic plan, you said, you're prioritizing near term revenues.
Could you give us some more color on your potential pharma partnership you said that you would likely announce this year.
Does that mean to say that youre going to be prioritizing or more upfront payments versus milestones and royalties.
Can you give us a little bit of color on.
The potential deal structure there.
Yes, we expect the deals to be traditional and structure of any there'd be upfront fees milestones and a back end royalty.
We would to some extent prioritize upfront fees over extremely long term factor.
Factors like the royalty. So if we have that trade off we would probably optimize an agreement to increase the upfront portion.
In general during our product prioritization process. It was important that we de prioritized programs that we're very long term in other words things that might get to market four or five years out.
In favor of ones that we could put into the market over the next few years and so that was part of the.
Adjudication process, we use as we went through the prioritization of the portfolio back in the last half of last year.
Okay got it and then the go forward on your pharma drug discovery partners.
Similarly, prioritize balance for the near and long term revenues.
Yes, as I said, we'll prioritize to some extend upfront fees. It doesn't mean, we will push everything to the upfront, but but if we had if we could gain a point and royalty that was 10 years out versus another few million dollars in an upfront fee, we would probably do the latter.
Okay got it and if I could sneak in one more you said you are the CEO a formal search launched in February .
That's right.
What is it what is the expected timeline for for a new CEO , then and I know you don't have a crystal ball, but your best guess.
They were always uncertain.
My experience in a position like this is typically to expect about six months and as I've said previously the intent is for this to be.
I leave on Friday in the ECS starts Monday, there'll be there'll be an overlap.
During a period of.
Sort of orientation of any new person into the company, we want that transition to be as smooth as possible both for the.
The internal employees and to make sure that the new CEO is.
Yes.
Sort of prioritizing the kinds of strategic initiatives that we believe are important.
Okay. Thank you.
And thank you.
And our next question comes from Derik de Bruin from Bank of America. Your line is now open.
Great. Thanks for taking my question. This is Mike Ruskin on for Derek.
I want to start first with the Opex commentary for <unk> and sort of the guidance as you go forward.
Could you talk about sort of the moving pieces there between the two.
The R&D and the SG&A line and some of the other adjustments.
Now that you're past some of the restructuring.
What I'm also trying to get at is at some of these programs that use kicked off relatively recently as they progress should we expect R&D to ramp accordingly sort of how is that going to flow through the model.
Let me answer in General first and then I'll pass it to Ina framework.
<unk>.
We thought it was important that we give some indicator of what the Q1 run rate might look like.
To give everyone an opportunity to kind of model out what the business will look like for 2022 in terms of cash burn profile.
I think what we gave you in terms of details in the script are probably as far as we're going to go we're not going to breakdown by individual line items. How the Q1 expenses are going to rollout through the rest of the year, but.
We thought it was important as I said to kind of give you. The overall backdrop anything to add to that no I think thats exactly right <unk>. Other thing I'd say is yes do you think about the guidance. We gave on total operating expenses of $70 million to $75 million.
That includes cost of revenue R&D sales and marketing and G&A expenses in line with how we report total opex.
In our press release.
And again that also includes $15 million to $19 million.
Stock based compensation depreciation and amortization noncash.
Noncash yes.
And Mike one of the thing that I didn't answer the second part of your question, which is do we expect a ramp up of R&D as we launch products. The answer is no we've kind of planned out.
Inside the existing infrastructure of the company both on the commercial side and the R&D side to stay roughly within the parameters that we gave you for the next six quarters.
<unk> be some fine tuning in moving people back and forth between groups, but.
And maybe some small increases but nothing material.
Okay, and then just a quick follow on to that I think you also indicated.
Sufficient cash until mid 'twenty, three and yet youre not expecting.
Sort of material product revenues until more or less that same timeframe. So just lease the natural question of.
Cash balance and thoughts on maintaining that so.
What are.
What are the avenues, you're considering I realize you're still maybe a little over a year away, but what are the different Matt.
Options, you are considering maintaining sufficient cash.
Yes.
Options are on the table we haven't.
Precluded any approaches and obviously that will depend on what happens with markets and interest rates in various forms of funding as we all know tend to come in and out of favor.
Different periods and so we will look at all options as we get closer we'll probably begin that and some earnest in Q3 of this year.
Okay, and then last quick one if I could squeeze one in on.
On the customer validation and the process validation process.
Any any comments you can give in terms of how that's gone over the last.
Three to six months after the strategic shift.
Are you having to undergo any additional steps to sort of walk people through the process.
So the on boarding process.
How should we think about timelines, there and things like that.
Yes, I'd say overall, we've been pleased with what's happened across the various different different products that we're working on.
In any customer evaluation. The reason you do it and in fact, the reason we pulled it forward and our processes to get feedback from customers as early as we can and that will result in fine tuning of the products, but thats. How this should work and will work.
So in the various areas, we're getting information about exactly what format of the product that people want to <unk> printing. This.
Pellets and spools and different markets are going to require a different physical formats.
And so that's the kind of feedback that we're getting.
With our focus.
<unk> focus on bringing forward commercial input all the way in fact into the research area of what we're doing that.
That will.
Dramatically, we think increase the probability that by time, we get a product to market is a good fit for the customers.
Great. Thank you.
And thank you.
And our next question comes from Matt Larew William.
William and Blair.
Your line is now open.
Hey, this is actually Max on for Matt. Thanks for taking our questions I just had a few quick ones on the automation side of the business. So.
Just a couple of weeks ago that you have two contracts in place for detailed system design. Just wondering if you could give some more context around.
The next steps that are generated in a potential sale and how much revenue a potential sale.
And then any detail you can provide around how those two customers.
Those two customers, specifically and how they plan to use your automation technology.
Sure.
Let me give you what I can on that.
The idea of these design contracts is too.
Take the use case of the customer.
Which involves understanding their application.
Their throughput what kinds of components, they would need based on what aspects of preparation. They are doing some customers will needs particular types of modules, others will need distinctively different loans.
And what we do in this design phases, we configure.
The system and we very clearly understand whether there's any additive software that's required to fully enabled that customer's application once we complete that design.
We will present that to these customers and of course that will have associated with it the cost of implementation.
So the customer of all aspects of the system. So the hardware required any augmentation or changes to the software that might be some custom programming.
The cost of ongoing service contracts all of that would be presented to a customer.
And that would be the opportunity to make the sale and so the hope is that because we have the ability to obviously design around our approach to automation that it dramatically increases the probability of those customers Ulta.
Ultimately, placing a purchase order.
The range of revenue possibilities here is quite broad because the system is so modular so configurable.
You could imagine systems, probably as low as a few hundred thousand dollars that have a handful of modules in them that would be a small implementation up.
Theoretically to the tens of millions of dollars for very large installations and so.
We're not in a position to disclose the particular configurations of these two initial.
Potential customers, but obviously should we win.
Got it very helpful. Thank you just a follow up from me here on the product pipeline that you completed your sprint won a couple of weeks ago.
And you gave some detail.
The products there, but is there any detail you can provide around that 20 potential product opportunities that youre evaluating how they split out by industry and application and then.
Just curious if you have any more detail on the background of your employees and your.
Our research team and what sort of industry experience, they have and whether or not that could inform the way that they identify potential product opportunities.
Well I can say that.
What our team presented was in some ways almost overwhelming there were so many different options opportunities market segments and different technologies.
It was an incredible performance by the group.
Particularly given the very short timeframe, we put them on to deliver.
Just a concept on powerpoint, but a physical implementation of <unk>.
A product, it's not an end product, but it's a physical embodiment of the underlying science that would go to a product.
And so the range of these.
<unk> was sort of breathtaking in a way.
The kinds of people we have there are both molecular biologists.
And chemists and we have this unique ability.
To have our biologists chemists worked together on these programs and so we can conceive things in our biology group that can be made ultimately biologically, but very often it takes a long period of time to physically get enough material to and to actually create an implementation.
To reprogram microbes to go through the fermentation might typically take nine months to a year.
Can create that molecule synthetically and chemical chemistry for a surrogate molecule thats close to it quite quickly and so what we are able to do is to make that iterations. So we can create something in our chemistry group.
In Cambridge that has the ability to provide that physical demonstration very quickly we can evolve it using to some extent using our chemistry methods and then we can go back to the biologists to say, okay. Now we want to make this out.
An organism and so as that cyclical process that we think is so powerful and our research team.
And they come from all sorts of background Sciences.
And different experiences in terms of the application markets they've worked in.
Very helpful. Thank you.
And thank you.
And our next question comes from Mac Sykes from Goldman Sachs.
Your line is now open.
Thank you Hi, Jay Thanks for taking my questions, maybe just the first one on the BCE opportunity Jay you mentioned spending $800 million market supply demand is kind of a little bit back in balance, but theres still some supply chain issues.
But it's still competitive just wondering where you see the competitive advantage for your potential product is it.
Cost efficacy just any other details you can provide as you enter that market constantly entering that market.
Well, we certainly think that.
Performance basis will be at least as good as the products on the market and we're continuing to.
Improve the process internally with a goal of being better.
The VC process is a challenging one for the manufacturing side of this is difficult and so I think because of the meta genomics starting points that we have for enzymes and our ability to the way we can process this and reprogram knees.
These bacteria that we have the chance to continue to improve this so this is iteration one for us that we've done in maybe 10 months, maybe 12 now.
It's been quite fast for us to pull this all together from.
From a cost perspective.
Our goal clearly is to have a great cost position on this how we wind up pricing. It is an open question.
Really not ready to to announce pricing nor have we looked at the ultimate.
Pricing that we would have through a distributor because we are going to take this to market through through a distribution partner.
But the plan is to be at least competitive pricewise and technically with the products on the market.
Got it. Thanks, that's very helpful. And then maybe just a follow up on the earlier question regarding automation.
You gave a lot of details about.
Design contracts I'm, just wondering from like an economic standpoint.
Is there a certain ability to generate some recurring revenue from this as service contracts I think you mentioned, but also maybe software licensing.
Maybe some details around kind of what the economics would look like on one of these types of contracts are partnerships with the customer.
Yes. So the initial model, we'll have ongoing service contracts that you would expect in any sale like this.
That would include.
Just hard hardware support and.
And various customers will require different levels of support some will be.
As is typical again in this kind of business two day response time, but if it is critical it could be 24, seven and response time, which comes at a higher price and so that will be customer dependent.
The software will be licensed as part of the initial purchase price, but there could be either built into the service contracts or as a standalone pricing for software upgrades that would come as part of this so that's an opportunity for annuity revenue.
Downstream, probably not in the first few contracts, but downstream there may be.
Situations, where we would install a system and it would all become recurring revenue by charging essentially an operating cost to run the hardware.
On the hardware and the software together Thats kind of a second level business model that certainly has potential here, but it's not something that we're going to do in the initial contracts.
Got it thanks very much appreciate it.
Yeah.
Thank you.
And our next question comes from Jon <unk> from UBS. Your line is now open.
Hi, Thank you for taking my question.
I guess when you look at the opportunities across advanced materials drug discovery automation I guess can you just maybe talk more on really where is the nearest near term opportunity there to maybe start to generate revenues.
Yes, I would say the nearest term revenues.
As we indicated a bit in the script or in automation in drug discovery and so even though.
Most people think of drug discovery is having a very long revenue cycle and it certainly does by time, you get to an ultimate product.
Where you launch a therapeutic the opportunity for us in drug discovery is in is in upfront fees in relatively near term milestones and so.
As we've again tried to indicate those upfront fees will clearly be cash they may or may not actually be revenue, depending upon how contracts get.
Ultimately defined.
But thats an opportunity for cash infusion to the company and those forms of upfront fees. Similarly in automation, we mentioned that we hope to.
At least one contract during 2022.
Again, we think that will be a great validation of our platform and a great springboard two other contracts, but it's unlikely we'll be able to go through the full process of installation and qualification.
For year end so that.
That type of transaction should result in revenue in 'twenty three.
In the advanced materials side, we think any material revenue will be in 'twenty, three and as we've continued to indicate their there won't be any material revenue from those four markets in 2022.
Yes.
Got it. Thank you for the color there and I guess, just a follow up on the automation can you confirm that or.
Are any of these processes patented.
Number of patents if you do have any around these processes there.
We do have some patents for sure I don't know the exact number.
Could follow up with U.
That's important.
And.
There are some patents on the software, which are are useful, but sometimes hard to defend.
So I wouldn't say that the software patents are things that are blocking patents necessarily to third parties.
But the architecture of the hardware.
Is pretty unique and something I think thats benefited not just from many many years of Knowhow that we have built up inside the company, but the close proximity of our automation team to our scientists. So unlike a lot of other automation companies. We've actually used this at scale for many years and continue to evolve it.
To meet the needs of scientists running these real world applications, and so I think that gives us a unique.
Viewport into what the real customer requirements are and how to optimize the combination of hardware and software to meet those needs.
Got it thank you for taking my questions.
My pleasure.
And thank you and our next question comes from Rachel.
From JP Morgan.
Your line is now open.
Great. Thanks for taking the questions. So why hasn't the John's question, you don't expect any meaningful revenue this year in advanced materials, but you've been making progress in all four of those end markets. So can you just walk us through which products and advanced materials are closest to make it to market and that you have the highest confidence in and then should we be modeling any product that means for advanced materials.
In 2023.
The answer to the last part of the question is yes. So we will have revenue from advanced materials in 'twenty three.
The leading candidates for revenue timing wise would be the enzyme <unk>.
And also the three D printing opportunity or that would be the two meeting.
Areas. So in water repellent see that remains more exploratory in terms of the ultimate application.
And in AG.
Because of the annual planting cycles.
Any revenue from that would come at the earliest at the end of 'twenty. Three there is some potential from the Sumitomo partnership that we could begin to get some revenue on one but I think that's less likely so if I were to prioritize them.
Put the.
Enzymes in three D printing at the top.
Sumitomo kind of in the middle in AG and water repellent Tse and the third bucket.
In terms of price.
Paul and then just one more on automation. So you mentioned that Youre that you have contracts in place and then 20 customers in the pipeline. So can you give us some more color on that pipeline and where you are at in the selling process for those 20, some customers in the pipe.
Yes, it's pretty.
Well distributed.
As you might expect so there is a number where we are demonstrating the technology and talking specifically about how they might use. It. So those are in sort of the latter phase of what you'd call sales pipeline and then we have some that are in the very early conversation phase and then many in between so.
It pretty much spans the kind of four.
Segments of the sales pipeline that you would typically expect the two where we have the design contracts are obviously the furthest along in the most likely to turn into revenue.
Great. That's it for me thank you.
Thank you.
And thank you and I'm showing no further questions I would now like to turn the call back over to Jay Flatley for closing remarks.
So we just wanted to thank all of you for the time, you've taken with US today and we look forward to speaking with you next quarter. Thanks again.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yeah.
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Good day, and thank you for standing by and welcome to the <unk> fourth quarter 2021 financial results call. At this time, all participants are in a listen only mode.
The speaker's presentation there'll be a question and answer session.
That's a question during this session you will need to press star one on your telephone. Please be advised this call is being recorded.
If you require any further assistance please press star zero.
I'd now like to hand, the conference over to your host today, Mike Doolin.
Our communications.
May begin.
Good afternoon earlier todays Amgen released preliminary financial results for the quarter and full year ending December 31 2021.
You Havent received this news release or if you'd like to be added to the company's distribution list. Please send an email to investors at zymogen Dot com.
Joining me today from Zymogen are Jay Flatley, acting Chief Executive Officer, and in a thing Chief Financial Officer.
Before we begin I would like to remind you that management will make statements. During this call that are forward looking statements within the meaning of the federal securities laws.
<unk> involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated.
Additional information regarding these risks and uncertainties appears in the section entitled forward looking statements in the press release Zymogen issued today.
For a more complete list and description. Please see the risk factors section of the company's latest 10-Q and other filings with the Securities and Exchange Commission, including when filed the Form 10-K for 2021.
Except as required by law zymogen disclaims any intention or obligation to update or revise any financial or product pipeline projections or other forward looking statements, whether because of new information future events or otherwise.
This conference call contains time sensitive information and is accurate only as of the live broadcast today March 22022.
In addition, please note that the fourth quarter and full year financial results discussed today are preliminary and estimated and are subject to the completion and finalization of the damages financial and accounting closing procedures with that I'll turn the call over to Jeff.
Thanks, Mike and good afternoon, everyone.
Today's call I will begin with an update on progress across our program pipeline and review recent developments from our research team.
And with a few milestones you can use to monitor our progress.
We will also share more detailed review of our financials, including our preliminary fourth quarter and full year 2021 results and our forecasted cash burn.
After a lot of hard work by our teams, we exited 2021 and with a clear focus on who we are and what we do.
As I imagine as a biotech company that designs and produces molecules microbes and materials for diverse end markets.
Our three year strategic plan was approved by our board in February This plan outlines our core areas of focus as well as the strategies and tactics to build our business at.
At the recent Jpmorgan conference I discussed the nine strategic imperatives that provide the bedrock for this plant.
We are prioritizing three business areas advanced materials drug discovery and automation.
In advanced materials will focus on four end markets agriculture water repellent.
Vas polymers and enzymes for health care.
In agriculture, our initial program in nitrogen fixation is delivering evolved microbes to our partner to replace nitrogen fertilizer. It's.
Believe that microbes can meet all of corns nitrogen needs and ultimately be expanded to include other cereal crops and nutrients are partners preparing the gen. Two strained consortium to plant and this year's field trials and we're already hard at work on the Gen. Three consortium for 2023 trials.
Our water where policy work it focused on our family of molecules that adhere to cellulose and repel water. We are currently making a prototype paper that is being tested by potential partners for various applications, including drinking straws and early tests have indicated excellent water repellent and wet tensile strength, which has the potential to rich.
<unk> the number of applies required with.
We think this technology is extensible to other substrates, which may broaden the application to markets, where papers, replacing plastics for new market segments, such as clothing.
In advanced polymers, we believe we found an important adjacent market opportunity to use our <unk> polymer and high performance <unk> printing applications. As you will recall <unk> was the base material for hiring.
This polymer has critical advantages for printing parts that require high tensile strength and improved yield showing approximately twice the strength compared to incumbents.
We have ongoing test with three D printing Oems, who supply the devices and consumables and with end users in defense and aerospace.
We also have interest in development grade material being used for validation and qualification the results of which will inform any future commercialization decisions.
The other active program in our advanced polymer portfolio is our partnership with Sumitomo, which is currently focused on applications for electronics.
As a reminder, sumitomo is exploring the use of <unk> as a cover film on cells.
They will be the single point of commercialization and are sharing equally in development costs.
This program team recently ran a successful 3000 liter fermentation to provide evaluation material and the resulting product had a purity and greater than 99%.
Finally, some updates on our enzyme program, which is initially focused on two components that are critical to produce mrna vaccines, namely <unk> and <unk>.
The global market for enzymatic capping that supports this production is approximately $800 million in 2022, and although supply is largely caught up with demand the supply chains are not yet resilient.
Our excitement about this market is based on the potential of post COVID-19 mrna therapeutics and vaccines.
We've decided to retain responsibility for manufacturing these enzymes using outside contractors, which we believe will help improve margins in a competitive market.
Discussions are underway with multiple commercial partners and we expect to start sampling materials soon.
Moving onto drug discovery, our program Leverages, our <unk> database, which provides access to natural product diversity at an unprecedented scale.
Our powerful machine learning tools allow us to uncover molecular matter that inhibits targets of interest focused initially in oncology, where we think our platform has unique advantages in the market has a consistent record of valuing innovation.
We're active with leading biopharma companies exploring our database against their targets of interest and are in discussions with multiple potential partners to take programs forward.
In October of 2021, we received a grant from the Bill and Melinda Gates Foundation to use our technology to explore 11 high potential therapeutic targets across malaria tuberculosis and COVID-19.
Earlier this month, we announced progress through the first three targets having identified over 200 hits for ETP that performed better than the benchmark molecule at a statin.
We're now moving ATP for malaria into validation testing and <unk> pro for COVID-19 is likely to follow.
Infectious disease is not a targeted area of interest for our internal programs, but this work proves the power of our drug discovery platform and can enable third parties to move these and other hits forward for continued development.
And finally, turning to automation, we're now offering our technology to customers outside the company that are interested in improving the throughput efficiency and reliability of their lab operations we.
We have over 20 potential customers in our commercial pipeline and have signed two contracts for system design.
While these initial contracts are small, creating a detailed design for a customer can greatly increase the probability of a future sale.
To support our business, we've implemented a rigorous product development program, which evaluates programs through stringent phase gates.
And to verify all aspects of the market the product and the team resources to fully develop that product to launch.
This is fully implemented and there are six product programs currently in the pipeline.
If all of these programs proceed without delay or cancellation, we expect to have at least three of these programs in the pilot phase and one in the launch phase by the end of 2022.
Ahead of the process, we have a robust research engine to create a pipeline of new opportunities.
I recently visited members of our research team in Cambridge, Massachusetts, where we were shown over 20, new material innovations that range from oxygen and moisture barrier for food containers to water repellent fabrics to seed coatings. These.
These exciting projects are early proof of concept and will require a considerable market review and technology vetting before theyre qualified to enter our pipeline.
However, they demonstrate our research teams ability to quickly move from idea to working material. In fact, this research cycle happened in less than four months.
This approach allows us to gather feedback from stakeholders or even potential customers to make faster smarter decisions about which programs to advance.
As I shared during my recent presentation at the Cowen Health Care Conference. Our goal for our research team has to move five programs into what we call. The waiting room by the end of 2022 ready for entry into our pipeline when resources allow.
We expect to put two to four of those into product development by year end.
I'll wrap up this portion of my remarks with a brief summary of next steps for each business and automation. We believe there is a potential to signed commercial contracts during 2022. However.
However, these are unlikely to generate revenue this year, because we will need to configure. These systems order material build and test our modular components install them and qualify them before we book revenue.
And drug discovery, we're looking for one potential partnership before year end and obviously hopeful for more in 2023.
And lastly in advanced materials. Our 2022 goal is to complete distribution partnerships in both enzymes and three D printing, which will provide both a channel to market and also validation of the technology.
As we've stated in earlier presentations, we do not expect meaningful revenue in the advanced materials programs. This year.
With that I'll turn it over to <unk> to update you on our financials.
Thanks, Jay I will now take you through our preliminary results for the fourth quarter and full year of 2020.
Starting with the fourth quarter total revenue was $3 million.
Primarily from R&D service agreements and collaboration revenue.
This compares to $5 9 million in the same quarter of 2020.
The decrease in revenue was primarily driven by fixed fee contracts completed in 2021 in line with our overall product focused strategy.
For 2020 revenue included milestones on the successful completion of a legacy contract.
R&D service revenue was $2 million in the fourth quarter of 2021 compared to $5 million in the same period of 2020.
Collaboration revenue was $933000 in line with the same period of 2000.
Total operating expenses for the fourth quarter of 2021 were $74 3 million.
An increase of 5% compared to $70 5 million in the fourth quarter 2020.
Fourth quarter operating expenses decreased 25% compared to $99 3 million in the third quarter of 2021.
Excluding $7 $6 million of restructuring charges total operating expenses were $66 7 million.
For the fourth quarter.
R&D expenses for the fourth quarter of 2021 with $2 1 million.
Roughly in line with the same period of the prior year.
R&D expenses for the fourth quarter decreased 23% compared to Q3, driven primarily by the slowdown in spending on cancer programs and lower head count as a result of volume reductions enforced.
Sales and marketing expenses for the fourth quarter of 2021 were $4 9 million.
An increase of 18% compared to $4 2 million in.
In the same period of the prior year, and an increase of 23% compared to the third quarter.
This increase compared to the third quarter was primarily driven by the effect of the one time reversal of accrued performance bonuses in the third quarter, and partially offset by headcount reductions and lower spend on third party advertising.
Relations and marketing.
The accrual reversal in Q3 had an outsize percentage impact due to the low expense base and sales and marketing.
General and administrative expenses for the fourth quarter of 2021 were $22 1 million.
Up 44% compared to $15 4 million in.
In the fourth quarter of 2020.
And up 23% from $17 9 million.
In the third quarter of this year.
The increase versus the third quarter 2021 was primarily driven by an increase in stock compensation costs, and partially offset by head count reductions.
Net loss in the fourth quarter of 2021 with $78 1 million.
Compared to $75 6 million in the fourth quarter of 2020.
$98 2 million.
In the third quarter of 2021.
The net loss of $78 1 million.
In the fourth quarter of 2021 included $7 6 million.
Restructuring charges related to a portfolio review and cost reduction work.
Turning to full year 2021 results.
Total revenue for 2021 with $16 7 million.
Primarily from R&D service agreement and collaboration revenue.
This represents a 26% increase from $13 3 million in 2020.
R&D service revenue was $12 4 million.
An increase of 27% compared to $9 8 million in 2020.
Collaboration revenue was $4 2 million.
An increase of 20% compared to $3 5 million in the prior year.
Total operating expenses for 2021 with $364 million, an increase of 43% compared to $254 million.
In 2020.
The increase in operating expenses was primarily driven by increased resources allocated to product development expenses incurred post acquisition have noted therapeutics restructuring charges as well as the costs associated with being a public company.
Excluding $28 8 million of restructuring charges operating expenses were $335 million for 2021.
R&D expenses for 2021 were $159 million.
75% increase compared to $90 9 million in 2020.
Sales and marketing expenses for 2021 with $23 6 million.
Up 27% compared to $18 6 million and <unk>.
2020.
General and administrative expenses for 2021.
$3 million, an increase of 38% compared to $60 1 million.
In 2020.
Net loss for full year 2021 with $362 million.
<unk> $262 million in 2020.
Net loss for full year 2021 include a $28 8 million of restructuring charges related to a portfolio review and cost reduction.
We ended the year with $386 million in cash and cash equivalents and $12 million in restricted cash.
Looking ahead to 2022.
We continue to expect product revenue to be immaterial this year and continue to prioritize closely managing expenses.
We expect our first product revenues from commercial sales in 2023, but have potential for a cash upfront fee. If we are successful signing of drug discovery partnership.
In 2021, we incurred $28 8 million of restructuring expenses related to restructuring reductions enforced contract termination costs long lived asset impairment and restructuring related consulting fees.
These activities began in the third quarter and was substantially completed by the end of the year.
However, certain activities such as lease restructuring will extend into the first half of 2022.
We expect to realize the full effect of our restructuring efforts in 2022.
As such we expect our first quarter 2022, total operating expenses to be in the range of $70 million to $75 million.
Which includes $15 million to $19 million.
Stock based compensation depreciation and amortization expenses.
We expect this to be in line with our go forward total operating expense run rate, excluding any lease termination restructuring charges.
As a result of cost savings related to our restructuring efforts. We believe that we have sufficient cash to fund operations to mid 2023.
However, the quarterly cash flow will be uneven due to capital expenditures on the lease hold improvements in the first three quarters of 2022.
The repayment of our perceptive deck by June 30th.
With that I would like to turn the call back over to Jay for closing comments.
Thank you Ana.
To close I'll leave you.
You with an update on our strategic plan and our CEO search.
As I mentioned earlier in February our board of Directors approved our three year strategic plan, which we had committed to completing in early 2022.
With our focus on a smaller number of programs and reduced cost structure, our new strategic plan charts, our course through 2024 with clear milestones and goals.
Under the new strategic plan, our investments prioritize near term revenue and the development of a solid pipeline of new opportunities by continuing investment in research. We believe this will fuel the creation of distinctive high performing products.
Lastly, we officially launched our search for a permanent CEO in February we believe our business is now set up for long term success, which opens the door to a broader cross section of potential leadership talent.
I hope it's clear how we are managing the business to create multiple successful products and then we have an engine behind that to create a pipeline of new opportunities with even higher potential with that we'll now open it up for questions operator.
Yes.
And thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw. Your question question <unk>. We please ask that you limit yourself to one question and one follow up again Thats one question and one follow up please standby, while we compile the Q&A roster.
Okay.
First question comes from Steven Mah from Cowen. Your line is now open.
Okay. Thanks, operator.
Hi, Jay.
Thanks for taking the questions.
Okay.
So on your on your strategic plan, you said, you're prioritizing near term revenues.
Could you give us some more color on your potential pharma partnership you said that you would likely announce this year does that mean to say that youre going to be prioritizing or more upfront payments versus milestones and royalties.
Give us a little bit of color on that.
Potential deal structure there.
Yes, we expect the deals to be traditional and structure of any there'd be upfront fees milestones and a back end royalty.
We would to some extent prioritize upfront fees over extremely long term.
Factors like the royalty. So if we have that trade off we would probably optimize an agreement to increase the upfront portion.
In general during our product prioritization process. It was important that we de prioritized programs that we're very long term in other words things that might get to market four or five years out.
In favor of volumes that we could put into the market over the next few years and so that was part of the.
Adjudication process, we use as we went through the prioritization of the portfolio back in the last half of last year.
Okay got it and then the go forward on your pharma drug discovery partners.
It'll be similar prioritize balance for the near and long term revenues.
Yes, as I said, we'll prioritize to some extend upfront fees. It doesn't mean, we will push everything to the upfront, but but if we had if we could gain a point and royalty that was 10 years out versus another few million dollars in an upfront fee, we would probably do the latter.
Okay got it and if I can sneak in one more you said, there's a CEO a formal search launched in February .
That's right.
What are the what is the expected timeline for for a new CEO , then and I know you don't have a crystal ball, but your best guess.
There are always uncertain, but my experience in a position like this is typically to expect about six months and as I've said previously the intent is for this to be.
I leave on Friday in the ACO starts Monday, there'll be there'll be an overlap.
During a period of.
Sort of orientation of any new person into the company, we want that transition to be as smooth as possible both for the.
The internal employees and to make sure that the new CEO is.
Sort of prioritizing the kinds of strategic initiatives that we believe are important.
Okay. Thank you.
Thank you.
And our next question comes from Derik de Bruin from Bank of America. Your line is now open.
Great. Thanks for taking my question. This is Mike Ruskin on for Derek.
I want to start first with the Opex commentary for <unk> and sort of the guidance as you go forward.
Could you talk about sort of the moving pieces there between.
The R&D and the SG&A line and some of the other adjustments.
Now that you're past some of the restructuring.
And what I'm also trying to get at is at some of these programs have kicked.
Kicked off relatively recently as they progress should we expect R&D to ramp accordingly sort of how is that going to flow through the model.
Let me answer in General first and then I'll pass it to Ina for.
Any more specifics.
We thought it was important that we give some indicator of what the Q1 run rate might look like.
To give everyone an opportunity to kind of model out what the business will look like for 2022 in terms of cash burn profile.
I think what we gave you in terms of details in the script are probably as far as we're going to go we're not going to breakdown by individual line items. How the Q1 expenses are going to rollout through the rest of the year, but.
We thought it was important as I said to kind of give you. The overall backdrop anything to add to that no.
I think thats exactly right global warming other thing I'd say is as you think about the guidance. We gave on total operating expenses of $70 million to $75 million.
That includes cost of revenue R&D sales and marketing and G&A expenses in line with how we report total opex.
In our press release.
And again that also includes $15 million to $19 million of stock based compensation depreciation and amortization noncash.
Noncash.
One of the thing that I didn't answer the second part of your question, which is do we expect a ramp up of R&D as we launch products. The answer is no. We've we've kind of planned out.
Side, the existing infrastructure of the company both on the commercial side and the R&D side to stay roughly within the parameters that we gave you for the next six quarters.
There'll be some fine tuning in moving people back and forth between groups, but in.
And maybe some small increases but nothing material.
Okay, and then just a quick follow on to that I think you also indicated.
Sufficient cash until mid 'twenty, three and yet youre not expecting.
Material product revenues until more or less that same timeframe. So just lease for the natural question of <unk>.
Cash balance and thoughts on maintaining that so.
What are what are the avenues, you're considering I realize you're still maybe a little over a year away, but what are the different Matt.
Options, you are considering maintaining sufficient cash.
Yes, I'd say all options are on the table we haven't.
Precluded any approaches and obviously that will depend on what happens with markets and interest rates in various forms of funding as we all know tend to come in and out of favor.
Current periods and so we will look at all options as we get closer we will probably begin that and some earnest in Q3 of this year.
Okay, and then last quick one if I could squeeze one in.
On the customer validation and the process validation process.
Any any comments you can give in terms of how that's gone over the last.
Three to six months after the strategic shift.
Are you having to undergo any additional steps to sort of walk people through the process.
Sort of the Onboarding process.
How should we think about timelines there things like that.
Yes, I'd say overall, we've been pleased with what's happened across the various different different products that we're working on.
In any customer evaluation. The reason you do it and in fact, the reason we pulled it forward and our processes to get feedback from customers as early as we can and that will result in fine tuning of the products, but thats. How this should work and will work.
So in the various areas, we're getting information about exactly what format of the product that people wanted to have a three D printing theres theres pellets and spools and different markets are going to require a different physical formats.
And so that's the kind of feedback that we're getting and with our.
Focus on bringing forward commercial input all the way in fact into the research area of what we're doing that.
That will.
Dramatically, we think increase the probability that by time, we get a product to market is a good fit for the customers.
Great. Thank you.
And thank you.
And our next question comes from Matt Larew William.
William and Blair.
Your line is now open.
Hey, this is actually Max on for Matt. Thanks for taking our questions I just had a few quick ones on the automation side of the business. So.
Just a couple of weeks ago that you have two contracts in place for detailed system design. Just wondering if you could give some more context around.
The next steps there to generate in a potential sale and how much revenue a potential sale.
And then any.
Detail you can provide around how those two customers.
Those two customers, specifically and how they plan to use your automation technology.
Sure.
Let me give you what I can on that.
The idea of these design contracts is too.
Take the use case of the customer.
Which involves understanding their application.
Their throughput what kinds of components, they would need based on what aspects of preparation. They are doing some customers will needs particular types of modules, others will need distinctively different loans.
And what we do in this design phases, we configure.
The system and we very clearly understand whether there's any additive software that's required to fully enabled that customer's application once we complete that design.
We will present that to these customers and of course that will have associated with it the cost of implementation. So the cost of the customer of all aspects of the system. So the hardware required any augmentation or changes to the software that might be some custom programming.
Cost of ongoing service contracts all of that would be presented to a customer.
And that will be the opportunity to make the sale and so the hope is that because we have the ability to obviously design around our approach to automation that it dramatically increases the probability of those customers ultimately.
Ultimately, placing a purchase order.
The range of revenue possibilities here is quite broad because the system is modular so configurable.
You could imagine systems, probably as low as a few hundred thousand dollars that have a handful of modules in them that would be a small implementation up.
Theoretically to the tens of millions of dollars for very large installations and so.
We're not in a position to disclose the particular configurations of these two initial.
Potential customers, but obviously should we win.
Got it very helpful. Thank you just a follow up from me here on the product type I know you completed your sprint won a couple of weeks ago.
And you gave some detail.
The products there, but is there any detail you can provide around that 20 potential product opportunities that you evaluated how they split out by initiating application and then.
Just curious if you have any more detail around the background of your employees and your.
Our research team and what sort of industry experience, they have and whether or not that could inform the way that they identify potential product opportunities.
Well I can say that.
What our team presented was in some ways almost overwhelming there were so many different options opportunities market segments and different technologies.
It was an incredible performance by the group, particularly given the very short timeframe, we put them on to deliver.
Not just a concept on powerpoint, but a physical implementation of.
A product, it's not an end product, but it's a physical embodiment of the underlying science that would go to a product.
And so the range of these.
<unk> was sort of breathtaking.
Way.
The kinds of people we have there are both molecular biologists.
And chemists and we have this unique ability.
To have our biologists and our chemists worked together on these programs and so we can conceive things in our biology group that can be made ultimately biologically, but very often it takes a long period of time to physically get enough material to and to actually create implementation.
Because.
To reprogram microbes to go through the fermentation might typically take nine months to a year.
We can create that molecule synthetically in Canada chemistry for a surrogate molecule thats close to it quite quickly and so what we are able to do is to make that iteration. So we can create something in our chemistry group and.
In Cambridge that has the ability to provide that physical demonstration very quickly we can evolve it using to some extent using our chemistry methods and then we can go back to the biologists to say, okay. Now we want to make this out.
An organism and so as that cyclical process that we think is so powerful and our research team.
And they come from all sorts of background Sciences.
And different experiences in terms of the application markets they've worked in.
Very helpful. Thank you.
And thank you.
Our next question comes from Mac Sykes from Goldman Sachs.
Your line is now open.
Thank you Hi, Jay Thanks for taking my questions, maybe just the first one on the GCE opportunity. Jay you mentioned about $800 million market supply demand is kind of a little bit back in balance, but theres still some supply chain issues.
But it's still competitive just wondering where you see the competitive advantage for your potential product is it.
Cost efficacy just any any other details you can provide as you enter that market constantly entering that market.
Well, we certainly think that.
Performance basis will be at least as good as the products on the market and we're continuing to.
<unk> the process internally with a goal of being better.
The VC process is a challenging one for the manufacturing side of this is difficult and so I think because of the meta genomics starting points that we have for enzymes and our ability to the way we can process this and reprogram knees.
These bacteria that we have the chance to continue to improve this so this is iteration one for us that we've done in maybe 10 months, maybe 12 now.
So it's been quite fast for us to pull this all together.
From a cost perspective.
Our goal clearly is to have a great cost position on this how we wind up pricing. It is an open question.
We're really not ready to to announce pricing nor have we looked at the ultimate.
Pricing that we would have through a distributor because we are going to take this to market through through a distribution partner.
But the plan is to be at least competitive pricewise and technically with the products on the market.
Got it. Thanks, that's very helpful. And then maybe just a follow up on the earlier question regarding automation.
You gave a lot of details about.
Design contracts I'm, just wondering from like an economic standpoint is there a certain <unk>.
<unk> to generate some recurring revenue from this as service contracts I think you mentioned, but also maybe software licensing.
Just maybe some details around kind of what the economics would look like on one of these types of contracts are partnerships with the customer.
Yes. So the initial model, we'll have ongoing service contracts that you would expect in any sale like this that would include just hardware support.
And various customers will require a different levels of support some will be.
As is typical again in this kind of business two day response time, but if its critical it could be 24, seven response time, which comes at a higher price and so that will we will be customer dependent.
The software will be licensed as part of the initial purchase price, but there could be either built into the service contracts or as a standalone pricing for software upgrades that would come as part of this so that's an opportunity for annuity revenue.
Downstream, probably not in the first few contracts with downstream there may be.
Situations, where we would install a system and it would all become recurring revenue by charging essentially an operating cost to run the hardware.
On the hardware and the software together, that's kind of a second level of business model Thats. Certainly is has potential here, but it's not something that we're going to do in the initial contracts.
Got it thanks very much appreciate it.
Yeah.
Thank you.
And our next question comes from Jon <unk> from UBS. Your line is now open.
Hi, Thank you for taking my question.
I guess when you look at the opportunities across advanced materials drug discovery automation I guess can you just maybe talk more on really where is the nearest near term opportunity there to maybe start to generate revenues.
Yes, I would say the nearest term revenues.
As we indicated a bit in the script or in automation in drug discovery and so even though.
Most people think of drug discovery is having a very long revenue cycle and it certainly does by time you get to an ultimate product that you launch a therapeutic the opportunity for us in drug discovery is in is in upfront fees in relatively near term milestones and so as we've again tried to indicate those upfront fees will clearly be.
Cash they may or may not actually be revenue, depending upon how contracts get.
Ultimately defined.
But thats an opportunity for cash infusion to the company and those forms of upfront fees. Similarly in automation, we mentioned that we hope to.
Have at least one contract during 2022.
And we think that will be a great validation of our platform and a great springboard two other contracts, but it's unlikely we'll be able to go through the full process of installation and qualification.
Before year end, so that that type of transaction should result in revenue in 'twenty three.
In the advanced materials side, we think any material revenue will be in 'twenty, three and as we've continued to indicate their there won't be any material revenue from those four markets in 2022.
Yes.
Got it. Thank you for the color there and I guess, just a follow up on the the automation can you confirm that.
Are any of these processes patented.
Number of patents if you do have any around these processes there.
We do have some patents for sure I don't know the exact number.
Could follow up with U.
That's important.
And.
There are some patents on the software, which are are useful, but sometimes hard to defend.
So I wouldn't say that the software patents are things that are blocking patents necessarily to third parties.
But the architecture of the hardware.
Is pretty unique and something I think thats benefited not just from many many years of Knowhow that we have built up inside the company, but the close proximity of our automation team to our scientists. So unlike a lot of other automation companies. We've actually used this at scale for many years and continue to evolve it.
To meet the needs of scientists running these real world applications, and so I think that gives us a unique viewport into what the real customer requirements are and how to optimize the combination of hardware and software to meet those needs.
Got it thank you for taking my questions.
My pleasure.
And thank you and our next question comes from Rachel.
From JP Morgan.
Your line is now open.
Great. Thanks for taking the questions and provider to John's question, you don't expect any meaningful revenue this year in advanced materials, but you've been making progress in all four of those end markets. So can you just walk us through which products and advanced materials are closest to make anti market and that you have the highest confidence in and then should we be modeling any product that means organic material.
In 2023.
The answer to the last part of the question is yes. So we will have revenue from advanced materials in 'twenty three.
The leading candidates for revenue timing wise would be the enzyme <unk>.
And also the three D printing opportunity or that would be the two meetings.
Areas, so and water repellent see that remains more exploratory in terms of the ultimate application.
And in AG.
Because of the annual planting cycle.
Any revenue from that would come at the earliest at the end of <unk>.
'twenty three there is some potential from the Sumitomo partnership that we could begin to get some revenue on one but I think that's less likely so if I were to prioritize them.
Put the.
Enzymes in three D printing at the top.
Sumitomo kind of in the middle in AG and water repellent Tse and the third bucket.
In terms of perfect. That's really helpful. And then just one more on automation. So you mentioned that you're that you have contracts in place and then 20 customers in the pipeline. So can you give us some more color on that pipeline and where you are at in the selling process.
Customers in the pipe.
Yes, it's pretty.
Well distributed.
As you might expect so there is a number where we are demonstrating the technology and talking specifically about how they might use. It. So those are in sort of the latter phase of what you'd call sales pipeline and then we have some that are in the very early conversation phase and then many in between so.
It pretty much spans the kind of four.
Segments of a sales pipeline that you would typically expect the two where we have the design contracts are obviously the furthest along in the most likely to turn into revenue.
Great. That's it for me thank you.
Thank you.
And thank you and I'm showing no further questions I would now like to turn the call back over to Jay Flatley for closing remarks.
So we just wanted to thank all of you for the time, you've taken with US today and we look forward to speaking with you next quarter. Thanks again.
This concludes today's conference call. Thank you for participating you may now disconnect.