Codexis, Inc.

Greetings and welcome to Cadexus Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. and now I'll turn the call over to Stephanie Marks from Argo Partners. Please go ahead.

Thank you, Operator. With me today are John Nichols, Codexas President and Chief Executive Officer, and Ross Taylor, Codexas' Chief Financial Officer. During this call, management will be making a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. To the extent that statements made by management are not descriptions of historical facts regarding Codexys, they are forward-looking statements reflecting beliefs and expectations of management as of the statement date, August 5, 2021. You should not place undue reliance on the forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are in some cases beyond the company's control and could materially affect actual results. In particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic. This means that results could change at any time and the currently contemplated impact of the virus on the company's operations, financial results, and outlook is the best estimate based on available information. For details about these risks, please see the quarterly news release that accompanies this call as well as the company's SEC filings, including Codexys' annual report on Form 10-K, filed with the SEC on March 1, 2021, and Codexys' quarterly report on Form 10-Q, filed with the SEC on May 7, 2021, as well as Codexys' other periodic reports filed with the SEC. Codexys expressly disclaims any intent or obligation to update forward-looking statements except as required by law. And now I'll turn the call over to John.

Thank you, Stephanie. Good afternoon, everyone. I am very pleased to report exceptionally strong second quarter 2021 results for Cadexes. Total revenue for the quarter grew by an impressive 70% year over year. Product revenue more than tripled over a year ago, and product gross margin reached a new high of 71%. We are demonstrating our ability to capitalize on Codexys' rapidly accelerating business model, translating years of groundwork and R&D efforts into impressive top-line growth. We had 22 customers who contributed over $100,000 in revenue in the quarter, nine of whom contributed over $1 million in revenue. We are firing on all cylinders in our sustainable manufacturing business. In June, we received a significant new commercial scale quantity order from an unnamed global pharmaceutical company for one of Cadexis's proprietary enzymes. This enzyme is designed for use in the manufacturing process of a therapeutic drug that is in late stage clinical trials with an accelerated development and regulatory process. This business will deliver the largest annual sales for a product in the company's history. We raised our guidance in June upon receipt of the $13.9 million order. Today, we are raising our revenue guidance again as we have solidified that order's delivery schedule to be executed within 2021 and have solid indications from the customer that they have significant additional 2021 product needs as well. Ross will provide more details later in the call. On top of that exceptional strength in pharma manufacturing, we recently executed a commercialization agreement in the food sector, working with our innovative partner, CalSec, to help them introduce new hop extracts to beverage applications. We also had very good sales to Tate & Lyle for their commercial stevia and allulose sweeteners, and we have a solid outlook for revenues related to both of these products over the balance of the year. We're building strong momentum in the food and nutrition vertical. In the life science tools market, our newly launched engineered enzymes continue to gain traction with market interest, and our partnered programs continue to drive significant 2021 R&D revenue growth. And in our biotherapeutics business, our partner Takeda exercised its option to expand our collaboration to add a fourth program to the pipeline. In addition to all of our customer-driven programs, we are applying our R&D resources to an increasing number of self-funded programs across all lines of the business. We are advancing programs further into development as part of our strategy to capture even greater value in the future. Every year at the end of June, we provide an update to our pipeline of programs and products across the company. breaking them down in a number of ways to provide insight on how we're expanding our future growth opportunities. Today, we published this annual pipeline snapshot as of June 30, 2021, which you can see here and find on our IR website. Let me highlight a few metrics that I think are particularly salient. First, our total number of commercial products and pipeline programs has grown by 20% since last year, increasing to 78 from 65. We have dramatically increased our number of shots on goal. We now sell enzymes to sustainably manufacture 17 commercial products, up more than 50% from 11 just two years ago. The ultimate goal of our pipeline is to drive programs to commercial recurring revenue stage So it's great to see momentum building for us here. Clearly, this is connected to the dramatic product revenue growth we're delivering in 2021 versus the past. Pharma manufacturing continues to be the largest application area in our pipeline, but we are also putting stakes in the ground more broadly. Note the 50% growth in performance enzyme programs outside pharma manufacturing in the last year. led by the life science tool sector, but also nice growth in the food and other industrial markets as well. Our biotherapeutics pipeline continues to expand as well, highlighted by our investments in three new self-funded programs over the last year and by Takeda's exercise of its option to license a fourth program from Cadexis during the quarter. Our business model is consistently delivering acceleration of assets in our pipeline, as you can see in the four-year trends shown in slide five. More than doubling over the four years in almost all categories. An explosion of programs in our new high-growth verticals of life science tools and novel biotherapeutics. We look forward to continuing to these trends going forward. Adding to our shots on goal, advancing those towards commercial, increasing the average program speed to market, and peak revenue potential, all in tandem. Let's dive more deeply into our recent progress across our three businesses, starting with sustainable manufacturing. Sustainable manufacturing is where we built Codexys' enzyme engineering leadership over the past two decades, and this market currently represents the large majority of the company's revenues. Codexis's novel high-performance enzymes continue to enable our customers to dramatically reduce the cost and increase the sustainability of manufacturing their end products. Compared to using traditional non-enzymatic chemistry, which is capital-intensive and inefficient, our engineered enzymes decrease capital needs meaningfully while also enabling higher yields, reduced energy usage, and lower waste generation. and our CodeEvolver platform is constantly accelerating the speed of our ability to discover and design these value-creating enzymes. Small molecule pharmaceutical processes have been and continue to be a core target for growing the sustainable manufacturing market for Codexys. We have partnered with 21 of the 25 largest pharmaceutical companies in the world to help them adopt and install novel Cadexis enzymes for manufacturing their APIs. The $13.9 million order that we announced in June from an undisclosed global pharmaceutical company is a historic one for Cadexis, and it came to fruition with unprecedented speed. In a matter of months, we scaled up production of the enzyme to manufacture hundreds of kilograms, and now we are fully ramped up and in position to produce at the metric ton scale to fulfill this order during the second half of 2021. And as I mentioned earlier, we already have strong indications from this customer that they will need additional supply in 2021 on top of the June order, and we've already established sufficient supply chain capacity to be able to fulfill the incremental demand. Another aspect of our sustainable manufacturing business is our ability to license our CodeEvolver protein engineering platform technology to partners. In the second quarter, we earned the largest back-end licensing milestone payment from our partner, GlaxoSmithKline. It was related to the advancement of the commercialization of an enzyme designed by GSK using CodeEvolver that is engineered to improve a key step in the manufacturing process for an undisclosed, patented, on-the-market drug. CodeEvolver back-end license milestone payments such as this one are 100% profit margin, highlighting another important and emerging facet of our business model. We also announced the completion of a CodeEvolver platform license technology transfer to Novartis. This was our third licensing collaboration to enable a customer to bring Cote d'Ivoire technology in-house, but the first one where we had to implement a considerable portion of the tech transfer virtually. I'm incredibly proud of our team's efforts to operate in lockstep with Novartis to ensure a smooth tech transfer. In addition to pharma manufacturing, in the past few years, we've been expanding to other industries designing enzymes for sustainably manufacturing a range of applications, including food and beverage ingredients, recycling, consumer care, and animal feed, et cetera. These products have shorter development timelines and lower regulatory hurdles, enabling our enzymes to reach the market more quickly. Recently, we announced the expansion of our research collaboration with CalSec. a leading producer of food and beverage industry products. Through the partnership, we have entered into an exclusive supply agreement for a novel enzyme to produce CalSec's newest natural hop extract. This enzyme was engineered using our Codivolver technology to improve functionality, stability, and efficiency, enabling CalSec to deliver consistent hop characteristics and taste. while also furthering Codexys' mission to support the development of sustainable and clean label products. We're really excited about our growing opportunities in the food and nutrition vertical. In addition to the new development with CalSec, we also had strong quarterly product sales from Tate and Lyle. They are growing the downstream adoption and sales of their newest sweeteners that use our enzymes for the manufacturing of Tastiva Amstevia and Dulcia Prima Allulose sweeteners. This is a very encouraging progress for these enzymes, and we believe they could grow to be one of the largest enzyme products over time. With our deep and growing pipeline of other late-stage development industrial enzyme candidates, we expect this shift towards high-margin, faster-to-market products to continue to accelerate Codexys's growth in sustainable manufacturing. Another area of expansion for Codexys is the life science tools market, which is a significant growth opportunity for the company. Codexys engineered enzymes can enable improvements in next generation sequencing and molecular diagnostics, biosensor applications, DNA and RNA synthesis, and more. This market is very attractive given its high growth, rapid commercialization cycles, and above average margin prospects. The market also affords us the opportunity to develop products that can be marketed to multiple customers in addition to the highly engineered enzymes we customize for partners. In the past year, we've developed three new life science tools enzymes for broad-based customer marketing. Codex high-cap RNA polymerase, Codex HiFi DNA polymerase and Codex reverse transcriptase. Our RNA and DNA polymerases have led the way as we rapidly advanced these enzymes towards commercialization last year and began marketing at the end of 2020. In the first half of 2021, we've already been demonstrating success. We engineered Codex HiCap RNA polymerase to provide dramatically higher capping efficiency, enabling customers to significantly reduce the amount of capping reagent that is critical to stabilizing the product for pharmaceutical use. In addition, our proprietary enzyme decreases the production of unwanted double stranded impurities, which increases yield and simplifies downstream purification of the messenger RNA product. We made our first commercial sales of Codex HiCap RNA polymerase to several customers earlier this year, and now this product is in various stages of customer trials with multiple other messenger RNA manufacturers. Although the adoption cycle is a bit longer than we had hoped, this is an excellent start, and we are confident that we're well positioned for potential installations in a range of processes for development stage mRNA-based vaccines and therapeutic candidates. We expect product sales to begin to grow more meaningfully in the coming quarters. We're also making solid progress with the launch of Codex HiFi DNA polymerase. Our analysis demonstrates that Codex HiFi DNA polymerase enables the highest fidelity next-gen sequencing results of all the competitive DNA polymerases tested. The enzyme is being sampled by dozens of high-profile customers for potential use in their current and future NGS kits, and progress in their trials is encouraging. Codex reverse transcriptase has been developed to further improve performance versus incumbent enzymes in both diagnostic and sequencing applications. It is currently being tested by our early access users, and we are preparing for broader launch later this year. In addition to these broadly marketed products, we are also developing customer-partnered enzyme products for life science tools applications. In the second quarter, we earned an option milestone on a new enzyme with an unnamed life science tools leader and have multiple revenue-generating partnered programs advancing in parallel as well. As an update on our groundbreaking collaboration with Molecular Assemblies, for the commercialization of enzymatic DNA synthesis, we continue to make strong technical progress on this project. This disruptive approach to synthesizing DNA has the potential to significantly impact a wide range of high value markets from drug discovery and manufacturing through synthetic biology and longer term to compete with silicon for data storage. Leveraging the power of Codevolver to deliver dramatic performance improvements, we are engineering enzymes that should make molecular assemblies process a commercially viable, cost-effective, and differentiated solution to manufacturing long-chain DNA. We remain on track to complete the enzyme engineering work for this program in the second half of 2021. With an increasing number of differentiated products and strong partnerships in the life science tools market, Codexys continues to build momentum to capitalize on this high growth opportunity. In wrapping up the business review, we remain highly enthusiastic about the value creating potential for Codexys in the discovery and development of novel biotherapeutics. Here, we are rapidly building and advancing a high-value pipeline of oral biologics and gene therapy candidates discovered using our CodeEvolver platform. Just a few years ago, we had only two very early-stage programs in our pipeline. Fast forward to today, and we have over a dozen programs in the pipeline, including one in clinical stage and another in IND enablement development. We have an impressive multi-program partnership with Takeda Pharmaceuticals, focused on improving gene therapy candidates for rare diseases. Here, we are leveraging Codevolver to engineer transgenes with improved attributes, such as enhanced expression, improved half-life, greater stability, and better uptake in difficult-to-access cells. During the second quarter, Takeda exercised its option to expand our strategic collaboration for the research and development of an additional gene therapy for a lysosomal storage disorder, bringing the total number of programs under the agreement to four. We are extremely proud of the success we have generated in gene therapies for the potential treatment of Fabry disease, Pompe disease, and an undisclosed blood factor deficiency after just one year in collaboration with Takeda. especially given that we are just a year into the partnership. This expansion to four is a gratifying indication of Takeda's enthusiasm for our technology and its ability to discover differentiated gene therapies for patients with rare genetic diseases. Modifying transgenes using Codevolver to enable a gene therapy's expression of a better performing enzyme is a novel and differentiated approach to design improved next-generation gene therapy candidates. Accordingly, in addition to the partnered programs with Takeda, we have embarked on self-funded discovery programs targeting improved transgenes for other rare disorders. Leveraging Codevolver to discover novel oral biologics that are more safe, stable, and efficacious for gastrointestinal indications is another high-value growth strategy for Cadexis. We have four oral biologics in partnership with Nestle Health Science and three early stage self-funded programs. Three of the partner programs with Nestle are co-owned between the parties, the most advanced of those being CDX7108, which is targeting an undisclosed GI disorder. Our IMD enabling activities for CDX7108, including GMP manufacturing and preclinical toxicology, have now been successfully completed. In addition, CDX 7108 has been filed for approvals with the ex-United States regulatory authorities for its first clinical trial, which we expect to initiate around the turn of the year. Now let me hand the call over to Ross to take you through our financial results in more detail. Thanks, John, and good afternoon, everyone.