Yahoo Finance Codexis, Inc. (NASDAQ:CDXS) Q1 2024 Earnings Call Transcript
Codexis, Inc. (NASDAQ:CDXS) Q1 2024 Earnings Call Transcript May 2, 2024
Codexis, Inc. beats earnings expectations. Reported EPS is $-0.1647, expectations were $-0.17. Codexis, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Codexis' First Quarter 2024 Earnings Call. [Operator Instructions] Please note this event is being recorded. And now I'll turn the call over to Carrie McKim, Director of Investor Relations. Please go ahead.
Carrie McKim: Thank you, operator. With me today are Dr. Stephen Dilly, Codexis' President and Chief Executive Officer; Kevin Norrett, Chief Operating Officer; Sri Ryali, Chief Financial Officer; and Stefan Lutz, SVP of Research. During this call, management will be making a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including our guidance for 2024 revenue; product revenues, and gross margin on product revenues; anticipated milestones, including product launches, technical milestones, and public announcements related thereto; as well as our strategies and prospects for revenue growth and successful execution of current and future programs and partnerships.
To the extent that statements contained in this call are not descriptions of historical facts regarding Codexis, they are forward-looking statements reflecting the beliefs and expectations of management as of the statement date, May 2nd, 2024. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond Codexis control and that could materially affect actual results. Additional information about factors that could materially affect actual results can be found in Codexis filings with the Securities and Exchange Commission. Codexis expressly disclaims any intent or obligation to update these forward-looking statements such as required by law.
And now I'll turn the call over to Stephen.
Stephen Dilly: Thanks Carrie and thanks everyone for joining. We started 2024 really well. In addition to a strong financial start to the year, we're also making exciting technical progress with our ECO Synthesis manufacturing platform. During our call in February, we projected at least 10% year-on-year growth in product revenue in 2024. Everything is shaping up nicely in line with our expectations. As in past years, we expect some of our projected revenue to be a bit lumpy across quarters, but we're confident in reiterating our full year 2024 guidance. Now, just two years ago, customers came to us saying that if we could enzymatically synthesize full-length RNA oligos, they'd be interested. We're now very close to meeting that objective, are in the final stages of completing the enzymatic synthesis of a full-length oligonucleotides by the TIDES USA meeting in a couple of weeks' time.
We believe this will be a scientific-first. After we achieved this historic milestone, we can then go back to those customers and also to make them enzymatically synthesize versions of their proprietary molecules a research-grade, which they can in turn test and compare to conventionally synthesized materials. Throughout developing our ECO Synthesis technology and engaging with these potential customers, we've learned that optimal process conditions vary quite significantly depending on the construct being built. That's why we've positioned ourselves with a versatile set of capabilities that can be adapted to best suit each molecule. Starting with our ligation program, we can use a double-stranded RNA ligase to stitch separate R&D fragments together into full length constructs.
We're confidence that ligation is a crucial component of this market and we've seen increasing interest from customers who want to explore this approach. In fact, in Q1, we secured a low to mid-single-digit million dollar order for an engineered double-stranded RNA ligase with a large pharma company, with potential for more orders in 2025. We're also looking forward to further commercial interest once we launch our double-stranded RNA ligase screening services at TIDES USA, which Stefan and Kevin will cover shortly. In addition to setting us up for significant downstream revenues, our double-stranded RNA ligase program encourages customers to introduce an enzymatic step into their existing manufacturing process and positions us to engage with those who want to explore full sequential synthesis.
From there, we have optionality how to generate the most value, including the potential to move in-house full scale of sRNA production when the time is right. Our plans for the ECO Synthesis Innovation Lab will play a vital role in this process for two reasons. One, it provides a facility where we can perform ligation on behalf of customers; and two, it gives us a venue to define and optimize the manufacturing process for each customer before scale-up. That's critical because ahead of transferring a process to a partner, we need to make sure it works seamlessly, is efficient, and it's entirely scalable. The Innovation Lab will ensure that our technology gets baked into early-stage programs that have potential to generate meaningful revenue dollars down the line.
Our timeline for that facility remains on track and we expect to have it largely built out by the end of this year. We're also really pleased with progress towards the enzymatic synthesis of costly input materials like NQPs and the enzymatic placement of targeting moieties. By addressing these additional elements of the manufacturing process, we can deliver an even more valuable product and significantly increase our own potential revenue capture in the process. Underpinning this progress is our CodeEvolver directed evolution platform, which marries rich datasets and iterative learning with experts who have decades of experience tackling increasingly complex engineering projects. But to get this competitive advantage is Artificial Intelligence combined with great data and human intelligence.
With that, I'd like to pass the call over to Stefan Lutz, Senior Vice President Research described some very exciting technical progress. Stefan?
Stefan Lutz: Thank you, Stephen. I'll begin by previewing our presentation at the upcoming TIDES USA Meeting and then highlight some of our additional ambitious projects related to the ECO Synthesis manufacturing platform. Starting on Slide 3, we are very much looking forward to attending TIDES USA later this month. As Stephen alluded to already, we are very close to achieving the sequential enzymatic synthesis of at least one full line oligonucleotide with therapeutic relevance. We will also share an update on the continuous improvements of platform performance. We had a combination of enzyme and process engineering, as reflected in the impurity profile of our oligonucleotides. These efforts have resulted in significant improvements in product quality.
And in just two years, we are today delivering coupling efficiencies on par with phosphoramidite chemistry despite its 40-year head start. Finally it is important to emphasize that our ECO Synthesis Manufacturing Platform incorporates the different nucleotide modifications most frequently found in approved siRNA therapeutics today from Starter oligonucleotides all the way to full length products. We are thrilled with our progress and are on track to accomplishing this historic achievement which is a direct result of an incredible Enzyme Engineering capability that we have cultivated through decades of experience. In addition to demonstrating the viability of our platform, this key milestone will enable us to show potential customers that we are well within the range of synthesizing the same as our siRNA therapeutics that they're actively developing.
When achieved the sequential synthesis of a full-length siRNA molecule would certainly represent an important threshold for Codexis, particularly given the Breakneck Pace of our technical progress to-date. However enzymatic synthesis of siRNA is just one facet of the valuable and exciting work that we're doing as we are advancing our ECO Synthesis Technology. There is a vast white space that we can continue to innovate and our work is far from over. Moving to slide number 4, we have previously spoken at length about our efforts to engineer the core suite of enzymes that make up our ECO Synthesis Technology or Manufacturing Platform, including our Engineered Polymer arrays derived from TdT enzyme. That core technology is the engine that powers our broader effort across RNA Synthesis and so far where the lion's share of our effort has been focused.
However, as Stephen mentioned, we're taking things to the next level by addressing challenges associated with the Enzymatic Synthesis of input materials like NQPs & Starter Oligo as well as working on ensuring the seamless incorporation of Targeting Moieties. By establishing innovative new enzymatic solutions for inputs like adding NQPs we could dramatically reduce associated costs and yield more product of higher quality for the same amount of starting material. In short, these efforts have the potential to lead to better, cheaper products. Similar to the focus on NQP, we're also aware of the important role played by Targeting Moieties in this class of Therapeutics, by enabling the effective shuttling of oligonucleotides to specific locations and organs within the body, this innovation improves the potency and efficacy of siRNA assets.
We have made real progress towards the enzymatic and cooperation of Targeting Moieties in each of the position of interest to our customers, whether it is on the five prime end to three prime end or anywhere in between. Before I pass things over to Kevin, I'd like to briefly share my perspective on the importance of our double-stranded RNA Ligase program. Our ability to offer customized high performance double-stranded RNA Ligases fully leverages our prior Enzyme Engineering experience. Our collection of thousands of Ligase variants and corresponding activity data allows for efficient library screening for Lead Enzymes. Fine tuning via enzyme and process engineering and finally scale-up production for customers. Because we are starting with a rich database and specialized know-how we can streamline the process and maximize our ability to respond quickly.
As Stephen mentioned, the concept lies at the core of our competitive advantage. Ultimately, we believe in our ability to deliver a modular approach that gives customers flexible design options, to support the manufacturing of their siRNA Therapeutic Assets and given the resources and capacity constraints of Traditional Chemical Synthesis, we are confident that the versatility of our technology will provide fundamental value to players in the space. And thinking ahead, it's not lost on us, that the valuable intermediates we are developing today could be applied to other processes and growing modalities in the RNA space. Now, I'll hand the call over to Kevin to speak to the commercial side of the business Kevin?
Kevin Norrett: Thanks, Stefan. As Stephen previously highlighted, we have started the year with a strong set of Q1 results and we have made tremendous technical progress since achieving grand scale since this last December at the TIDES USA meeting in May, Stefan and his team plan to present a technical update on the ecosystems manufacturing platform and we are on track to demonstrate the enzymatic synthesis of a full-length RNA molecule by them. When achieved this milestone position us to offer a variety of ways to demonstrate our informatics solutions for RNA sensors to customers. First, let me expand on our double-stranded RNA ligase program on slide 5. As I've mentioned in the past the double-stranded RNA ligase program is our bridge for customers to incorporate enzymes into their RNAi therapeutics manufacturing.
But it's more than just that, our increase in inbound customer interest has made it clear that drug innovators are already exploring the possibility of migrating short strands of siRNA to immediately decrease manufacturing costs as they scale through clinical trials and to overcome challenges and synthesizing longer and more complex RNAi construct. As signing of our first large pharma customer order for their customized double-stranded RNA ligase in the low to mid single digit millions is good evidence of this market expansion. In addition, we have a second customized program in development, which we hope to convert to a future product order either later this year or early next year. Finally, we have several other customers testing other double-stranded RNA ligase variance as part of our early access program launched earlier this year.
Just like we saw in pharma manufacturing, we were not surprised to see early adopters of a ligation-based approach be large companies because they can afford to test and assess new technologies in parallel to traditional chemistry. We are excited to see this playing out with this opportunity and look forward to growing our programs over the next year. To capitalize on this momentum, we are launching our double-stranded RNA ligase screening service at TIDES USA. This service will simplify the screening process for our customers and potentially lead to additional customized programs. We anticipate that this program will also increase the odds of our technology being used in the scale-up of many promising assets already in clinical development.
Later this year, we plan to also launch our ecoRNA ligase kit variance, which can be sent to customers for testing in their own hands. Finally, we plan to offer in-house RNA ligation capabilities through our ecosystem innovation lab where customers can send us their constructs and we can do the ligation for them. This is super exciting as it is our first step towards becoming a full service provider of siRNA for testing and preclinical studies. While these offerings won't be significant revenue drivers in 2024, they allow us to secure potential customers into our enzymatic approach and are expected to translate into future product revenues. Shifting to our full ecosystem manufacturing platform and our ECO Innovation Lab on slide 6, let me reiterate a few key points.
We continue to garner significant inbound interest from key RNA synthesis players and we are already in dialogue with those you'd expect, many drug innovators and CDMOs have also made site visits where we can show and tell our capabilities. With the continued build-out of our ECO Innovation Lab we will be able to offer customers a path to the production of GLP-grade material. First, we will be able to offer ligation for their chemically derived short mergers in the future we plan to offer a semi and enzymatic method, which will include the TdT polymerase and other core ECO Synthesis enzymes. And finally, we plan to offer a completely enzymatic process with enzymatically synthesize raw materials. The more development projects get off the ground this year and next, the more we learn to be able to address the different process conditions required for each customer's RNA construct and by producing the material for preclinical testing, we plan to outline the tech transfer process for large scale GMP manufacturing with the downstream CDMO partner.
The ECO Synthesis Innovation Lab also supports our plans to scale for GMP either through CDMO partners or our own manufacturing facilities. Finally moving to slide 7. I am super excited that we delivered a great quarter with double-digit growth in product revenues. However, as I mentioned in our end-of-year results call our product revenues remain concentrated in a handful of large pharma customers across four commercial enzymes. Therefore, we remain focused on expanding our customer base and filling our pipeline to sustain future annual double-digit product revenue growth throughout the decade. We have made significant progress with getting several new screening programs off the ground this year across midsize pharma and large biotechs and we expect these programs to translate into R&D revenues later this year.
With that, I'll turn the call over to Sri to discuss our financial results.
Sri Ryali: Thanks Kevin, and good afternoon, everyone. Moving to slide 8, we delivered strong first quarter 2024 results. Our full financial results were issued in a press release earlier this afternoon, which is available on our Investor Relations website. But I'd like to call out a few highlights here. Total revenues were $17.1 million for the first quarter of 2024, compared to $13 million from the prior year, an increase of 32% year over year. Product revenues were up 14% to $9.6 million for the first quarter, compared to $8.4 million in the prior year. Turning to R&D revenues, we reported $7.5 million in Q1 compared to $4.6 million last year. In Q1, we recognized $6 million full amount related to the license agreement with Roche for the double-stranded DNA ligase contributing to the strong quarter.
Product gross margin improved to 49% this quarter, compared to 46% in the first quarter of 2023. Turning to expenses, R&D expenses for the first quarter of 2024 were $11.2 million compared to $16.7 million last year. SG&A expenses were $12.9 million compared to $15.4 million in the first quarter of 2023. You can see the continued benefit from the actions we announced last year on our expense base with R&D and SG&A expenses down approximately 32% and 16% respectively compared to Q1 2023. Taking a look at expenses compared to Q4 2023, which was our first full quarter after the reduction in force and consolidation of facilities, you can see we have maintained a similar run rate across R&D and SG&A. The slight increase in Q1 2024 expenses was primarily driven by noncash stock-based compensation.
It is also worth noting that we expect to see a slight uptick in R&D expenses as we ramp up operating costs related to the E-Co synthesis Innovation Lab later this year. Maintaining tight control over cash and continued expense discipline remains a key focus. Before shifting to our guidance, I want to share a closer look at our 2024 revenue dynamics. On Slide 9, the graph on the left-hand side shows the distribution of our first quarter product revenue by major category for both Q1 2023 and Q1 2024. In Q1 2024 of the $9.6 million we reported in product revenue, roughly 37% came from the big three commercial pharma manufacturing products that we have previously highlighted. You can see that is down significantly from roughly 72% in Q1 2023, reflecting the progress we've made toward diversifying our revenue base.
Approximately 5% of Q1 2024 product revenue was from enzyme supply and other commercially approved products and 19% was for generics. Outside these three categories, 34% which are programs that we currently supply and clinical trials which include the name programs, some of which are likely to convert to commercial products and drive future revenues as we transition to the big six or big seven in our pharmaceutical manufacturing business. Finally, roughly 5% of Q1 revenue was from life sciences and other programs. Turning to guidance, we are confident in reiterating our 2024 revenue and gross margin guidance ranges. To help with modeling, we also wanted to provide additional detail on what we expect the rest of the year to look like in terms of revenue distribution.
Starting with product revenue, as highlighted during our results call in February and in line with the lumpy nature of customer orders, we continue to expect that Q2 will be our lowest quarter of the year and down as compared to Q2 2023. Based on the visibility we have today, we expect Q2 product revenue to be roughly 60% to 70% of the product revenue we reported in Q1, followed by a strong second half of the year. It is also important to note that we expect to recognize the large customized double-stranded RNA ligase pharma order that Steven and Kevin mentioned as product revenue by the end of the year. Now, looking at R&D revenue on Slide 10. First, I'll note that Q1 2023 included approximately $3.5 million in revenues related to our biotherapeutics programs, which we previously announced that we discontinued.
This quarter, due to the recognition of the $6 million related to the double-stranded DNA ligase agreement with Roche, we expect Q1 2024 to be our highest R&D revenue quarter of the year. Building off Kevin's commentary on our maturing pharmaceutical manufacturing pipeline, we anticipate the R&D revenues will be weighted toward the back half of the year, as new development programs get off the ground. With that in mind, we expect Q2 R&D revenue to be roughly in line with our Q1 2024 base business which was $1.5 million. Broadly speaking and excluding revenue accounting related to tax loaded, we project that our full year revenue will be weighted roughly 40% for the first half of the year from 60% for the second half of the year. Moving to slide 11, we ended the quarter in a strong position with cash and cash equivalents and investments of $85 million, which we continue to expect, will fund our planned operations through positive cash flow, anticipated around the end of 2026.
And now I will turn the call back to Stephen.
Stephen Dilly: Thanks Sri, and thank you to Stefan and Kevin for the encouraging updates across the different facets of our business. As you've just heard, we delivered a strong first quarter and we've made great technical progress on the E-Co manufacturing platform. We are really looking forward to going into more detail of the TIDES meeting in a couple of weeks in Boston. Now, we'd be happy to take your questions. Operator?
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