Codexis, Inc. Q2 FY2022 Earnings Call

Welcome to the Codexis Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this event is being recorded. And now I'll turn the call over to Brendan Strong from Argot Partners. Please go ahead.

Thank you, operator. With me today are John Nicols, Codexis' President and CEO; Ross Taylor, Codexis' Chief Financial Officer; and Dr. Stephen Dilly, current Board Member and incoming President and CEO of Codexis. 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 2022 revenues, product revenues and gross margin on product revenues, prospects for our Life Sciences Tools, food sector and Biotherapeutics product businesses and our expectations regarding the sales of one of our proprietary enzymes to Pfizer for the manufacture of their COVID-19 antiviral therapeutic, PAXLOVID. 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, August 4, 2022. 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' annual report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2022, and on Form 10-Q filed with the SEC on May 9, 2022, including under the caption Risk Factors and in Codexis' other periodic reports filed with the SEC. Codexis expressly disclaims any intent or obligation to update these forward-looking statements, except as required by law. I'll now turn the call over to John.

Thank you, Brendan. Good afternoon, everyone. First, it's great to spend this time with all of you today. Those who have been following us for a while know that for the last five-plus years, we have been on a very strong, sustained growth trajectory with a remarkable track record of financial and strategic execution. Our confidence and optimism for our business remains steadfast, as you will hear us reiterate many times on today's call. At the same time, as we outlined a few weeks ago, our R&D revenue is not building as quickly as we originally anticipated, which led to our first significant downward guidance revision in recent memory. As always, you know us as transparent and clear communicators. And we wanted to make sure that today, we proactively provide you with key insights into those bumps in the road and how we are managing them. Still know that the fundamental strengths of Codexis are unwavering and will continue to enable us to deliver significant and sustained long-term growth, benefiting our customers and shareholders alike. Let's get into the results for the quarter, starting with slide 3. We are proud of our second quarter product revenue and first half of 2022 revenues overall. You can see this positive trend on the right-hand side of Slide 3, stemming from growth not only within pharma manufacturing, but also in other verticals like food and nutrition. With total year-over-year revenue growth of 51% for the quarter and year-over-year product revenue growth of 135%, we are executing on our goals to expand product adoption, ramp up commercialization and establish new offerings. In the second quarter, our base of customers generating significant revenue remained strong and wide with 18 customers who contributed over $100,000 in revenue, six of which contributed over $1 million in revenue. We'll provide an in-depth overview of each of our business segments shortly, but first, I am pleased to share our latest annual pipeline snapshot update. For the last seven years now in this August investor call, we have provided an update to our pipeline of programs and products across the company to provide insights into how we are executing on and expanding our growth opportunities. Today, we published this annual pipeline snapshot as of June 30, 2022. Let me take a moment to discuss a few of the most notable metrics in this year's update. As you will see on Slides 4 and 5, the total number of our pipeline programs again increased by over 20% to 94 from 78 last year. Both pipelines for Performance Enzymes and Biotherapeutics grew double digits annually to 70 and 24 programs, respectively. Importantly, five more performance enzymes were commercialized over the last 12 months. We now have 22 commercial enzyme products doubled from three years ago and up 29% versus last year. You will also note the step-out growth in programs we have been executing in the life science tool sector where we now boast 21 total pipeline programs, up 62% from 13 last year. We are also pleased with the advancements across our biotherapeutics pipeline shown on Slide 5, where we continue to gain momentum reflected by the addition of six new programs since last year's snapshot. Consistent with our existing business strategy, we are hard at work to advance and expand our pipeline of oral enzyme therapies and gene therapy assets. Our business model is designed to consistently accelerate the number of pipeline assets, driving the expansion of new programs in high-growth verticals and increasing our total number of shots on goal. As seen on Slide 6, we have steadily been doing just that across each focus area within our broader segments. As we continue trending in this direction, we look forward to advancing a growing proportion of these assets towards commercialization, while also working to increase the average program speed to market and peak revenue potential. Broken out by segment on Slide 7, the expansion trend becomes even more evident. The most salient points include the more than doubling of commercialized products within our Performance Enzyme pipeline and the significant increase in biotherapeutic programs over these last four years. It is gratifying to look back and show such significant and consistent growth in application of our CodeEvolver enzyme engineering platform over the years. This is exactly what we mean when we say that Codexis is enabling the promise of synthetic biology, bringing sustainability benefits and innovation to today's world. We believe Codexis is the only synthetic biology company currently delivering real benefits to today's markets. Before I hand the call to Ross to share details on the second quarter financial results, let me first provide some detailed updates across each of our businesses. Moving to Slide 8. Sustainable Manufacturing is where Codexis has differentiated itself as an established leader in engineering enzymes that reliably enable customers to overhaul manufacturing processes and increase efficiencies across an array of applications. Using our unique CodeEvolver platform, we are unrivaled in our ability to quickly discover and commercialize these high-value enzymes at scale to dramatically reduce the cost and increase the sustainability of manufacturing and products. With a diverse customer base spanning branded and generic drug companies, food and beverage providers and other industrial manufacturers, this market continues to represent a large majority of the company's revenues. Small molecule pharmaceutical processes have been and remain a core target for growing the sustainable manufacturing market for Codexis. As a result of our long-standing efforts to revolutionize pharma manufacturing by pioneering the use of enzymes in this space, Codexis has established the credibility and supply chain capacity to execute on key partnerships with some of the biggest players in pharma. We currently serve 21 of the 25 largest pharmaceutical companies in the world, helping them adopt and install novel Codexis enzymes for manufacturing their APIs. Through our work with industry powerhouses like Merck and Pfizer on JANUVIA and PAXLOVID, respectively, Codexis is becoming increasingly known for the quality and commercial scale of our enzymes and our ability to deliver meaningful cost savings, enhance sustainability and operational efficiencies for our customers. To that end, we recently announced that Codexis has entered into a multiyear agreement with Pfizer to supply an enzyme used in the manufacturing process for PAXLOVID. We are incredibly proud of our role in responding to the COVID-19 pandemic to date, and we are pleased that this opportunity allowed us to demonstrate our ability to rapidly fulfill orders at unprecedented scale and deliver significant cost savings to our customer. While the revenue opportunity that we are demonstrating from PAXLOVID in 2022 is not expected to continue in 2023. We view our contributions to support Pfizer as an important proof point that has not gone unnoticed by other pharmaceutical manufacturers. Nicely illustrating our growing commercial enzyme installed base and pharma manufacturing, we are pleased to report strong seven-digit sales to multiple additional customers during the second quarter, including Merck, Allergan, Kyorin and Urovant. In addition to the deep relationships we've cultivated with household pharma names, we are continually working to widen our scope with smaller biotech and generic companies. Here, we are pleased to update you on our excellent progress to get our enzymes installed in future generic Sitagliptin manufacturing processes. On top of our previously announced agreement with Almelo in India, we now have supply agreements in place with four other leading generic pharmaceutical manufacturers. More agreements are in the works, and we have supplied quantities of our enzymes to over two dozen other aspiring generic Sitagliptin companies. Note that Sitagliptin is the first of Codexis' pharma end products to approach its transition from the branded to generic stage. Our business model and patent positions enable us to sustain revenue through other future generic transitions as well. Importantly, the advantages offered by our engineered enzymes can extend far beyond the pharmaceutical manufacturing space. We are steadily growing in other industries and exciting new verticals, especially the food industry. With the shorter development time lines and lower regulatory hurdles found in these industries as compared to pharma manufacturing, they offer ample opportunity for us to capture additional market share and ensure that our enzymes reach the market more quickly. As mentioned previously, we are delighted with our results in the food sector with over $1 million in sales this quarter, led by enzyme sales to Tate & Lyle but also spreading nicely across other food and nutrition customers as well. We look forward to continuing to broaden our reach in the sector, both with existing and new customers. Let's now shift to life science tools on Slide 9. We first identified this area as a target market just a few years ago. Since then, we have been hard at work making inroads into this space as we demonstrate the potential for Codexis engineered enzymes to improve a widening range of life science and molecular biology applications such as next-generation sequencing, nucleic acid synthesis and more. This market is very attractive given its high growth, short commercialization cycles and above-average margin prospects and the fact that enzymes developed for life science tools applications can often be marketed to multiple customers. Today, the large majority of our revenues are generated from a growing list of bespoke enzyme R&D projects with specific partners. As we reported a few weeks ago, several of these life science customers have paused or slowed their project work with us in 2022, broadly due to a general increase in R&D cost consciousness in the space. That is leading us to reduce our prior $12 million life science tools revenue outlook for 2022 to similar levels as last year, or around $7 million. We view this lack of growth as a temporary situation and are highly confident to recover significant sector revenue growth in 2023 and beyond. As I shared in the pipeline snapshot review, the number of new programs in life science tools has been booming, nearly tripling in just the last two years. Those programs are poised to advance and expand boding well for future renewed step-out revenue growth in the sector. Plus, we are seeing growing traction for our slate of recently launched widely marketed products, including Codex HiFi DNA polymerase for use in next-generation sequencing, Codex HiCap RNA polymerase for use in messenger RNA manufacturing and Codex HiTemp Reverse Transcriptase for use in qPCR viral diagnostics. Each of the three enzymes is engineered to offer differentiated and highly beneficial performance attributes such as enhanced diagnostic fidelity, thermal stability, robustness, cycle time reductions and/or reduced waste generation. While these recently launched products are a minor contributor to today's sector revenues, we are pleased with these products' progress to date and continue to see each of these as substantial revenue generators in the future. Our HiFi DNA polymerase is tracking below plan so far this year as we have determined that modifying the product formulation would enhance NGS adoption rates. That reformulation is completed, and renewed customer trialing is now back in gear. On the flip side, we now have a growing list of customers buying our HiCap RNA polymerase for developmental stage messenger RNA manufacturing installations. And we are quite encouraged by the positive trial results that we have seen at multiple customers for the more recently launched HiTemp reverse transcriptase for qPCR viral detection applications. In addition, our partnerships with life science industry innovators continue to push the boundaries of how we can leverage the power of our CodeEvolver platform to deliver significant performance improvements and drive progress in this rapidly evolving market. As an example, Molecular Assemblies or MAI for short, and Codexis partnered in 2020 to engineer an enzyme to deliver differentiated and cost-effective solutions for the fully enzymatic synthesis of DNA. In April, we announced the successful completion of one of the most intensive enzyme engineering campaigns in Codexis' history. The resulting highly evolved version of TDT polymerase delivers unparalleled coupling efficiency and speed at elevated temperatures. This enzyme both enables and significantly differentiates MAI's fully enzymatic synthesis or SES technology from other emerging players as well as versus today's industry standard non-enzymatic DNA synthesis methods, allowing MAI to produce longer, highly pure sequence-specific DNA more quickly. On the heels of the exciting advancements on the scientific front with MAI, we just announced the execution of a commercial license and enzyme supply agreement with them. This transition from research to a commercial supply of our enzyme represents a critical inflection point on the path towards MAI's commercial launch anticipated in 2023. We are confident that once commercialized, the superior quality of this technology will enable MAI to penetrate the market and quickly become competitive with existing products. From a Codexis perspective, we are now generating modest enzyme product revenues from MAI. We note that we also have the opportunity to generate milestone revenues as well as royalties on their product sales as a result of this agreement. And as MAI's second largest shareholder, we are excited about the potential value of our equity investment as they commercialize into the $1 billion plus and fast-growing DNA synthesis market starting next year. Our second strategic investment is with seqWell, a developer of transformative library preparation products for various genomics and NGS applications. Much like our partnership with MAI, CodeEvolver enzyme engineering can enhance seqWell's product offerings, and we look forward to reporting on the progress of this recently established partnership over time. Let me shift now to take a few minutes to highlight our progress building a biotherapeutic pipeline leveraging our CodeEvolver platform. Here, we are focused on discovering and advancing unique patentable oral biologic and gene therapy candidates for a widening range of human health disease challenges. No other synthetic biology company possesses such an extensive biotherapeutic discovery and development capability, and we are highly confident in Codexis' ability to capitalize on our biotherapeutic pipeline investments. The majority of our most advanced programs are supported by growing partnerships with Nestle Health Science and Takeda. These partnerships are structured to help us de-risk, learn, cover costs and generate revenues. In addition, as we've developed more proof of relevance from our CodeEvolver platform as a drug discovery engine, we have been increasingly investing over the last few years in our own self-funded pipeline assets to enable us to retain more value from our successes in this arena. As we shared in the pipeline snapshot update, over the last year, we have added six self-funded biotherapeutic programs in pursuit of this goal. While we are optimistic across our 15 current self-funded preclinical programs, we are shifting our focus in favor of partnering necessitated by the current capital markets environment. Given the heavy resource investment required to advance biotherapeutic assets, we are also cognizant of the need to prioritize programs that demonstrate the most potential, something we will continue to bet on as our pipeline matures. These early assets and our growing reputation as a uniquely capable drug discoverer set us up well to partner, monetize assets and control costs versus our earlier higher investment strategy. Stay tuned for us to share updates on this over the coming quarters. Shifting to specific program updates. Let me start with CDX-7108, co-owned with Nestle Health Science for the treatment of exocrine pancreatic insufficiency, or EPI, currently in a Phase 1 trial. CDX-7108 is an orally administered GI active lipase that was precisely engineered to be highly stable to the acidic conditions in the stomach, which is a key challenge for today's industry standard billion-dollar-plus pancreatic enzyme replacement therapies. We are pleased to report that the partnership has completed the first two stages of the Phase 1 trial in healthy volunteers without adverse events. As the next step of the Phase 1 trial, we have begun dosing patients and expect to share the complete study results early in the New Year. In parallel, we are currently making excellent progress on IND-enabling work for CDX-6512 for homocystinuria. Very encouraging in vivo efficacy results have been generated in the relevant mouse model and in nonhuman primate preclinical studies. The drug substance manufacturing process is being tech transferred to our CMO partner, who will begin GMP manufacturing later in the year. In addition, we remain on track to advance two additional developmental candidates into IND-enabling stage in 2022. One of those co-owned products is with Nestle Health Science, an oral biologic targeting an undisclosed GI disorder. That has been delayed on its initiation of IND-enabling work versus our early '22 expectations, resulting in a low single-digit million dollar reduction in our expected R&D revenues from this program this year. Alongside our pipeline of oral biologics, we are leveraging CodeEvolver to enable more effective next-generation gene therapy candidates. As previously shared, we have handed off our lead CodeEvolver engineered transgene candidates for three of the four programs to Takeda. We are extremely pleased with the momentum on this front as Takeda advances each of these through their gene therapy preclinical evaluations. Codexis also presented preclinical data at the American Society of Gene and Cell Therapy 25th Annual Meeting in May. Here, we highlighted enzyme variants engineered with our CodeEvolver platform to offer potentially improved efficacy as compared to current enzymes when administered as transgenes and gene therapies for Fabry disease, Pompe disease and hemophilia A. We view our participation in this meeting as encouraging validation of our gene therapy efforts, and we look forward to further establishing ourselves as an innovator in the space. Now I'd like to hand the call over to Ross to take you through our financial results in more detail.

Thanks, John, and good afternoon, everyone. Let me dive into our second quarter 2022 financial results, which are summarized on Slide 11. Total revenues for the second quarter of 2022 were $38.4 million, an increase of 51% from the prior-year period. On a segment basis, $36.5 million in revenue was from the Performance Enzymes segment and $1.9 million was from Biotherapeutics. This compares to $21.6 million and $3.9 million for the Performance Enzymes and Biotherapeutics, respectively, for the prior-year period. Product revenues for the second quarter of 2022 were $34.6 million compared to $14.7 million in the second quarter of 2021. The increase was largely due to higher enzyme sales to Pfizer for PAXLOVID as well as strong sales to other key pharma manufacturing customers. R&D revenues were $3.8 million compared to $10.7 million last year. The decrease was driven by a mix of fewer new deals being signed in 2022 and lower-than-anticipated revenue from existing customers. Product gross margin for the second quarter of 2022 was 67% compared to 71% in the second quarter of 2021. The change was largely driven by changes in product mix, variations in prices for volume sold, namely for enzyme related to PAXLOVID and higher shipping costs. Turning to operating expenses. Our R&D expenses for the second quarter of 2022 were $19.1 million compared to $12.8 million in the second quarter of 2021. The increase was primarily driven by increases in costs associated with higher headcount and salaries as well as higher expenses for facilities, lab supplies and outside services. SG&A expenses for the second quarter of 2022 were $10.7 million compared to $12.8 million in the second quarter of 2021. The decrease was primarily driven by a decrease in legal fees, mostly due to the settlement of a trademark dispute and lower allocable expenses, partially offset by an increase in costs associated with higher headcount and higher outside services. The net loss for the second quarter of 2022 was $2.6 million or $0.04 per share compared to a loss of $4.3 million or $0.07 per share for the second quarter of 2021. As of June 30, 2022, the company had $90.1 million in cash and cash equivalents, not including the $25.9 million retainer fee payment from Pfizer. Also, we have not drawn any funds from our $50 million ATM equity facility that we put in place in May of last year. I would like to spend a moment breaking down our financial results by segment outlined on slide 12. Revenue in our Performance Enzymes business increased 69% to $36.5 million in the second quarter of 2022. Before the allocation of corporate overhead expense, operating income for this segment was $14.5 million in the second quarter for an operating profit margin of 40%. In our Biotherapeutics business, revenue was $1.9 million, and we generated an operating loss of $9.9 million, again, before the allocation of corporate overhead expenses. Our operating losses in this business increased year-over-year as we have continued to grow and advance our self-funded programs. Moving to Slide 13. As you know, we updated our 2022 financial guidance on July 14, and we are reiterating those expectations today. We expect full-year 2022 total revenues to be in the range of $135 million to $141 million. Product revenues are expected to be in the range of $112 million to $118 million, which is the same range that we originally provided in February. This includes approximately $75 million in revenue from Pfizer. As you may recall, when we originally provided our revenue guidance for 2022, we were anticipating $75 million to $80 million of revenue from Pfizer. While we now expect Pfizer revenue to be at the low end of this range, we expect to offset this with the strength that we are seeing in product sales from other customers. We expect R&D revenues will be in the range of $20 million to $25 million, down from approximately $40 million that was implied by our original revenue guidance for the year. This reduction is the result of multiple factors, including some anticipated new partnerships not being signed within the timelines we expected, in part due to the macroeconomic backdrop as well as lower-than-expected revenues from existing partnerships due to delays in some project timelines. The softness in R&D revenue is across both our Performance Enzymes and Biotherapeutics segments. Gross margin on product revenue is expected to be in the range of 65% to 70%, consistent with prior guidance. Excluding any one-time non-cash charges that may arise from our CEO transition, we anticipate R&D and SG&A expenses combined will be in a range of $136 million to $140 million for the full-year. This forecast range is down from the $150 million expectation that we described on our fourth quarter earnings call back in February, demonstrating that the expense mitigation efforts we implemented are having an impact. Also, in line with our business strategy, we are continually evaluating opportunities to partner our programs and share the financial risk of development with some of our self-funded programs, particularly within our biotherapeutics business. Regarding cash, we anticipate that our cash flow should be positive in the second half of this year due to the $25 million payment from Pfizer. We expect that our existing cash and cash equivalents, combined with our future expectations for product revenues, R&D revenues and expense management will be sufficient to fund our planned operations through the end of 2024. And now I'll turn the call back to John.

Thanks, Ross. As we near the end of our prepared remarks, I'd like to reiterate our 2022 corporate goals and catalysts, as outlined on Slide 14. In Sustainable Manufacturing, the headline over the past year has been our execution of exceptionally high-volume enzyme sales to Pfizer for their manufacture of PAXLOVID. In parallel, we are driving widened adoption and product commercializations with other pharma manufacturing customers, and we are encouraged by the accelerated uptake we are seeing in the food and industrial verticals as well. With that in mind, we are well positioned to continue to drive double-digit growth for our non-Pfizer product sales in the coming quarters as we continue to strengthen the diversity of Codexis' business. In life science tools, we are focused on driving increased adoption and product sales for our three commercial enzymes, advancing and adding to our R&D partnerships and building long-term value from our synergistic inorganic investments with Molecular Assemblies and seqWell. Finally, we're advancing and monetizing our pipeline of high-value assets and partnerships in Biotherapeutics. We look forward to reporting data from the Phase 1 clinical trial of CDX-7108 early next year as well as our continued progress to bring an increasing number of partnered and self-funded assets successfully into early clinical development stage over time. In closing, I am sure you have read a few weeks ago that I am stepping down as President and CEO of Codexis in the coming days for family reasons. My wife, Marcy has suffered from a debilitating post-viral infectious disorder for decades now. And after 30-plus years of her supporting my demanding and deeply gratifying career, it's time for me to focus the majority of my attention on her health. Second only to my family, my involvement in Codexis has been the most rewarding endeavor of my life and the capstone of my 35-year career. I am incredibly proud to have had the opportunity to lead Codexis over this past decade. Codexis is stronger and better positioned than ever with an incredibly talented team in place, I am grateful to the entire Codexis team for their dedication, hard work and collaborative spirit and for helping us become such an exciting company to work for and with. We are only seeing the beginning of the long-term benefits that Codexis, its team and technology can bring to our world. Our future is in excellent hands with Dr. Stephen Dilly. I've been thrilled to get to know Stephen as a member of Codexis' Board over these past two years. He is a proven leader with a successful two-time CEO track record among many other significant accomplishments. He is uniquely poised to hit the ground running for Codexis, and I look forward to supporting Codexis' ongoing success as a continuing member of the Board and as a strategic advisor over the next few years. Now I'll turn the call over to Stephen to say a few words.

Good afternoon, everyone. First, I want to thank John for his leadership over the past decade. I look forward to building upon the strong foundation that he's laid. I know many of you are probably curious about my plans for Codexis' future. I plan to spend my initial months learning the core business from the inside as I continue formulating my broader vision for Codexis. As a Board member over the past two years, I'm coming into this role, having participated actively in the company's recent strategic decisions, so you can expect continuity near-term. I'm honored that the board selected me for this role and look forward to getting to know each of you in the months ahead. Back to you, John.

Thank you, Stephen. I have no doubt that the business will continue to flourish under your capable leadership. Now we'd be happy to take your questions. Operator?

Thank you. We will now be conducting a question-and-answer session. Our first question comes from the line of Brandon Couillard with Jefferies. Please proceed with your questions.

Thanks. This is Matt on for Brandon. And John, I just want to send you my best. It's been a pleasure working with you over the years. Maybe first one first, Stephen, I appreciate the comments there. Can you just talk about kind of high level, what attracted you to see that as the CEO knowing you've been on the board here for a few years? And then curious to get just some of your initial thoughts around what you see as some of the most exciting areas of the portfolio today. And then also your familiarity with the biotherapeutics pipeline and kind of philosophically how you're thinking about areas of that area of the business versus the product side? Thanks.

Yes, thanks. First of all, I'd actually say this is my fifth CEO role. So I'm a bit of a glutton for punishment. So it was really when John and I started talking about Codexis and his personal circumstances, I really did wish I could do something about it. And serendipity just played into our hands that allowed me to step in. And what was really exciting was looking at this core technology CodeEvolver at all the different ways that it can play out to add value. And as you commented, one of the areas that I'm most familiar with is the Biotherapeutics pipeline, which I think is significantly underappreciated but also the ability to get into different parts of the value chain, for instance, pharmaceutical manufacturing. And when you look at an opportunity like this, the big question to ask is, how can I help? How is Dilly the right person to put into this role? And I think that partly it's because I've become familiar with the company as a Board member, and I'm in a good position to maintain some continuity. But also I'm a bit complementary in my skill sets. I'm much more thinking from a market focus. I'm much more thinking about the drug product at the end of the process rather than the enzyme at the start of the process. So I think there's a lot of ways that the mind meld, and thank goodness, John's going to be around as an advisor through at least the medium-term future. We can really synergistically add value. So I couldn't be more excited than I am right now.

Thanks. That's helpful. And then on the pipeline, another nice year, growth year on the commercial side adding five products versus last year. Can you just talk a little bit about where some of those newer programs are in their ramps? Are they all contributing meaningful revenues to Codexis today and kind of where those could go over the next year or two? Thank you.

Yes, thank you, Matt. This is John. I appreciate your kind words at the start. The momentum in our pipeline remains very promising for Codexis. We have seen over 20% growth in the number of pipeline assets, which are well distributed across the various sectors we are developing. Many of these commercial products, with 22 in total, are still in the early stages of market adoption, particularly in the food and life sciences sectors. Looking back four years at our pipeline snapshot, we had only one commercial product in the food sector, and now we have three. In life sciences, we started with no commercialized products and now have five. These products are still in the early phases of commercial adoption, indicating significant opportunities for revenue growth, especially in emerging markets like food and life sciences. It's also encouraging to see the continued success we are achieving from our pharmaceutical manufacturing pipeline. Four years ago, we only had two commercialized products, namely JANUVIA and one other in the patented space. Our business development efforts have primarily focused on integrating Codexis enzymes into clinical stage programs. At that time, we had 14 Phase 2 and Phase 3 installations, and out of those, seven have successfully transitioned into commercial products, which is noteworthy given that many Phase 2 and Phase 3 programs do not move on to FDA approval. It’s exciting to see the growth from what were just three commercial products in these sectors to now 17, not counting the generic space. Things are progressing well, and we have considerable potential for revenue growth from these relatively newly commercialized installations.

Super, I will leave it there. Thank you.

Thanks, Matt.

Thank you. Our next question comes from the line of Steven Mah with Cowen. Please proceed with your questions.

Great, thanks for the questions. And a warm welcome to Stephen and John, best wishes to you and your family.

Thanks from both of us.

All right, two questions on the Life Science tools enzyme business. One, can you update us on the Roche T4 DNA-Ligase license agreement? And the second part, can you give us any color on the size of the Molecular Assemblies milestone payment, expected demand from Molecular Assemblies and remind us of the margin profile of this optimized TdT enzyme. And the reason I ask that is that given that it was such a tour to force to engineer the TdT enzyme or margins or are you going to be charging more because of that versus other life science tools enzymes?

Yes, Cole, that's a great question. Regarding your first inquiry about our collaboration with Roche and the T4 DNA ligase for next-generation sequencing library preparation, we transferred this technology to Roche several years ago. During the pandemic, they have been developing their ability to produce the enzyme in-house and integrating it into next-generation library prep kits. They have been focused on getting their products ready with our T4 DNA ligase. There isn't much new information to share, but I want to remind everyone that since Roche can now manufacture the enzyme, our revenue will come in the form of royalties from their product sales rather than from our own. We look forward to seeing further advancements as Roche continues to enhance their library prep with our DNA ligase. Thank you for your question about the Molecular Assemblies partnership. We are very excited about the progress we've made together. Recently, we announced that we have achieved another important milestone that will enable Molecular Assemblies to commercially launch their oligonucleotide and gene synthesis offerings, which they expect to do next year. We have finalized how we supply the enzyme, and to be concise, we anticipate at least a typical gross margin on those product sales, potentially even higher. We must be mindful about pricing so it doesn't impact their production costs negatively, which could hinder their commercialization efforts. We've agreed on a solid pricing model for supplying the enzyme, ensuring it's fair. Additionally, the agreement allows us to earn modest low single-digit royalties on their product sales, and as the second largest shareholder, we’re positioned to benefit from their future successes, which we are optimistic about and committed to supporting. I appreciate your mention of our effort to create the best TdT enzyme, which they now have exclusive access to under our agreement, enhancing their competitive edge. Overall, these are promising developments, and we look forward to sharing their progress in due course, as will they.

Got it. And then any color on the milestone payments from Molecular Assemblies like the timing of revenue recognition of that and magnitude?

The milestones opportunities I mentioned in my prepared remarks are potential future milestones. We will wait to share this news as it becomes available. I think Ross can provide insights on any milestone R&D revenue generated from the completion of this commercial supply agreement.

Yes, Steve, it's Ross. Yes, you may see us record one milestone here in the back half of the year that might be in the neighborhood of seven digits, but we'll report on that later.

Okay. I appreciate it. And then my last question, it's going to be on PAXLOVID. I listened to the Pfizer earnings call, and they called out that they improved the manufacturing process for PAXLOVID reducing the lead time, improving the yield. So they don't need as much API to produce the same amount of finished goods. My question is, was this the reason that they pulled back on the PAXLOVID manufacturing enzyme orders? And are you a victim of your own success in optimizing enzymes so well? And could this potentially happen with any of your existing or future API manufacturing partners? I'm thinking about JANUVIA or the generic Sitagliptin players you're talking to. How should we think about any sort of risk around that, if any.

Yes, I'll jump in. We can't speak for Pfizer. We noticed in their transcript that when asked about our enzyme agreement, their response primarily focused on API manufacturing, not on enzymes. I encourage you to pay close attention to the phrasing they used in their answer. However, we're not a victim of our own success here because we didn't develop this enzyme. It was an enzyme readily available that we provided to them early in their development phase. Ultimately, as you know, our enzyme became a part of their manufacturing process, which has resulted in the significant sales we are generating this year. I believe that addresses your questions.

Yes, okay. Yes, thanks for clarifying that. Okay, thanks. I don't have anything else.

Okay, thanks Steve.

Thank you. Our next question comes from the line of Matt Hewitt with Craig-Hallum. Please proceed with your questions.

Good afternoon. And just to reiterate what the others have said. John, it's been a pleasure working with you the last few years, and welcome, Stephen. We look forward to working with you as well. Maybe first up, given the current inflationary environment, the success that you've had with Pfizer and others, I'm just curious if you're seeing more interest, more demand for your enzymes as a result, because of the cost reductions that you can make and bringing products to market faster through your enzymes?

Yes, we continue to achieve significant success in sales related to the adoption of our manufacturing processes. Inflationary pressures have certainly increased our customers' focus on supply chain efficiencies, and enzymes serve as a valuable tool for cost reduction, often incrementally. Additionally, our collaboration with Pfizer on PAXLOVID has demonstrated how rapidly and substantially Codexis' technology and products can deliver value, and this has not gone unnoticed in the industry. Furthermore, we are not only maintaining our relationships with major pharmaceutical companies but are also extending our outreach to smaller biotech firms to illustrate the benefits enzymes can provide in their manufacturing processes. This strategy is beginning to yield positive results. Achieving these sales successes takes time, but we anticipate continued growth in both the medium and long term as we capitalize on these opportunities.

Got it. And then regarding the partnering kind of the shift that you talked about with your internal candidates, maybe shifting more towards partnering a little bit earlier. Is that something that you anticipate happening here in the back half of the year? Or is it a function of kind of needing to build up the interested parties, and so it's more of a '23 event?

Yes, I believe that it requires some time. Our R&D revenues for the first half were slightly over $8 million, and Ross mentioned our forecast for the full year is between $20 million and $25 million. We expect to see an increase in the second half compared to the first half. As we adapted our strategies earlier this year due to changes in the macroeconomic and capital market landscape, we've been aligning our resources to foster company growth. We anticipate that the significant R&D revenue will start to materialize more next year rather than in the short term over the next five months. We aim to elevate our R&D revenues from this year's position. A crucial priority for us is to improve our outlook for 2023, and we expect to achieve substantial year-on-year growth in R&D revenues. Additionally, there is strong momentum in our product sales, excluding Pfizer, which is encouraging. We're progressing towards double-digit sales growth, increasing from about 36 excluding Pfizer last year to potentially 40 or more by the end of this year. Before the Pfizer opportunity emerged, we had a five-year compounded growth rate in product sales of 22%. We’ve highlighted the positive developments in our pipeline and recently introduced several new commercial products over the past few years, which are still early in their revenue generation stages. We're optimistic about these growth drivers for 2023 and the future, which supports our ongoing efforts for medium and long-term growth as a company.

That's great. And if I could sneak one more in regarding Molecular Assemblies. You guys have been fairly public as far as your relationship and you buying in, your ownership of the company. And I'm curious if you have started to develop a pipeline of potential candidates, has Molecular Assemblies had customers reaching out even before this contract was formalized, wanting to be first movers to use the product as it became available?

Yes, yes and that's actually a key component of Molecular Assemblies as press releases recently, also highlighted in the press release that we co-issued earlier this week. They're putting forward now that they are finalizing their pilot manufacturing capabilities, they're putting forward what they call, I think, the key customer campaign to tap into the early interest from many different parties in many different DNA synthesis marketplaces. So that's really the key focus for them is to validate with real customers, their ability to generate longer strands of high-quality DNA quicker than traditional approaches.

Got it, thank you.

Thank you, Matt.

Thank you. Our final question will come from the line of R.K with H.C. Wainwright. Please proceed with your questions.

Thank you. John, it's been a great pleasure and also really appreciate how you've grown Codexis from where it was, I believe, about six years ago when I first met you at the 2015 JPM. Good luck. And I very much hope and wish your wife and yourself good health.

Thank you.

Welcome aboard, Stephen. So I have a couple of quick questions. One is on the relationship that you have been building with some of these generic companies that are planning to manufacture Sitagliptin. When it's said and done, would the revenue run rate be similar to what you have been achieving with the branded JANUVIA?

Yes, do you want to take one at a time, R.K.? Do you want to add to that question?

Okay, I want to ask about Tate & Lyle. I'm trying to understand if our relationship will deepen beyond just the Stevia that we’ve had for a while now.

Yes, let me address those points one by one. We've provided a strong qualitative update on our progress in integrating our enzymes into generic Sitagliptin processes. Currently, the market is still under Merck's exclusive control globally, which positions several generic companies to eventually enter what will become a significant generic market. We announced last year that we formed a generic partnership with an Indian company named Almelo, which has been progressing well. Today, we also announced that we have established four additional supply agreements with other leading generic companies. These are significant agreements that we have put in place so far, and we've seen a lot of sampling activity. Consequently, we anticipate more agreements with other generic companies as we work towards getting our enzymes integrated into the emerging generic market, which is very promising. This development is crucial for us to maintain or potentially grow our sales in that generic sector compared to our current performance with Merck. At this moment, we cannot specify what kind of revenue run rate we will achieve with generic companies in comparison to Merck; we'll need to wait for the generic market to fully develop in the near future. Our partnership with Tate & Lyle has been exceptional. We have one of our commercial enzymes being used in the production of a better-tasting Stevia product that Tate & Lyle has launched, which is gaining traction and they are purchasing more of our enzyme. Additionally, we have a commercial enzyme involved in another of Tate & Lyle's newly launched sweeteners called DOLCIA PRIMA, which is a more bulky, low-calorie sweetener that is also seeing growth. Both of these enzyme applications with Tate & Lyle are performing well, and we continue to demonstrate quarter-over-quarter revenue growth with them and in the wider food sector. Given our success with Tate & Lyle, we are engaging in ongoing discussions and I am optimistic that we can highlight further commercial advancements beyond these two products with them over time.

Thank you. Thank you for taking the questions and good luck.

Thank you too, R.K.

Thank you. We have reached the end of our question-and-answer session. I'll now turn the call back over to John Nicols for any closing remarks.

Yes, thank you, everybody again, for joining us today. We look forward to continuing to update you on our progress, as Stephen takes the helm of the company. Have a great evening.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.