Codexis, Inc. Q2 FY2025 Earnings Call

Welcome to the Codexis Second Quarter 2025 Earnings Conference Call. This event is being recorded. I will now hand over the call to Georgia Erbez, Chief Financial Officer. Please proceed.

Thank you, operator. With me today are Dr. Stephen Dilly, Codexis Chairman and Chief Executive Officer; and Kevin Norrett, Chief Operating Officer. During this call, we 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 2025 revenue, anticipated milestones, including product launches, pilot scale manufacturing and path to scale up, technical milestones and public announcements related thereto as well as our strategies and prospects for revenue growth, path to profitability 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 our beliefs and expectations as of the statement date, August 13, 2025. 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 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, except as required by law. And now I'll turn the call over to Stephen.

Thank you, Georgia, and thanks, everyone, for joining. Our second quarter results are strong and demonstrate our ability to run an effective business. We've maintained a solid cash balance, operating margins are significantly improved. Our revenue is above consensus and our operating loss is half compared to Q2 2024. Given this trajectory, it is clear that the objective of cash flow breakeven by the end of 2026 is attainable. However, given the strong interest in the ECO Synthesis platform with more than 30 ongoing customer engagements, we're considering that this may not necessarily be the best way to create stockholder value. It is apparent that demand for ECO will rapidly exceed our ability to supply, starting in the ECO lab and then moving to GMP production. Therefore, we're exploring options that would expand our bandwidth to support early projects now and investing in the future to maximize the return from the ECO platform. The clearest path to creating value over the longer term is to lock in as many early phase products as we can onto the ECO platform. As they mature into late-phase assets and commercial drugs, the return on investment becomes compelling, particularly if we remain the direct source of siRNA for as long as possible. To share a bit more, let me pass it over to Kevin.

Thanks, Stephen. Moving to Slide 3. We are pleased with recent progress across each of our core businesses, and we remain on track for the key milestones we mentioned during TIDES U.S. earlier this year. Before sharing updates on our ECO Synthesis platform, let me start with our strong Q2 revenue, which was driven by increasing orders for enzymes supporting late-phase and commercialized APIs within the Pharma Biocatalysis business. Codexis remains the gold standard in enzyme engineering. Customers continue to bring us their most challenging small molecule manufacturing problems because we have a proven track record of delivering high-quality enzymes that address each client's specific needs. That credibility has fueled the expansion of our early biocatalysis engagements with some recent wins within the large pharma segment. As we have mentioned before, our commercial focus has been on generating these new programs, but they take time to grow into meaningful revenue streams. However, they provide the basis for future revenue growth as they move through clinical trials and towards commercialization. Shifting to our ECO Synthesis platform, customer engagement is progressing nicely. At the TIDES U.S. meeting earlier this year, enzymatic manufacturing solutions were a central focus and 3 of our CDMO collaborators featured the ECO platform in their own presentations. That meeting also made it clear that ligation, otherwise known as the chemo-enzymatic route, is rapidly becoming the new standard in siRNA manufacturing. As a result, we are extremely focused on winning new ligase customers with our machine learning capabilities and expansive ligase library. Some of our newest customers came to Codexis after they were not able to achieve desired performance from competitor and wild-type ligases. We continue to believe ligase performance makes a fundamental difference in the productivity and cost of a manufacturing process, and we are seeing indications that our customers are recognizing this, too. As I mentioned before, we expect to add several new ligase customers before the end of the year. Finally, we continue to believe that our ligase business creates the bridge to our full ECO platform. We have also continued to fill our sales funnel with new potential ECO innovation lab customers. We have signed another new contract with TIDES U.S., and we expect to bring additional customers on board before the end of the year. These proof-of-concept projects with process development and material scale-up allow us to show customers that we can develop a reproducible, scalable process for their assets before they commit to our process for GLP material for tox studies and future GMP material for their clinical trials. As we've said before, another critical element of securing long-term customer buy-in is to have a credible path to GMP-grade material. Our CDMO partnering strategy provides one option, but establishing a Codexis-owned GMP facility offers a few key benefits. First, it will dramatically improve our ability to create a seamless scale-up process before tech transfer to a customer's chosen CDMO. Second, this facility enables us to service small and medium-sized drug innovators, allowing them to stay with Codexis for the long term with supply of GMP-grade material for their Phase I and II clinical trials. As you can tell, our ECO Synthesis business is lifting off. Our focus is on translating our exciting commercial momentum into meaningful revenue, and we look forward to a busy second half of the year. With that, I will now turn the call over to Georgia for a discussion of our financial results.

Thanks, Kevin. Good afternoon, everyone. Starting on Slide 4, I will provide a brief overview of our financial results here on the call and invite you to review our 10-Q filed today for a more detailed discussion. Total revenue for the second quarter ended June 30, 2025, was $15.3 million compared to $8 million in the second quarter of 2024. The increase was primarily due to variability in Pharma Biocatalysis customers' manufacturing schedules and a clinical trial progression, further demonstrating the trends we've seen of order size and timing having a significant effect on revenue. As we begin the second half of the year, it's important to note that we will continue to see some lumpiness in our quarter-to-quarter revenue due to the inherent unpredictability of our Heritage business. This will be mitigated over time as ECO revenues begin to grow. But for the next few years, we anticipate a hybrid dynamic while Pharma Biocatalysis remains a significant percentage of our base business. Product gross margin was 72% for the second quarter of 2025. This was up from 45% in Q2 2024, largely due to shifts in sales to more profitable products and declines in less profitable legacy products. While this is a significant increase quarter-to-quarter, we do not anticipate this magnitude of change to be sustained over the entire year. We continue to push for efficiencies in our manufacturing practices and expect gross margins to improve for the entire year compared to 2024. Turning to operating expenses. Research and development expenses for the second quarter of 2025 were $13.8 million compared to $11.4 million last year. The increase was largely driven by costs associated with higher headcount as well as the internal reclassification of certain employees to the research and development function. Selling, general and administrative expenses were $12.39 million compared to $15.7 million in the second quarter of 2024. The decrease was primarily due to lower stock-based compensation expense, lower legal expense and reduced use of outside services. As ECO revenues begin to materialize, we are conscious of our burn rate and remain focused on carefully managing expenses. We are fortunate to be in a strong cash position, and we are making the most of that by streamlining our business practices and thoughtfully balancing our resource allocation. The net loss for the second quarter of 2025 was $13.3 million compared to $23.8 million for the second quarter of 2024. Finally, based on our current operating plan, we are reiterating our 2025 guidance. As a reminder, we guided to a range of $64 million to $68 million for 2025. We ended the quarter in a strong cash position with $66.3 million in cash, cash equivalents and investments, which we expect will be sufficient to fund our planned operations through the first quarter of 2027. With that, we'll be happy to take your questions.

Our first question comes from Matt Stanton with Jefferies.

Maybe just to start off on the pipeline. If I go back to May at TIDES, I think it was over 20. Now you're talking about well over 30. I think the deck had 34 specifically. So can you just help level-set us? I assume these are at various stages of discussions. So maybe bucket them out a bit in terms of where they are in the funnel. And then any more color you can provide on the May over 20 to now over 30 coming at TIDES, just mix between Biopharma originators or CDMOs, maybe even on a geographic basis, just a bit more flavor on some of those incremental opportunities coming into the pipeline from there.

Kevin, that's an interesting one for you.

No, super exciting to say that we have well over 30 discussions going on. I think that number might even be a little bit higher growing into the 40s as we speak today. Particularly, it's a mix of CDMOs, large drug innovators, and small stealth biotech and medium-sized biotechs. It's really hard to point to any one single customer segment. I think the other thing in terms of where they are in various stages, I think I mentioned that we signed another potential customer. We signed another customer since the last time we spoke, and we expect to sign several new ligase customers before the end of the year. We're very much on track for both of those metrics. But they are at various stages of discussion, and we're super excited about the progress we've seen so far.

Yes. And the great thing about this breadth of pipeline is we can't hope to service all of them. So we can start to choose and select and say where are the places where we can get the most traction, which are the ones that look most interesting to us, and that's really driving our strategy.

And Steve, maybe sticking with you, just can you talk about in terms of process development projects entering the ECO innovation lab, any more color in terms of those customer programs? I know it's very early days, but how that's maybe tracking versus plan, if there's any way to kind of talk about where utilization of the ECO lab is today or where it could be by the end of the year? And then maybe the second part of that question, just you talked about in your prepared remarks around kind of exploring options for additional capacity. I guess maybe just any more color in terms of what those options are that you're considering? And any update on timing of when we could learn more about that? It sounds like the demand is far outseeing supply. So it sounds like maybe we'll get an update sooner rather than later given that reason, but would just love any more color in terms of the options and the timing around those things.

Yes. So great question. The thing that we are really excited about is recruiting and locking in early phase projects where they start out of the gate as ECO projects and they remain ECO projects all the way through development and commercialization. The obvious challenge with that is it takes a while, and there will be attrition. But the good news is it's actually relatively cheap for us to scale that early phase support. And so the very current conversation here within Codexis is how we set up ECO Lab #2 because we had a certain capacity for ECO Lab #1, and it's very easy to service that early part of the funnel. What we're also finding is that the performance of our platform is very, very good, and we're super pleased with the scalability and what we call the volumetric efficiency, which means we can do more with a smaller footprint. And so we're actually rebuilding our models with aspirations to go a lot further ourselves and control the value that way.

Okay, that's helpful. Maybe if I could ask one more question regarding the guidance. I know you've mentioned some variability, but can you provide more details on the timing? Will the third quarter show an increase compared to the second quarter? I understand the fourth quarter usually sees strong seasonal performance, but any additional insights on the pacing and overall visibility would be appreciated, especially considering the significant jump from the first half with revenues in the low $20 million range to the low to mid-$40 million range in the second half.

We still anticipate steady growth in our core business. Our guidance remains unchanged from earlier in the year. We expect most of the growth to derive from our ligase and ECO Synthesis sectors in the latter half of the year. Based on our ongoing discussions and negotiations, that is where we foresee growth occurring. Additionally, the average guidance from analysts is within a reasonable range.

Our next question comes from the line of Allison Bratzel with Piper Sandler.

Really a follow-up to some of the last questions. I just wanted to drill down on some of your commentary that you're exploring options to expand the bandwidth to maximize return on the ECO platform. I guess, could you just expand on how that changes. The near-term steps you plan to take in building out ECO Synthesis? And also just where does the path to GMP come into play? You have optionality via CDMO partnership versus building out your own GMP capabilities. Could you just talk to the relationship there? And then maybe separately, just kind of a back to basics question, but one I've been getting from investors is, could you just remind us of your IP position around ECO Synthesis, the platform? What does that look like? And just can you talk to the overall competitive moat you have there around the platform?

Sure. Our focus is on optimizing our existing capacity and determining where further expansion is needed. Kevin and his team are effectively utilizing the ligase platform's capacity while also developing a pipeline of early opportunities. We aim to enhance capacity particularly for early opportunities that can benefit from sequential synthesis using the ECO platform. We're looking for companies with strong potential for success, which have clearly defined clinical strategies, access to funding, and significant market opportunities. We have a specific selection criteria for potential partners. In terms of the route to GMP, our initial step is to provide high-quality and well-controlled materials for testing, transitioning to GLP-grade materials available from our ECO Innovation Lab. Eventually, they will require GMP materials after about a year, and we are capable of managing this timeline ourselves. We're actively engaging with regulators and assessing our facilities and others that could meet our needs. Regarding our intellectual property, we have a robust portfolio related to enzymes and processes. However, we recognize the importance of trade secrets and expertise in maintaining our long-term competitive advantage and being a desirable partner. I believe we operate more in a high-tech context than in traditional biotech, as we are building a platform that necessitates careful consideration of these factors. Our IP strategy includes keeping certain key elements proprietary, which supports our goal of maintaining greater control and flexibility over the long term. Ultimately, we want to ensure that when our technology is ready for market, we are an attractive partner and that there are fewer incentives for others to circumvent us. This summarizes our approach.

Our next question comes from the line of Kristen Kluska with Cantor Fitzgerald.

Congrats on the quarter and the clear level of interest that you're getting here. A couple of questions for me. First, how should we be correlating this strategy to go for some of the earlier stage and work with them for the long term from a revenue perspective? Is it that more initial shots on goal could lead to more future revenues even if hypothetically like 30%, 40% of these drugs end up being something meaningful? And then how should we also be thinking about the pace to collecting revenues, especially if there's a lot more companies upfront?

Great. So it is absolutely locking in a large number to get a slightly smaller number at the other end, hitting when the supply becomes important. And in that is as we move to be the direct supplier of the siRNA, we remove a lot of complexity out of the equation like how you make money from reagents and raw materials and all that kind of stuff through to saying, no, we're going to be competing based on the quality, the timeliness, and the cost of the material that we supply direct to the customer. Now what you also have to realize is in the early stages, we are asking often small companies to trust us with their baby, and we have to make that something that they can do easily. Some of that is by partnering with them very well, offering them reliability of supply, all those good stuff being able to point to how we're going to make the GLP and the GMP material, but managing their costs early on. And so it definitely is something about being less emphasizing the early revenues and really driving for a valuable market going forward as these assets mature. Now in order to pay for that, we have to drive revenues in the shorter term. And that's where the ligase strategy where increasingly, we are being validated in our assertion that we have a world-beating ligase portfolio in customers coming to us that have tried others and didn't like them and come back to us. And our access to big late-phase assets in the short term is through the ligation strategy. Anything to add to that, Kevin?

No, I think we're seeing that play out based upon what came out of TIDES and the chemo-enzymatic approach being here to stay. That's the only thing I would add. I'd say ligase is here, and it's a growing market, and we're making inroads versus competition.

Yes. Our ligase represents a significant improvement over existing options, allowing us to compete directly based on performance. With the ECO platform, we aim to introduce innovative solutions while gradually bringing our partners along as we advance.

And then I would imagine as much as you guys want to go out there and do this in-house to convince these folks to stay with you long-term, they probably want the same thing so that by the time they're later stage, they don't have to worry about any tech transfer or any significant step-ups that could delay their product getting on the market. So clearly, you've been having a substantial amount of conversations. Was it your experience that this is kind of what your potential partners were hoping for you to choose as well?

Absolutely. It's like the fewer transitions during the development timeline, the better. And it's also the impressive scalability because a year ago, we thought we knew what the scalability of our tech was. Now we're much more certain. As we take each step up, we're really pleased with the improvements that we're making. And it allows us, as I say, to do more with a much smaller footprint, which is great.

Okay. And I'll ask one last question. Just how should we be thinking about the time and the cost for this process? And clearly, it sounds like there's a lot of interest and you can be selective here about working with some partners that could help offset this a little bit.

So one of the things that we did talk about in our prepared remarks was we did a modest, very targeted top-up of our cash position. That was designed to give us access to the facilities, infrastructure, and everything else that we need to do this scaling. So be reassured about that. We're not getting out over our skis. We can afford to do what we need to do. Yes. And it really is looking at working through the rest of the year and having clarity early next year in terms of the trajectory.

It really depends on the mix of business that we see in the contracts that come out over the next 6 to 9 months, and we'll give you more clarity on that when we do our 2026 guidance.

Our next question comes from the line of Matt Hewitt with Craig-Hallum Capital Group.

Maybe first up, the variable manufacturing schedule you noted, does that imply that there's maybe some pull-forward pushout that's occurring, and that's what's creating the variability? Or is there something else that I'm missing?

The variability from Q1 to Q2 last year and then again this year is primarily due to the timing of significant orders. We have limited visibility on this. Some orders we expected in the fourth quarter actually arrived in the first quarter and vice versa. This time, it didn't happen to the same extent as in previous years. We're definitely experiencing some unpredictability regarding when larger orders are being placed.

Okay. That's super helpful. And then the GMP scale-up partner that you noted in the press release and in your prepared remarks, is that likely one of the 3 CDMO partners that presented at TIDES this spring? Or are there others that you're in discussion with that could ultimately leapfrog those 3?

So we are talking to more than those 3. They progress at different rates. But Kevin?

Yes. I mean, certainly, ones that we presented with are in the mix but as Stephen said, there are others that have risen to the challenge, I would say, in the last couple of months and are accelerating in terms of our conversations.

And I then come to what do we need CDMO partners for. And it's not immediately for scaling the ECO process itself. We can do that in-house. This is for relationships with big customers that are doing chemo-enzymatic. So quite often, what we get is one of those CDMOs bringing us a problem to address for them to service one of the big players. So that's really one of the critical models that we're working on.

Our next question comes from the line of Brendan Smith with TD Cowen.

I wanted to actually ask, first, just a bit more about how you see the potential revenue funnels through clinical development. I fully appreciate the ramp in revs is going to really depend on clinical success in the therapeutic area, among other things. But I guess just what kind of ramp from maybe preclinical to Phase I, II, III are you broad strokes forecasting, at least among partners that you've already signed or are in talks with? And then I have a follow-up.

Okay. So when you're talking about the very initial phases of feasibility, can the platform perform and do what they needed to do in terms of producing the construct, you're talking about collaborations that take a couple of months and are hundreds of thousands of dollars. You then move from that, which is really a technical collaboration to some milestone-based revenues as we progress through development, but also the material supply itself. And in early development, the way we make ourselves whole is by supplying the material for a certain cost, but also milestones as we go through that. But as it becomes more significant in terms of quantity, it gets much simpler and it's just the amount they're paying for the siRNA that they're buying from us. So that's the way the ramp works. We try and sort of square the circle early with the milestones and payments such that it transitions to something very simple towards the latter stages.

Got it. Okay. That's very helpful. Appreciate that. And just maybe a quick follow-on. I wanted to ask, I guess, just as of today, and again, appreciate this might shift over time. But can you just speak a little bit to what the scope of options is to kind of fund some of the scaling to GMP maybe even faster than is necessary, just given kind of the renewed interest and maybe if potentially even to sale the Biocatalysis business or something like that would be on the table in that respect.

So we really like our Biocatalysis business because even though its growth trajectory is modest, it is very profitable because a lot of these are significant assets that we baked in a while ago. We know how to make them. The margins are good. Therefore, that is worth a lot to us as an engine that reduces our need for cash. There's also work around the ligase, particularly lucrative contracts there that can help us fund. And also, we don't need to spend all the money we need to scale right away. So it's an incremental process where because the technology is very rapid to set up, we can stay just in front of the curve. It's not like we have to build a facility and then wait for 2 years. We can actually step forward with GLP within our existing footprint and then set up GMP in a very short time such that we're ready to supply as existing assets in our pipeline mature rather than building it and hoping they come.

I'm showing there are no further questions. I'd like to turn the call back over to Stephen Dilly for any closing remarks.

Well, thanks, everyone, for tuning in. And as you hear, we're very excited about where we are. We're thinking very hard about the market dynamics going forward and how best to capture the value from this exciting technology that we built in ECO Synthesis. And we'll be hoping to see some of you live at the forthcoming meetings over the next month or so. So thanks very much for tuning in.

This concludes today's call. Thank you for your participation. You may now disconnect the call.