Earnings call: Codexis reports revenue growth and strategic focus in Q3 2024
Codexis , Inc. (NASDAQ: NASDAQ:CDXS), a leading enzyme engineering company, reported a notable increase in its third-quarter revenues for 2024, marking a rise to $12.8 million from $9.3 million the previous year. During the earnings call led by CEO Dr. Stephen Dilly and CFO Georgia Erbez, the company highlighted its strategic initiatives, including the divestment of its genomics enzyme portfolio and a focus on its core business. Codexis also announced its aim to reach profitability by the end of 2026, bolstered by growth in pharmaceutical manufacturing and rising demand for its double-stranded RNA ligase.
Key Takeaways
Total revenues increased to $12.8 million in Q3 2024, up from $9.3 million in Q3 2023.
Product revenue rose to $11.2 million, driven by customer order timing.
Net proceeds of $31 million raised to strengthen the balance sheet.
New executive hires and divestment of genomics enzyme portfolio to focus on core business.
Codexis targets profitability by end of 2026, with growth in pharma manufacturing.
Plans to enhance enzyme production and establish a kilogram-scale ECO Synthesis manufacturing facility.
Strong cash position of $90 million, expected to fund operations through 2027.
Company Outlook
Codexis maintains a positive outlook with reaffirmed revenue guidance for 2024.
Anticipates significant advancements in partnerships and technology, especially in the siRNA therapeutic space.
Upcoming presentations at TIDES Europe and completion of the ECO Synthesis Innovation Lab by year-end.
Bearish Highlights
R&D revenue decreased to $1.7 million due to lower non-recurring items.
SG&A expenses increased to $13.6 million, mainly due to higher consulting costs.
Bullish Highlights
Product gross margin improved to 61%, up from 58% year-over-year.
Net loss narrowed significantly to $20.6 million from $34.9 million.
Partnership with Alphazyme expected to generate initial revenues in 2025, with growth projected through 2026 and 2027.
Misses
No specific misses reported during the earnings call.
Q&A Highlights
Executives discussed the ECO Synthesis platform’s adaptability and potential for scaling up.
Investment plans include modernizing manufacturing and establishing a new facility for large-scale production.
Emphasized enzymatic production’s quality, environmental benefits, and competitiveness.
Codexis aims to onshore production to comply with the BIOSECURE Act.
Management highlighted improved reputation and deeper client engagement.
Codexis’ strategic decisions, such as hiring new executives and divesting non-core assets, along with its focus on optimizing relationships, are expected to strengthen the company’s market position. The enzymatic production of RNA building blocks, such as nucleoside phosphoramidates (NQPs) and nucleoside triphosphates (NTPs), is poised to offer competitive advantages in terms of quality and environmental impact, which could significantly impact mRNA production costs. The company’s engagement with major mRNA players to potentially reduce costs underscores its commitment to innovation and customer-centric solutions. With a busy November ahead, including several investor conferences and the TIDES Europe meeting, Codexis is set to continue its momentum in the biotech industry.
InvestingPro Insights
Codexis, Inc. (NASDAQ: CDXS) has shown resilience in its recent financial performance, as evidenced by its Q3 2024 results. This positive trajectory is further supported by real-time data from InvestingPro. The company’s market capitalization stands at $246.12 million, reflecting investor confidence in its strategic direction.
One of the most striking InvestingPro data points is Codexis’s impressive 1-year price total return of 89.16%, which aligns with the company’s reported improvements in revenue and gross margins. This substantial return underscores the market’s positive reception of Codexis’s strategic initiatives, including its focus on core business areas and the divestment of non-core assets.
However, it’s important to note that Codexis is currently operating at a loss, with a negative operating income of $53.11 million in the last twelve months. This is consistent with the company’s stated goal of reaching profitability by the end of 2026, as mentioned in the earnings call.
InvestingPro Tips highlight that Codexis holds more cash than debt on its balance sheet, which supports the company’s strong cash position of $90 million reported in the earnings call. This robust liquidity is crucial for funding operations through 2027 and investing in strategic initiatives like the ECO Synthesis manufacturing facility.
Another relevant InvestingPro Tip indicates that Codexis is quickly burning through cash. This aligns with the company’s increased investments in R&D and manufacturing capabilities, as outlined in their strategic plans. The management’s focus on reaching profitability by 2026 appears to be a direct response to this cash burn rate.
For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights. Currently, there are 8 more InvestingPro Tips available for Codexis, providing a deeper understanding of the company’s financial health and market position.
Full transcript – Codexis Inc (CDXS) Q3 2024:
Operator: Welcome to the Codexis Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note that 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; Georgia Erbez, Chief Financial Officer. Dr. Stefan Lutz, our SVP of Research, is also here and will be available for any questions during the Q&A. 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, facility expansions, 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 the beliefs and expectations of management as of the statement date, October 31, 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: Thank you, Carrie. And thanks everyone for joining. This has been another strong quarter for Codexis. Let’s review a few of the highlights. First, we strengthened our balance sheet by adding $31 million in net proceeds from existing institutional investors via our ATM. Secondly, we strengthened our executive leadership team with the hires of Georgia Erbez as chief financial officer and Allison Moore as chief technical officer. Their decades of relevant experience across multiple business entities will be invaluable as we enter our next phase of growth. Third, we strengthen the business. We delivered strong revenue growth in pharma manufacturing. We initiated several technical collaborations on our ECO Synthesis manufacturing platform. And finally, we completed the divestiture of our legacy genomics enzyme portfolio to Alphazyme, so we can focus our efforts on the core business. Moving to slide three, we have a clear path to profitability by the end of 2026. We get there based on two key factors. First, continued growth in pharma manufacturing revenues and improved profitability as our existing pipeline of higher margin biocatalysis products progress through clinical trials and into commercialization. Second, increasing orders for our double-stranded RNA ligase offering from existing customers as their siRNA assets progress through clinical trials. Even better news is that our strong cash position is sufficient to fully fund Codexis until we reach profitability. The net result is that we expect Codexis to reach positive cash flow based on the products, customers and cash reserves that we have today, which will put us in the enviable position of launching the complete ECO Synthesis manufacturing platform around the end of 2026 from an already profitable based business. Shifting to slide 4. I want to talk briefly about why we chose to strengthen our balance sheet a few weeks ago by taking in about $31 million via our ATM. Some of the money, perhaps half, we plan to keep on our balance sheet for the foreseeable future to provide greater operating flexibility and frankly to cushion and strengthen our path to profitability. The rest will enable some very targeted investments that will strengthen our existing business and accelerate growth in new areas. First, we’ve identified an opportunity to accelerate adoption of our pharma manufacturing biocatalysis enzymes by moving some enzyme production in-house, so that we can respond to initial scale-up requests rapidly and efficiently. We’ll spend a few million dollars over the next year to modernize and streamline our existing internal manufacturing capability. Second, we’re going to invest in our downstream purification capabilities to support initial commercial orders of a double-stranded RNA ligase variants directly from Codexis. Keeping this in-house a little longer improves our ability to be responsive to customer needs. Third, we’re designing a kilogram scale facility for our ECO Synthesis manufacturing platform to supply GMP grade siRNA drug substance for early stage clinical trials. There’s a theme here. We’ve learned that we can improve our speed, responsiveness and value capture by taking assets a little further through development in-house. This is all part of evolving Codexis into a truly customer orientated, mature commercial organization, which seems like a great segue to pass the call over to Kevin.
Kevin Norrett: Thanks, Stephen. Today, I want to reiterate our commercial strategy, our near-term revenue drivers, and provide some insights into our progress with customers. Finally, I will highlight some key upcoming milestones. Starting on slide 5, our commercial focus remains consistent with what we stated at the beginning of this year. We are delivering revenue growth in pharma manufacturing. Orders from our existing customer pipeline grew both in quantity and size this quarter. Our intention is to provide double-digit growth in annual revenues through the end of the decade from our existing pipeline. We are also adding new customer programs to secure the long-term prospects of this business. Next, we are focused on securing expected follow-on orders for our double-stranded RNA ligase enzymes from existing customers as they progress through the clinic. Continued outreach has led to new customers testing our double-stranded ligase variants, and feedback indicates excitement regarding the superior performance they are seeing, which promises reduced manufacturing, time and purification costs. Finally, we are focused on adding development programs into our ECO Synthesis Innovation Lab, where we can synthesize a customer’s desired siRNA construct and demonstrate the capabilities of our ECO Synthesis manufacturing platform. Moving to slide 6, we are on track for three exciting presentations at the TIDES Europe meeting in mid-November. First, we have a joint poster presentation demonstrating the superiority of our double-stranded RNA ligase variants in collaboration with [indiscernible], a leading CDMO specializing in the manufacture of siRNA. Second, we will have an oral presentation comparing data on siRNA manufacturing using our engineered ligase versus using various wild type versions. Third, will be another oral presentation that demonstrates the enzymatic synthesis of a commercially available drug using a variety of approaches, emphasizing our ability to meet customers’ needs in a variety of ways with our growing ECO Synthesis capabilities. We also expect to share the results from another customer collaboration with the top siRNA drug innovator, further showcasing the real-world application of our technology and the concrete commercial interests we are seeing from major players. We are aware that many of you don’t attend TIDES meetings. And as they are not webcast, it can be a bit challenging to keep track. With that in mind, we are intending to host a webcast investor recap call at 4.30 PM Eastern time on November 14th, where we will relay news from the meeting and review key points in our presentations. The access information for this call will be available on our investor relations website. On slide 7, I want to focus for a second on an emerging market opportunity related to the ECO Synthesis platform. Currently, the nucleotide quatro phosphate, or NQP, building blocks that are used in our process are synthesized chemically. We have made great technical progress on building an enzymatic process that can produce these NQPs more sustainably and at comparable cost to a chemical approach. This is becoming increasingly important as large drug innovators want a fully enzymatic and more sustainable approach to all materials used in the process. Furthermore, we can also use a similar simplified version of the process to make the nucleotide triphosphate, or NTP, building blocks used in mRNA synthesis. Like the double-stranded ligase opportunity, this may expand the market reach of our platform to support the growing demand for mRNA production. On slide 8, as customers understand what the ECO Synthesis platform can do for them in terms of scalability, efficiency, sustainability, and even quality, they also need to know that our process will provide a reliable source of their siRNA at sufficient scale for their near-term and future needs. Our ECO Synthesis Innovation Lab gives us the ability to manufacture GLP-grade material in sufficient quantities to support preclinical development. It also allows us to optimize scaling of the specific process before tech transfer to a GMP facility. In the short term, we will focus on partnerships for GMP production. So early process optimization is critical. We are working towards solidifying a scale of partnership with a GMP CDMO where we can tech transfer a customer’s siRNA for bulk production to support clinical trials and beyond. You might ask, will we rely on GMP scale-up partners for the foreseeable future? The answer is no. We believe there is significant value in establishing our own kilogram-scale GMP facility to directly supply customers as they enter early-phase clinical trials. We expect this to accelerate adoption of our ECO Synthesis manufacturing platform with smaller drug innovators who don’t have an established path to GMP, allowing us to hold onto the customer longer and to capture more revenue over the life of the product. Shifting briefly to milestones on slide 9, we look forward to sharing multiple examples of customer collaborations at TIDES EU from November 12th to 14th. And we remain on track for the completion of the ECO Synthesis Innovation Lab by the end of the year. Looking ahead for ECO Synthesis , in 2025, we will concentrate on building scale through our Innovation Lab and increasing the number of customers using our ECO Synthesis manufacturing platform. to produce their GLP-grade siRNA material. Finally, in addition to presenting at both key TIDES meetings again next year, we also expect to sign in and announce a GMP scale-up partnership. With that, let me turn the call over to Georgia to discuss our financial results and outlook for the rest of the year.
Georgia Erbez: Thanks, Kevin. Good afternoon, everyone. I recently joined Codexis this fall, so let me take a moment to introduce myself before reviewing the quarterly results. I have decades of financial and operational experience across investment banking, capital markets and strategic advisory, and I have spent roughly 12 years as a corporate CFO at several biotech companies. I have also had the pleasure of working with Stephen and Kevin in prior roles, and I am looking forward to working alongside them again as we execute this next phase of Codexis growth. Now, starting on slide 10, 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 revenues were $12.8 million for the third quarter of 2024, including product revenue of $11.2 million and R&D revenue of $1.7 million. This is compared to total revenue of $9.3 million for the third quarter of 2023, including product revenue of $5.4 million and R&D revenue of $3.9 million. The increase in product revenue was driven by timing of customer orders, while the decrease in R&D revenue was primarily due to lower, non-recurring items, including for biotherapeutics program that we previously discontinued. Product gross margin was 61% this quarter. This was up from 58% in Q3 2023, largely driven by product mix. Turning to expenses, R&D expenses for the third quarter of 2024 were $11.5 million compared to $13.7 million last year. You can see the continued benefit of the expense control actions we took last year reflected in the 16% year-over-year reduction. I also want to note that we expect to see a slight increase in R&D expenses as we ramp up operating costs related to the ECO Synthesis Innovation Lab. SG&A expenses were $13.6 million compared to $12.3 million in the third quarter of 2023, largely due to an increase in consulting and outside services. The net loss for the third quarter of 2024 was $20.6 million compared to $34.9 million for the third quarter of 2023. Moving to slide 11, we are reiterating our guidance and expect revenue will fall in the current range of analyst estimates for the year ended 2024. We ended the quarter in a strong cash position with $90 million in cash, cash equivalents and investments, which we expect will fund our planned operations through profitability and into 2027. With that, I will now turn the call back over to Stephen.
Stephen Dilly: Thank you, Georgia. As you just heard, we continue to make great technical progress. Just as important, we have strong market traction with our existing businesses and clear line of sight to generating value with our full ECO Synthesis manufacturing platform. We’re only about two years away from profitability and we have the financial, technical, and human resources to get there. Now we’d be happy to take your questions. Operator?
Operator: [Operator Instructions]. And our first question comes from Kristen Kluska with Cantor.
Kristen Kluska: Just at a high level, I know EU TIDES is going to be a big presentation for you, and without asking you what the data is itself, can you just tell us what parameters one looks at to check off synthesis when looking whatever this undisclosed asset is relative to the process they took? So, essentially, I’m trying to ask you, without looking for the specific data, what are the key parameters that you look at to check off whether or not it’s a success.
Stefan Lutz: There’s really two key parameters. One is overall yield of full length product. The other one is the impurity or the quality of the material, which is represented with the so-called impurity profile. Both sets of information, we’re planning to provide.
Kristen Kluska: It sounds like collaboration talks are getting into the weeds here. So, can you give us a sense of, if you announce partnerships, collaborations in the future, do you have a sense of what level of detail you’re going to be able to give to the Street? I’m guessing you’re going to be able to tell us the company name, but anything about program specifics, revenue structure, etc.?
Kevin Norrett: We definitely want to give as much color as we can. Obviously, each one of these collaborations works a little bit differently depending on the partner. However, what we’re focused on is ensuring that we get these projects from proof of concept into revenue-generating development projects within our ECO Innovation Lab, which should be finished by around the end of this year. So more to come on that, but I think where we’re excited is we’re working with the top siRNA drug developers. We’re going to share and show something at TIDES associated with one of those, in addition to an exciting collaboration on the ligase with a top siRNA producer, CDMO. So we’ll share more as we get more with that, but I think it’s going to depend on the partners themselves and what we do.
Kristen Kluska: Last question for me, if I may. I know all of your guidance is exclusive of Paxlovid, but wanted to see if you can give us any color about any early expectations. Saw that the sales they reported this quarter were 4x higher than what analyst consensus were, so it seems like the drug is being utilized quite a bit, but any color you could share there would be helpful.
Stephen Dilly: We’re really not assuming anything there, Kristen. And so, if they want more, that’s great, but we’re not planning for anything on Paxlovid.
Operator: And our next question comes from Tycho Peterson with Jefferies.
Jack Melick: This is Jack Melick on for Tycho. I guess kind of sticking with the increased volume of inbounds for the ECO Synthesis technology, are you able to share any sort of color on the type of client, whether they’re more clinical stage, CDMOs versus pharma, just any additional color there into the type of client you’d be working with would be great.
Kevin Norrett: I’d say, increasingly, we’re seeing a lot of interest from the large major siRNA drug developers. They’re really the ones that are at the forefront from an innovation standpoint and coming to us to say, prove to us you can make their construct. And so, that’s one of the things we plan to share at this upcoming TIDES meeting, which I think is de-risking for other emerging players to get into working with us. We’re in the enviable position of actually looking for quality over quantity at this point. We have to prioritize these projects. So I think, again, a focus on making sure we can prove to the major players that we can do this and they want to adopt the technology is first and foremost. We are also working with the CDMOs, as I mentioned in the call, specifically because we need to get to signing a GMP scale-up partnership in 2025 to be able to provide all of these clients a full path to GMP.
Jack Melick: I guess just one more, as we start to think about 2025, I guess is there any sort of swing factors that we should be thinking about one way or another?
Stephen Dilly: The two big drivers, Jack, for 2025 are the continued growth of the pharma manufacturing business. We’ve got a good line of sight on the trajectory there. And the other one is, as Kevin said before, it’s converting the initial orders of the ligase into follow-on bigger volume orders and making sure we fulfill them. So we’re feeling good about 2025 and beyond.
Operator: And our next question comes from Dan Arias with Stifel.
Dan Arias: Kevin or Stephen, just going back to the partnerships, can you just touch on what you see as the major hurdles that you still have in front of you there? Obviously, you’re talking about year-end for pharma, so I imagine the to-do list there for that one is getting kind of short, but I am kind of curious about what the list does look like? And then if you could just talk to how it differs, how that list differs, depending on whether you’re talking about pharma or you’re talking about a CDMO?
Stephen Dilly: We’re talking here about the ECO platform and how we’re partnering with different players, right Do you want to start off with the CDMO, Kevin?
Kevin Norrett: From a CDMO standpoint, first and foremost, we’re focused on trying to identify a major siRNA producing CDMO that can be our GMP scale partner. So that is literally taking things that we’ve developed through the ECO Innovation Lab, applying our technology and being able to have a partner to transfer them for GMP scale up. They’re also interested in other elements of our technology, one of which I mentioned is particularly adding a ligase to their sort of toolbox to be able to thrive more efficient manufacturing today and to be able to offer that to their clients. On the large drug innovator side, those are more what I would say traditional ECO innovation development projects coming into our lab. and say bring constructs to us, want us to make them, we’ve optimized the process, use our toolbox to be able to do that, and provide them something that they can either take in-house or take to a downstream CDMO partner. Does Stephen probably want to add anything else?
Stephen Dilly: That’s right. And the thing that we’re learning increasingly is that to move this to being a real product and to get into real sort of economic conversations, we need to show them the path to GMP, and so that’s why those two relationships are very complementary that we can do stuff in our ECO innovation lab, but then they need to see, okay, how are we going to scale, how are we going to support this going forward. The other thing that they’re very interested in is, of course, the security of our raw material supply. And that’s why Kevin’s comments around the synthesis of NQPs and the sourcing of NTPs is really important. So it’s kind of this whole picture.
Dan Arias: If I can just maybe drill into that. Kevin, in this conversation with CDMOs, as you’re trying to convince them that you’re the partner that they should go with, what are the near-term items that you’re most focused on in terms of getting them over the hump? Because it kind of seems to me that it would be different potentially for a CDMO versus a pharma. You’re obviously pretty far down on the road on pharma. In two months, you’re expecting to announce that partnership or thereabouts. But as far as discrete items that we’re talking about to get that CDMO on board, can you kind of just point us to what it is that we should think about you being successful doing in order to get that second one across the finish line as well?
Kevin Norrett: I think part of it, Dan, is really coming down to what we can do for these larger innovators because, at the end of the day, being able to make these constructs, the CDMOs are also working with these same players and we’ve actually have several three-way conversations going on now associated with that. So them seeing us being able to do that is actually then – then the next step after that is being able to provide them a package of materials that they can take and actually put into their facility to be able to do the scale up. But the first step here is really the proving out of the technology with making the constructs themselves.
Dan Arias: Maybe just to follow on to that idea, as you’ve broadened the scope of therapeutics or at least the number of therapeutics that you’re pointing ECO Synthesis at, I’m curious if you’ve picked up on any differences that might exist that make your process or your capability either more or less advantageous depending on which one you might be talking about or working on.
Stefan Lutz: Our main focus has been and continues to be siRNA therapeutic assets. The number of building blocks, the type of modifications people incorporate have been the focal point for developing our technology platform. And that has continued.
Dan Arias: If I could ask maybe a follow on to that. So if there are six siRNA therapeutics that are approved right now by the FDA, are you essentially saying that your process and the benefit to be derived from your process is essentially the same across all of them, if we wanted to use that as the example, or are there certain things within certain therapeutics, specific therapeutics that when you see – when you look at the manufacturing process, you say, hey, the economic case for us can be better or worse than if we’re talking about another one.
Stephen Dilly: We developed this platform looking at what’s currently available, right? So to start with, with all the modifications currently included. So if you throw a rug over the six currently approved, they look very similar in terms of our platform. Then we’re looking at new stuff people are doing and where they’re going, construct wise, whether they’ve got a hair pin in there, whether it’s a standard one, all that kind of stuff, making sure we cover that landscape. Where we’re at now in the conversations with specific companies is starting to drill down on what their actual pipeline is, where we can help them with their pain points. Sometimes that’s a ligase to help them scale more rapidly. Sometimes it’s thinking about the whole manufacturing platform, but it’s really now moving from the generic. You build an engine that can do just about everything to, tuning it specifically to solve the problems of the customer. So that’s why the conversations take a little while, right, Kevin?
Kevin Norrett: Yeah, I think that’s right. And I think one other thing just to add to that is the other area, we’ve developed the technology around several specifically available conjugation modalities that exist. But where we see the explosion in siRNA and we’re looking forward to Stefan and team are working on additional conjugation moieties that can actually be targeted towards other organs, for lack of a better word. So I think that’s the other key piece that we want to expand our capabilities in in the near term because that’s really what expands the siRNA therapeutics universe for us.
Stefan Lutz: As Stephen points out, the existing platform is a prototype. It is broadly applicable and not to dissimilar to how phosphoramidate chemistry for manufacturing a specific asset in large quantities is being optimized for that process. The ECO Synthesis platform goes through that exact same process once we identify the specific target, including efficient incorporation of all the tissue targeting moieties, which are a great deal.
Operator: Our next question comes from Matt Hewitt with Craig-Hallum.
Matthew Hewitt: Congratulations on the progress. Maybe first up, kind of similar to the first question, what will the technical collaboration for ECO Synthesis look like? You’ll put out a press release. We’ve signed our first agreement with X company. But will there be an upfront, will it be milestone and royalty based, will there be shared R&D expenses initially? Just kind of walk us through what that first collaboration might look like.
Stephen Dilly: The short answer that I’ll give Matt is it depends. And then Kevin is going to drill down little bit more on the kind of flavors we’re having. That’s all right, Kevin?
Kevin Norrett: Yeah, it is truly it depends. There is everything from straight up, we want you to make the construct, doing it in this way with this set of parameters, and that’s sort of a straight up development contract, not necessarily like a joint development collaboration. Then there are players that are at the table that want to discuss a joint development collaboration where they have five or six assets that they want to license the technology for specific application and for us to do the preliminary process optimization work and then to take it in-house into their manufacturing facility. Those could follow more of sort of an upfront milestones and royalty-based type of agreement, but those, as you know, also take a little bit longer to do as opposed to filling our ECO innovation lab with current development contracts that is part of being an emerging CMO ourselves in terms of being able to do the process optimization up to a point and then transfer it to a big GMP scale-up partner before our kilogram facility is potentially online.
Matthew Hewitt: If I’m hearing you correctly, your preference would be maybe for the former and not the latter, at least for the first one, so that you can start utilizing that new facility.
Kevin Norrett: Well, I think that’s true because we learn a lot from each one of those too, and we want to be as successful as possible with expanding the breadth of what we can do for perhaps a really big player that wants to do a joint development collaboration on five or six assets that they have in their pipeline that are large indication assets. And that’s the type of conversation we’re having today.
Matthew Hewitt: I think in your prepared remarks, you were talking a little bit about some of your key targeted investments over the near term. As far as the investment in the purification for the double stranded capabilities and the kilogram scale facility, how should we be thinking about the magnitude of those investments? Are those low seven figures each? Obviously, the balance sheet is much better today than it was even last quarter, so you do have some flexibility there, but just trying to think about some of the cash use over the near term.
Stefan Lutz: Good question. So it goes into three buckets. One of them is the sort of streamlining modernization of the pharma manufacturing, small scale manufacturing capability. That really is retrofitting an existing facility with some newer fermentors or newer tanks, so that we can actually run more reliably and faster there. Think of that as low-single digit millions. Similarly, for the downstream processing, for the ligase. So, yeah, five should cover both of those. Then we’re looking at the kilo scale facility. That will be a bigger investment, but not immediately. That will be over time. So in 2025, the first half of 2025, we’re really doing the sort of the planning of that and exactly what it looks like and exactly where it’s going to go and all that kind of stuff. And then, look for us to start spending significantly on that in the second half of 2025 and 2026 if the business case holds up and we move forward.
Matthew Hewitt: Maybe one last one here, but obviously, with the Alphazyme partnership, how should we be thinking about the scale up and when we should maybe anticipate those revenues to start to ramp? Is that something that could start in 2025 or is it still too early to tell?
Stephen Dilly: It could start in 2025. I think they still have some work to do to optimize them for their commercialization process because they are actually a major genomics player. We think their ability to scale and commercialize these is better than ours, which is why we decided to do the deal. So some in 2025, but I would expect it to ramp further into 2026 and 2027.
Operator: Our next question comes from Chad Wiatrowski with TD Cowen and Company.
Chad Wiatrowski: This is Chad on for Brendan Smith. It’s nice to see the Alphazyme deal completed. Can you just speak to any additional opportunities you have to monetize non-core assets?
Stephen Dilly: We’re getting close to the end of that. Increasingly, it’s about focusing on the new stuff. Alphazyme was a big step there. We do have some potential incoming from, for instance, the relationship with Nestle with milestones on that down the line. We’re also looking at the optimization of our relationships with Sequel [ph], with MAI, so we really can be very, very focused on the core business of pharma manufacturing, 1.0 and then 2.0 with the ligase and the ECO platform.
Chad Wiatrowski: Just on bringing the enzymes in-house, do you expect that to have any material impact on gross margin? And can you help just contextualize for how much space you have? I know the innovation lab is modest in terms of square feet. So could you just help us understand sort of where you’re at with capacity?
Stephen Dilly: In terms of the innovation lab, the optimization of the in-house manufacturing for pharma, and the ligase, we can do all of that comfortably within our current footprint. We’re really asking the question about exactly where the kilo lab or the kilo manufacturing plant would go, but we’re in good shape. sort of real estate wise, and we’re in a very sort of efficient part of the Bay Area, cost wise as well.
Chad Wiatrowski: And do you see any impact on gross margin, bringing enzymes inhouse?
Stephen Dilly: What we’re working on, obviously, with these facilities are new enzymes, which tend to have significantly higher margins than the old ones. So the whole point about driving this adoption is to improve margins. And I don’t think we’ve quantified that yet, but directionally it should be very positive.
Operator: [Operator Instructions]. Our next question comes from Jacob Johnson with Stephens.
Jacob Johnson: On the RNA building blocks, I think it’s something you talked about for some time. It seems like maybe you now have a slide dedicated to it in the presentation. This might be a dumb question from a finance person, but just for these NQPs and NTPs, if the enzymatic version is comparable cost to chemical, why do these customers want enzymatic? And then just on the finance side of things, how should we think about the potential revenue opportunity from these building blocks? Should we just think about this as part of ECO Synthesis or could this be kind of like the double stranded RNA, a separate product on its own.
Stephen Dilly: I’ll answer the why question, and then Kevin and Georgia can answer the finance one. There’s two reasons for the why. One of them is around the quality, the purity of the product itself, and that actually some of our partners are very interested in the environmental impact of the processes they run. And a fully enzymatic route for making your NQPs is clearly advantageous. There’s also, down the line, things like the BIOSECURE Act happening and you’re onshoring the production – enzymatic production of NTPs and NQPs is a hell of a lot easier than doing it chemically within the United States. So all of those good reasons why we want it. The other one is to keep the chemical producers honest in terms of price point. Because we can actually peg them by what we can do enzymatically. And so, it really does allow us to drive a better deal in terms of the chemical supply if we have an alternative. And then in terms of the economics of that.
Kevin Norrett: I can jump in. Georgia can add in. On the economics of the NQPs, obviously, that’s a raw material that we’re trying to secure the lowest cost possible to ensure that our platform is comparable or better to phosphoramidate chemistry. So whether it’s chemical or enzymatic, doesn’t matter. To some customers, it’s about cost. And so, we want to ensure that we drive down that cost and make sure we’re really economically comparable or better. On the second piece, with regards to the enzymatic production of the NTPs I mentioned, we’re in various different conversations with key mRNA players there around their interest in that because one of the major costs within the production of mRNA constructs is actually the NTPs themselves. It’s about 30% of the cost reaction. So we still have some work to do in terms of those conversations, but the opportunity could be significant for them as well as they start to scale up and more of these become available.
Jacob Johnson: Georgia, it might be a bit early to ask you this, but how are you thinking of reporting the ECO platform? Would you be splitting stuff like this out?
Stephen Dilly: We’re working on that pretty intensely right now, figuring out what are the most meaningful operating metrics to talk to you guys about. We want the information that we put out to both be material and useful. So we’re working on how we’re reporting our different separate categories of revenue, so you might see some changes. coming up in 2025, but also as our other business lines continue to mature, we would look at reporting them when they become material.
Jacob Johnson: You mentioned kind of a scene here earlier about kind of improving speed and trying to increase your value capture. I’m just curious, now that you’ve been here for a bit, just do you think customers are starting to view Codexis any differently than maybe a couple of years ago? And maybe for Kevin, curious kind of your view on the awareness of Codexis and the sRNA market now versus a year ago when you guys got into this more meaningfully?
Stephen Dilly: I do think there’s a sea change, Jacob, in terms of how we’re being looked at. Partly it’s because we’re able to focus and go deeper and have much more intense conversations with the customers. We’re also therefore able to interact with them through different routes, not just in pharma manufacturing, historically. It was typically working with the procurement groups, which are fine, but you also need to get in there with the R&D groups to learn what they’re doing in the future and what their pain points are. And we’re taking that lesson and really applying it to the conversations with the RNA players, because we’re starting at the top. We’re often starting in the C-suite and then working down, rather than the other way up. So they’re very well aware of what we’re doing. And it is clear from those conversations that Codexis is considered the leader in enzymatic synthesis of RNA constructs. And we intend to stay in that position and leverage that reputation to secure the right partners.
Kevin Norrett: I think Stephen summed it up really nicely, which all speaks to the awareness, having gone way up and we’re getting approached by these major players and the innovation groups within that, which is starting at the C level and working our way down as opposed to the other way that we have to deal with in pharma manufacturing.
Operator: I’m showing there are no further questions. I’ll turn the call back to Stephen Dilly for closing remarks.
Stephen Dilly: Thanks. And thanks, everyone, for joining us again today. And as you can probably detect, we’re going to have a very busy November because the TIDES Europe meeting is coming up fast. As Kevin said, we’ll have a briefing event for those of you that can’t be there, and then followed by a series of investor conferences in New York, London, and Nashville. And we’re looking forward to connecting with many of you live over the coming weeks. So thanks again for tuning in.
Operator: Thank you. This concludes today’s call. You may now disconnect.
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