Codexis, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are identified below where relevant. Amounts are in U.S. dollars.
Business context
Codexis engineers and commercializes proteins and enzymes using its CodeEvolver platform. Its two segments are Performance Enzymes, serving pharmaceutical and industrial markets, and Novel Biotherapeutics, focused on drug candidates and collaborations. Pharmaceuticals remained its largest market. In 2019, Codexis signed a CodeEvolver platform agreement with Novartis and a license agreement with Roche for its EvoT4 DNA ligase. Nestlé Health Science exercised its license option for CDX-6114, transferring responsibility for future clinical development and commercialization to Nestlé, except for completion of an extension study.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $68.5 million | $60.6 million |
| Product revenue | $29.5 million | $25.6 million |
| Research and development revenue | $39.0 million | $35.0 million |
| Product gross margin | 47% | 51% |
| Operating loss | $12.5 million | $11.3 million |
| Net loss | $11.9 million; $0.21 per share | $10.9 million; $0.21 per share |
| Net cash used in operating activities | $12.6 million | $14.1 million |
| Cash and cash equivalents at year-end | $90.5 million | $53.0 million |
| Working capital at year-end | $98.8 million | $50.1 million |
| Total liabilities at year-end | $43.6 million | $23.0 million |
FY2019 investing cash outflow was $3.7 million, primarily for property and equipment; financing cash inflow was $54.0 million, largely reflecting the June private stock offering. Codexis reported no borrowings under its $15 million credit facility at year-end. Operating lease obligations were $26.1 million on the balance sheet; undiscounted operating lease payments totaled $34.1 million.
In the fourth quarter of 2019, revenue was $18.7 million, operating loss was $0.9 million, and net loss was $0.6 million.
Material changes versus prior period
- Revenue rose 13% year over year. Product revenue increased 15%, mainly on higher demand for enzymes used in branded and generic pharmaceutical manufacturing. R&D revenue increased 11%, supported by Novartis revenue and a $2.0 million GSK milestone, partly offset by lower Nestlé development fees and the prior-year completion of Tate & Lyle services.
- Product gross margin declined to 47% from 51%, which management attributed to product mix.
- Operating expenses rose 13%, including a 13% increase in R&D expense and an 8% increase in SG&A. Net loss widened by $1.1 million.
- Performance Enzymes segment revenue grew 24% to $58.2 million and segment operating income rose to $14.7 million. Novel Biotherapeutics revenue fell 24% to $10.3 million; the segment reported a $5.2 million operating loss versus $2.6 million operating income in 2018.
- Cash and cash equivalents increased by $37.5 million, principally due to $49.9 million net proceeds from the Casdin private offering and $7.1 million from stock-option exercises, partly offset by operating and investing cash outflows.
Outlook, commentary and risks
- Management stated that existing cash and cash equivalents were expected to fund operations, planned capital expenditures and working capital needs for at least 12 months from the filing. No specific revenue, earnings or margin guidance was provided. Capital spending was expected to be higher in 2020 than in 2019.
- Customer concentration is material: Merck, Novartis and Nestlé Health Science accounted for 66% of FY2019 revenue in aggregate. Merck alone contributed 28%. The filing also highlights reliance on a limited number of enzyme products and third-party manufacturers.
- Codexis has a history of losses and an accumulated deficit of $342.4 million. Profitability, future collaboration milestones, product commercialization and royalties remain uncertain.
- CDX-6114 is licensed to Nestlé; potential future payments include up to $85 million in development and approval milestones, up to $250 million in sales milestones, and tiered royalties. These are contingent, not assured. Other biotherapeutic candidates were preclinical.
- The filing identifies clinical and regulatory uncertainty, intellectual-property and competitive risks, and exposure to customer and supplier concentration. It also noted that the novel coronavirus outbreak could disrupt customers, partners, suppliers or contract manufacturers, with the impact then uncertain.
- In January 2020, Codexis and Nestlé agreed to advance a gastrointestinal-disorder candidate into preclinical and early clinical studies and extended their strategic collaboration through December 2021.
- The company reported no material pending litigation. The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded controls were effective as of year-end.
Important facts for investors to verify
- Whether product demand and R&D/platform revenue growth persist, and how much revenue depends on milestone timing and contract accounting.
- Whether customer concentration, particularly reliance on Merck, Novartis and Nestlé, changes and whether key customers expand or reduce activity.
- Whether product gross margins recover from 47% and whether expense growth moderates enough to improve the path to profitability.
- Progress and economics of the Novartis technology transfer and Roche enzyme license, including contingent payments, royalties and commercialization milestones.
- Clinical, regulatory and partner progress for CDX-6114 and other pipeline programs, alongside cash burn, planned capital expenditures and liquidity.
- Manufacturing capacity and continuity at the two principal external enzyme manufacturers, and compliance with credit-facility covenants despite no year-end borrowing.