Codexis(CDXS) - 2021 Q4 - Annual Report

PART I Business Codexis discovers, develops, and sells enzymes and proteins using its proprietary CodeEvolver® protein engineering technology platform, operating in Performance Enzymes and Novel Biotherapeutics segments - Codexis utilizes its proprietary CodeEvolver® protein engineering technology platform, which leverages artificial intelligence and high-throughput screening, to develop novel enzymes for various industries[11][12] - The company operates through two business segments: Performance Enzymes (for pharmaceuticals, food, diagnostics) and Novel Biotherapeutics (drug candidates)[16][17][18] - In 2021, Codexis began supplying a proprietary enzyme (CDX-616) to Pfizer for the manufacturing of its COVID-19 therapeutic, PAXLOVID™, recognizing approximately $34.5 million in revenue from these sales[22][23] - As of December 31, 2021, the company had 261 full-time and part-time employees, with 159 in R&D, 37 in operations, and 65 in SG&A[131] Key Customer Revenue Concentration (2019-2021) | Customers: | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Customer A | 33 % | * | * | | Customer B | 11 % | 26 % | 28 % | | Customer C | * | 19 % | * | | Customer D | * | 11 % | 15 % | | Customer E | * | * | 23 % | *Percentage was less than 10% Company Overview - Codexis discovers, develops, and sells enzymes and proteins, leveraging its CodeEvolver® protein engineering technology platform, which uses proprietary AI-based computational algorithms[11][12] - The company has expanded from its initial focus on small molecule pharmaceuticals to broader markets including food, feed, consumer care, life sciences (e.g., NGS), and biotherapeutics[12][15] - Codexis has licensed its CodeEvolver® platform to major pharmaceutical companies like Novartis, Merck, and GSK, and has strategic collaborations with Nestlé Health Science and Takeda for biotherapeutic development[12][15] Business Segments - The Performance Enzymes segment provides products and services for manufacturing small molecule pharmaceuticals, food, feed, consumer care, and life science applications like NGS and DNA/RNA synthesis[17] - The Novel Biotherapeutics segment focuses on discovering and developing biotherapeutic drug candidates, such as CDX-6114 for PKU (partnered with Nestlé Health Science) and novel gene therapies (partnered with Takeda)[18] Recent Development - Pfizer (PAXLOVID™) - In 2021, Codexis began receiving large purchase orders from Pfizer for its proprietary enzyme, CDX-616, used to manufacture nirmatrelvir, a key ingredient in the COVID-19 treatment PAXLOVID™[22] - The company recognized approximately $34.5 million in revenue from Pfizer in 2021 and expects significant additional orders for delivery in 2022 and 2023, although no long-term purchase agreement is in place[23] Our Market Opportunities - The pharmaceutical market is a primary focus, where Codexis' technology helps reduce manufacturing costs for small molecule drugs and enables the discovery of novel biotherapeutics[33][37] - Codexis has licensed its CodeEvolver® platform to GSK, Merck, and Novartis, allowing them to develop enzymes in-house for human healthcare applications[41][42][43][44] - The company is developing its own biotherapeutic candidates, including CDX-6512 for homocystinuria (HCU) and CDX-6210 for Maple Syrup Urine Disease (MSUD), and has partnerships with Nestlé and Takeda for other therapeutic programs[51][52][55] - Codexis is expanding into fine chemicals and industrial enzymes, with partnerships like the one with Tate & Lyle for producing a zero-calorie stevia sweetener[65][67] - The company is developing high-performance enzymes for molecular biology and in vitro diagnostics, including a licensed DNA ligase to Roche for NGS applications[68] Government Regulation - Biotherapeutic product candidates are regulated by the FDA as biologics and require a Biologics License Application (BLA) before marketing in the U.S, a process involving extensive preclinical testing, IND submission, and multi-phase clinical trials[96][99] - The FDA offers expedited programs like Fast Track, Breakthrough Therapy, Priority Review, and Accelerated Approval to facilitate the development of drugs for serious conditions[110] - Products may receive Orphan Drug Designation for rare diseases, granting seven years of market exclusivity upon approval[111] - Post-approval, products are subject to ongoing FDA regulation, including requirements for manufacturing (cGMP), labeling, advertising, and reporting of adverse events[114][115] - The business is also subject to healthcare laws like the Anti-Kickback Statute, False Claims Act, and data privacy laws such as HIPAA and GDPR, which govern interactions and data handling[123][129] Risk Factors Codexis faces substantial risks from its revenue dependence on Pfizer, a history of net losses, customer concentration, and the uncertain, costly nature of its early-stage biotherapeutics programs - A significant portion of 2021 revenue growth came from Pfizer purchase orders for the enzyme CDX-616 used in PAXLOVID™, with future revenue being uncertain as there is no long-term purchase agreement[147][150][152] - The company has a history of net losses, with an accumulated deficit of $387.7 million as of December 31, 2021, and may not achieve or maintain profitability[154] - Codexis is dependent on a limited number of customers, with two customers accounting for 44% of total revenue in 2021, and on a few contract manufacturers for large-scale enzyme production[161][177] - The biotherapeutic programs are early-stage, highly regulated, and expensive, with a high degree of uncertainty regarding clinical trial success and regulatory approval[185][186] - The ongoing COVID-19 pandemic could continue to adversely affect business operations, supply chains, and clinical trials[162][164] Properties Codexis leases office and lab space in Redwood City and San Carlos, California, which it believes is adequate for its immediate needs - The company's headquarters are located in Redwood City, California, consisting of approximately 77,300 square feet of leased office and laboratory space[334][335] - In January 2021, Codexis leased an additional 36,593 square feet in San Carlos, California, for office and R&D laboratory space, with occupancy beginning in December 2021[337] Legal Proceedings As of the report date, Codexis is not a party to any material pending litigation or other material legal proceedings - The company is currently not a party to any material pending litigation or other material legal proceedings[340] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Codexis's common stock trades on the Nasdaq under "CDXS," and the company has never paid cash dividends, intending to retain future earnings for business growth - The company's common stock is traded on the Nasdaq Global Select Market under the symbol "CDXS"[344] - Codexis has never declared or paid cash dividends and does not intend to in the foreseeable future, expecting to retain earnings for business expansion[345] Comparison of Cumulative Total Return (2016-2021) | $100 investment in stock or index | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Codexis, Inc. (CDXS) | $100.00 | $181.52 | $363.04 | $347.61 | $474.57 | $679.78 | | Nasdaq Composite Total Return | $100.00 | $129.63 | $125.95 | $172.17 | $249.51 | $304.84 | | Nasdaq Biotechnology (Total Return) Index | $100.00 | $121.64 | $110.86 | $138.69 | $175.33 | $175.37 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, total revenues grew 52% to $104.8 million, driven by a 134% increase in product revenue from Pfizer sales, while operating expenses also rose significantly, narrowing the net loss to $21.3 million - Total revenues increased by 52% in 2021, driven by a 134% increase in product revenue, primarily due to $34.5 million in revenue from Pfizer for the company's performance enzyme product used in its COVID-19 therapeutic[372][385] - Research and development revenue decreased by 12% in 2021, mainly due to lower license fees from Takeda and Novartis, partially offset by higher fees from other collaborations[372][386] - Operating expenses increased in 2021, with R&D expenses rising 26% to $55.9 million and SG&A expenses increasing 41% to $49.3 million, largely due to higher headcount and related costs[373][374] - The company's cash and cash equivalents decreased from $149.1 million at year-end 2020 to $116.8 million at year-end 2021, with net cash used in operations at $14.3 million in 2021[376] Consolidated Results of Operations (in thousands) | | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total revenues | $104,754 | $69,056 | $68,458 | | Product revenue | $70,657 | $30,220 | $29,465 | | R&D revenue | $34,097 | $38,836 | $38,993 | | Total costs and operating expenses | $127,451 | $92,976 | $81,007 | | Cost of product revenue | $22,209 | $13,742 | $15,632 | | Research and development | $55,919 | $44,185 | $33,873 | | Selling, general and administrative | $49,323 | $35,049 | $31,502 | | Loss from operations | ($22,697) | ($23,920) | ($12,549) | | Net loss | ($21,279) | ($24,010) | ($11,935) | Results of Operations - Product gross margin increased to 69% in 2021 from 55% in 2020, primarily due to a favorable product mix from sales of higher-margin branded products, including sales to Pfizer[372][393] - R&D expenses increased by $11.7 million (26%) in 2021, driven by higher headcount costs ($7.6M), increased lab supplies ($2.6M), and higher allocable expenses ($2.2M), partially offset by a decrease in CMC and regulatory outside services[396] - SG&A expenses increased by $14.3 million (41%) in 2021, mainly due to higher headcount costs ($6.6M), increased legal fees ($5.1M), and higher stock-based compensation ($3.1M)[400] Revenue by Type (2020 vs 2021, in thousands) | Revenue Type | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Product revenue | $70,657 | $30,220 | $40,437 | 134% | | Research and development revenue | $34,097 | $38,836 | ($4,739) | (12)% | | Total revenues | $104,754 | $69,056 | $35,698 | 52% | Results of Operations by Segment - Performance Enzymes segment revenue grew 88% in 2021, driven by a 134% increase in product revenue, largely from Pfizer sales[409] - Novel Biotherapeutics segment revenue decreased 32% in 2021, primarily due to lower license and R&D fees from the Takeda Agreement[409] Revenues by Segment (2020 vs 2021, in thousands) | Segment | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Performance Enzymes | $90,515 | $48,106 | $42,409 | 88% | | Novel Biotherapeutics | $14,239 | $20,950 | ($6,711) | (32)% | | Total Revenues | $104,754 | $69,056 | $35,698 | 52% | Income (Loss) from Operations by Segment (2020 vs 2021, in thousands) | Segment | 2021 | 2020 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Performance Enzymes | $33,061 | $3,844 | $29,217 | 760% | | Novel Biotherapeutics | ($18,735) | ($3,110) | ($15,625) | (502)% | Liquidity and Capital Resources - Net cash used in operating activities was $14.3 million in 2021, an improvement from $16.5 million used in 2020[376][442] - Net cash used in investing activities was $21.4 million in 2021, primarily for property and equipment purchases ($13.8M) and investments in non-marketable securities ($7.6M)[446] - The company has an Equity Distribution Agreement (EDA) to sell up to $50.0 million of common stock, but no shares were sold under this agreement in 2021[436] - The company believes its existing cash and cash equivalents are sufficient to fund operations, capital expenditures, and working capital for at least the next 12 months[438] Cash and Working Capital (in thousands) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $116,797 | $149,117 | | Working capital | $128,517 | $159,442 | Quantitative and Qualitative Disclosures About Market Risk Codexis's primary market risks are interest rate and foreign currency fluctuations, though the potential impact of both is considered immaterial - The company's primary market risk exposure is interest rate sensitivity on its $116.8 million in cash and cash equivalents, which are primarily in money market funds; a hypothetical 10% decrease in rates would have an immaterial impact[483] - Foreign currency risk is present but limited, as substantially all sales are denominated in U.S. dollars; a hypothetical 10% unfavorable change in exchange rates would result in a potential loss of approximately $46 thousand[485] - As of December 31, 2021, the company had no outstanding borrowings under its variable-rate Credit Facility, thus having no immediate exposure to interest rate risk from debt[484] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for the year ended December 31, 2021, which received an unqualified opinion from the independent auditor BDO USA, LLP - The independent auditor, BDO USA, LLP, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects and that the company maintained effective internal control over financial reporting as of December 31, 2021[492][509] - The auditor identified Revenue Recognition as a Critical Audit Matter due to the significant judgments and estimates required in evaluating performance obligations, standalone selling prices, and variable consideration in customer contracts[497][499] Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $246,383 | $221,646 | | Cash and cash equivalents | $116,797 | $149,117 | | Total Liabilities | $81,992 | $51,543 | | Total Stockholders' Equity | $164,391 | $170,103 | Consolidated Statement of Operations Highlights (in thousands) | | 2021 | 2020 | | :--- | :--- | :--- | | Total revenues | $104,754 | $69,056 | | Loss from operations | ($22,697) | ($23,920) | | Net loss | ($21,279) | ($24,010) | | Net loss per share | ($0.33) | ($0.40) | Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of December 31, 2021 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[753] - Based on an evaluation using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[755] - The independent registered public accounting firm, BDO USA, LLP, audited the internal control over financial reporting and issued an unqualified opinion on its effectiveness[756] - There were no changes in internal control over financial reporting during the fourth quarter of 2021 that materially affected, or are reasonably likely to materially affect, these controls[758] PART III Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees This section incorporates by reference information on directors, compensation, security ownership, and accountant fees from the company's 2022 Proxy Statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, and accountant fees is incorporated by reference from the company's forthcoming 2022 Proxy Statement[763][765][767][768] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements and provides an index of all exhibits filed with the Form 10-K, including material contracts and required CEO/CFO certifications - This section contains the index of all exhibits filed as part of the Annual Report, including corporate governance documents, material contracts, and required certifications[771][773] - Key material contracts listed include platform technology and license agreements with GlaxoSmithKline, Merck, and Novartis, as well as collaboration agreements with Nestlé Health Science and Takeda[787][791] - Certifications by the Principal Executive Officer and Principal Financial Officer as required under the Securities Exchange Act of 1934 are included as exhibits[792]