Wall Street finally started paying attention to Codexis (NASDAQ: CDXS) in 2017. But as investors are now being reminded, extra attention can bring extra scrutiny. While long-term investors have enjoyed three-year stock returns of more than 300%, shares have been more volatile in the past year. What's giving analysts pause?
On one hand, management expects full-year 2019 revenue to grow about 16% year-over-year. On the other hand, Wall Street has grown impatient with the pace of progress within certain programs. Case in point: Shares tumbled nearly 10% in intraday trading when CEO John Nichols provided a business update at an investor conference in early June.
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Should investors with a long-term mindset see the sliding stock price as an opportunity, or is more pain on the way for Codexis?
Is Wall Street's focus too narrow?
Not that long ago, Codexis was struggling to monetize its niche expertise in engineering enzymes. But the company's business model is finally gaining traction thanks to advances in software engineering -- namely, the rise of machine learning and artificial intelligence -- and genetic engineering, bolstered by high-throughput microbial screening. In terms of scientist years, an industry metric used to calculate how long it would take one scientist to complete a task, the progress has been tremendous. A single project has gone from requiring 40 scientist years to complete in 2005 to less than two scientist years today.
The acceleration of research & development is evident from the company's growing pipeline of projects and commercial products. What began as engineering enzymes to increase the production of active pharmaceutical ingredients (APIs) -- the molecules that provide the therapeutic benefit of a drug -- has expanded to supplying enzymes for the manufacture of food ingredients, powering molecular diagnostic tools, and even creating a pipeline of early stage biologic drug candidates.
Codexis has also found success licensing its software platform for enzyme engineering, called CodeEvolver, to major pharmaceutical companies. Novartis signed on in early 2019, so the small-cap biotech now lists three of the top 10 global pharmaceutical companies as software customers. The latest deal could fetch up to $22 million in payments, plus additional sums if Novartis decides to expand the scope of the license. Importantly, the Novartis license includes subtle but significant differences from those with Merck and GlaxoSmithKline.
While the new licensing deal will help Codexis to meet its full-year 2019 revenue guidance of $69 million to $72 million, representing year-over-year growth of 16% at the midpoint, Wall Street seems singularly focused on the company's biologic drug portfolio. It makes sense -- to a point.
Excitement for the drug pipeline has been the primary driver for the stock's epic rise in recent years. Codexis has earned $21 million in milestone payments to date for its first drug candidate licensed to Nestle Health Science. It could receive an additional $86 million in development milestone payments, plus up to $250 million in commercial milestones, plus royalties on sales.
Simply put, biologic drugs could be a huge growth driver for the business. But analysts appeared dismayed by something disclosed in a recent investor presentation -- probably a chart showing dosing responses from a phase 1 trial -- and cut the company's market cap 7% in response. Was that an overreaction?
Well, it's too soon to say, although shares did sharply recover from daily lows before trading ended that day. However, investors with a long-term mindset shouldn't share Wall Street's narrow focus on clinical trials.
What's next for Codexis?
The drug pipeline, which expects to deliver its second and third assets ready for partnering by the end of 2019, has always been de-risked by the industrial businesses of Codexis. Moreover, there are several catalysts on the horizon.
Codexis is still ramping up sales of an enzyme used by Tate & Lyle to manufacture its next-generation zero-calorie stevia sweetener, which should become the company's top enzyme supply deal in both volume and revenue in the coming years. The business is exploring partnerships for its new molecular diagnostics products, which were market tested in 2018 and are generating revenue this year. And the enzyme engineering leader is also quietly reaping rewards from a partnership with Porton Pharma Solutions.
The partner develops manufacturing processes for small-molecule APIs for a diverse range of global customers, while Codexis can develop enzymes to make those processes as efficient and low-cost as possible. Linking up creates a win-win relationship and could help the enzyme engineer capture new customers more quickly than ever.
In fact, the partnership has yielded $2.8 million in new revenue in its first 11 months. Considering Codexis has struggled to replace product revenue from aging supply agreements in recent years -- product revenue might stagnate at $26 million for 2017, 2018, and 2019 -- the Porton Pharma partnership is more important than Wall Street is acknowledging.
A promising biotech stock for the long haul
As demand increases for biology-based technologies, the niche expertise of Codexis might evolve from niche to mainstream. Enzymes created by global companies are already used to make your laundry detergent more efficient, produce "stone-washed" blue jeans, and manufacture dozens of food ingredients. Given advances in machine learning and biologic engineering, investors might want to begin considering the expansive potential of living technologies.
The small-cap enzyme engineer is certainly well positioned to capitalize on the opportunity, which is evident from the diversity of R&D projects transitioning to commercial products and services. Wall Street might be focused on the short-term happenings of a single drug program, but individual investors can think longer-term. Consider Codexis stock a buy.
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