Codexis, Shell to Part Company
Codexis expects to lose all of Shell funding, win freedom to operate globally (excepting Brazil). Pyrrhic victory or the necessary price of freedom?In California, Codexis (CDXS) announced that it expects to obtain rights from Shell to market its CodeXyme cellulase enzymes to other cellulosic biofuels developers, (excluding Brazil) and that Shell will discontinue its $60 million enzyme R&D program, which will result in the loss of 116 full-time jobs, or a third of the company’s staff. Raizen, the Shell-Cosan JV, will remain Codexis’ largest shareholder.
Yesterday, as the company reported Q2 earnings, Codexis CEO John Nicols said that “given the recently announced Exclusive Negotiation Agreement we entered into with Shell, we are expecting and are planning for Shell to deliver notice of a reduction in funding under our collaborative agreement by 48 FTEs effective September 1,” said Nicols. “In addition, although we have not received any formal notice from Shell, we do not currently expect any continued Shell FTE funding after October 31.”
At the same time, the company reported Q2 revenues of $22.9 million, a 12% decrease from $26.1 million in the second quarter of 2011. Product revenue in the second quarter of 2012 was $6.8 million, down 19% Q2 2011 on a change in the timing of pharmaceutical product orders.
Overall, the company reported a new loss of $5.5 million, or ($0.15) per share, compared to a $5.0M loss in Q2 2011.
Let’s look at the impact.
The financial assets.The company has $50 million in cash and cash equivalents, and has set for itself a course to reduce operating expenses to limit its cash burn to a maximum of $10 million per year. That will keep the company sustainable, financially – however, severe changes in the R&D team and structure will result, as the company transitions from an R&D focus to commercialization.
The technology.In total, Shell has invested $300 million in the CodeXyme cellulase enzyme platform. The claims around the performance of the platform are, basically, three.
Cost. So far as observers have been able to discern, Codexis enzymes currently are less cost-effective than, for example, Novozymes (NVZMY) CTEC3 or Genencor Accellerase Trio, but the company contends that the gap has narrowed sharply since Codexis licensed the Dyadic (DYAI) C1 enzyme production technology in 2010.
There’s high confidence at Codexis (and Dyadic) that that cost advantage can be eliminated by the time the major enzyme producers reach the kind of costs – around $0.25 per gallon of cellulosic biofuels – that are expected to catalyze major capacity building and big enzyme orders.
Performance. Dyadic has been particularly active in emphasizing that, even today, enzymes produced via its C1 technology perform better in the higher pH ranges. Motley Fool contributor Maxxwell Chatsko observed earlier this year that “Trichoderma enzymes Duet (Genencor) and Ctec2 (Novozymes) cannot compete with C1’s CMAX (Dyadic) at a pH of 6.5 – the most common fermentation pH in the biofuels industry.”
Onsite production. C1 enzymes can be produced onsite, eliminating the need for a transport system to receive a whale of a lot of off-site produced enzymes. Abengoa is heading down this route, for example, using its own enzymes produced by the C1 platform.
Potential new dance partners.The number of available major partners available is not huge. While Codexis was a captive of Shell, POET and DSM hooked up, Abengoa (ABGOY), Sud-Chemie, TMO Renewables, and Mascoma went with their own enzymes, Petrobras went with BlueSugars, Dupont (DD) acquired Genencor, and most of the remainder (COFCO, Chemtex, Shengquan, and Fiberight) lined up with Novozymes. Inbicon has been working with both Novozymes and Genencor, and has tested DSM. The others working in the space are generally still at pilot stage or in the lab.
So, here are some potential scenarios.
1. Codexis drums up a substantial business with Raizen.
Why it’s possible. The Cosan(CZZ)-Shell JV remains Codexis’ largest shareholder, but has not yet articulated its cellulosic biofuels plans. In this scenario, the enzymes will be trained upon already aggregated sugarcane bagasse at Raizen’s formidable network of sugarcane ethanol distilleries in Brazil.
The problem. There remains much uncertainty regarding the future of the Iogen processing technology.
2. Codexis wins a waiver to work elsewhere in Brazil.
Why it’s possible. Raizen, if it decides not to compete in cellulosic arena, may well wish to realize some value from its Codexis holdings by having Codexis supply to other sugarcane bagasse technologies – or may sell its interests in Codexis outright to other interested parties.
The problem. Assumes that cellulosic biofuels will not cut in to Raizen’s existing ethanol market share in Brazil.
3. Codexis wins cellulosic biofuels business with Abengoa or Chemtex.Why it’s possible. Abengoa has already licensed the Dyadic C1 platform itself, and may simply choose to go with CodeXyme cellulase enzymes based on performance and future potential. In turnn, Chemtex is already a Codexis customer for renewable chemicals.
The problem. Moving out the incumbent is always tougher in practice than on paper.
4. Codexis goes into partnership with Praj.
Why it’s possible. Since the wind-down got underway at Qteros, Praj has been essentially dancing without an enzyme solution, and there is an awful lot of sugarcane bagasse in India. Sud-Chemie’s processing.
The problem. South Asia has no developers on an advanced track towards production any time soon, and Praj had sets its sights on a consolidated bioprocessing solution, which may lead it to switch, ultimately, to Mascoma and its CBP technology.
5. Other wildcards emerge.There’s TMO Renewables, developing for the China market; there are some Novozymes clientele that may not be locked down for their Nth plants; it is possible that one of the existing players like Inbicon might add CodeXyme to their mix, or that companies like Lignol might advance substantially in their journey towards commercialization.
The bottom line.This is the hour where Codexis pivots from R&D towards commercializing what it has got. There are some questions that remain on how much of its R&D momentum it will be able to maintain, post-Shell, and its prospects in the key market of Brazil.
That said, the company is in for a rough rise over the next few months – but may well emerge as a leaner, fitter fighter in what is expected to become a multi-billion dollar market for cellulase enzymes.
More on the Shell-Codexis outlook in Known/Unknown, Black Swans and Yellow Cranes, here.
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