Jim Lane
Codexis, Shell redefine
relationship; Codexis gains global rights; will lay off 133 staff;
adopts anti-takeover measures; what does it mean for Shell,
Raizen, Iogen, Codexis and Dyadic?
What does it say about strategic investors in advanced biofuels?
In California, Codexis (
CDXS)
announced that Shell has granted Codexis a royalty-bearing,
non-exclusive license to develop, manufacture, use and sell
cellulase enzymes developed under the companies’ Amended and
Restated Collaborative Research Agreement. The scope of the New
Agreement is worldwide, except Brazil, for enzymes used in the
biofuels field. Codexis already has exclusive rights to
commercialize its cellulase enzymes in other fields.
Codexis rights, Shell royalty
In exchange for these new rights, Codexis will be obligated to pay
Shell a low single-digit percentage royalty on net sales of CodeXyme
cellulase enzymes to customers other than Shell and its affiliates.
Codexis will also be obligated to pay Shell a low single-digit
percentage royalty on Codexis’ own use of cellulase enzymes in the
biofuels field. Shell is also entitled to preferential pricing on
purchases of cellulase enzymes from Codexis should the companies
mutually agree to enter into a future supply arrangement.
Codexis and Shell have agreed to an early termination of the Shell
Research Agreement, effective now, and Shell will pay Codexis
approximately $7.5 million in satisfaction of remaining R&D
payments. Codexis also remains eligible to receive a one-time $3.0
million milestone payment upon the first sale or use by Shell of
such enzymes in the biofuels field in Brazil, or in other fields of
use previously specified in the Amended and Restated License
Agreement between Codexis and Shell.
The Shell Research Agreement would have expired on November 1, 2012
if not for the early termination effected by the New Agreement.
Shell’s 10-year rights
Shell has also agreed under the New Agreement not to sell any
cellulase enzymes to third party biofuel customers using technology
developed by Codexis. Shell retains its right to use and manufacture
such enzymes, including those enzymes that result from Codexis
improvements during the ten-year period beginning on August 31,
2012, for Shell’s own use and use by Shell affiliates, as well as to
sub-license the right to manufacture such enzymes to third parties
for Shell’s own use.
Codexis to lay off 133 employees
Codexis today announced a workforce reduction of 133 employees
effective October 30, 2012. All affected employees will receive
advance notice of their employment loss in accordance with
applicable law. Codexis estimates that it will incur total charges
of up to $3.6 million in the second half of 2012 as a result of this
workforce reduction, including $2.9 million in continuation of
salary and benefits of the affected employees until their work is
completed and their positions are eliminated and $0.7 million of
one-time termination and miscellaneous costs, all of which will
result in future cash expenditures.
Codexis shareholder rights plan
The Board of Directors of Codexis announced today that it has
adopted a short-term shareholder rights plan, which is scheduled to
expire on September 2, 2013.
The rights plan is intended to enable all of Codexis’ stockholders
to realize the underlying value of their investment in Codexis by
guarding against inadequate or unsolicited takeover offers. The
rights are not being distributed in response to any specific effort
to acquire control of Codexis. The rights are designed to ensure
that the Board of Directors has sufficient time to consider any
proposal and make sure that all stockholders receive fair and equal
treatment in the event of any proposed takeover of Codexis.
In addition, the rights plan will guard against partial tender
offers, open market accumulations and other coercive tactics aimed
at gaining control of Codexis without paying all stockholders a full
control premium for their shares.
Under the plan, one preferred stock purchase right will be
distributed for each share of common stock held by stockholders of
record on September 18, 2012. Subject to certain exceptions, the
rights will be exercisable if a person or group acquires 15% or more
of the Company’s common stock or announces a tender offer for 15% or
more of the common stock.
More on
the
rights plan, here.
Reaction from Codexis
“Codexis has developed some of the most cost effective and
competitively advantaged cellulase enzymes in the world. Securing
the rights to market these enzymes to advanced biofuel companies
outside of Shell is a major milestone for the company,” said John
Nicols, President and CEO of Codexis. “We also remain focused on the
Brazil market, where our discussions with Raízen continue
regarding commercialization of our cellulase enzymes for second
generation ethanol production.”
Analyst reaction
Piper Jaffray’s Mike Ritzenthaler writes:
Shares of CDXS are down 50% since February 21st, and at this point
we believe that most of the news around the new relationship with
Shell has been priced in. Over the next 2-3 years, we expect
essentially all of the value of the company to be derived from
pharma sales. With the lack of clearly defined catalysts (either
positive or negative), we have elected to take a Neutral stance. As
a result, we have elected to upgrade shares to Neutral, while
maintaining our $2 price target. The new agreement stipulates a
‘low, single-digit’ royalty percentage to be paid to Shell out of
any future net sales of CodeXyme to third-parties, with no apparent
sunset. However, winning new business for CodeXyme will be very
difficult, in our view, given the nature of the enzyme supply
agreements already in place for current cellulosic biofuel projects.
• New agreement eliminates Shell backstop. Codexis announced
yesterday that, as of August 31st, they are free to pursue global
opportunities for fuel applications of CodeXyme, and have agreed to
pay Shell a percentage of all future net sales. The royalty payments
are a mechanism for Shell to recoup their approximately $375 million
investment in the development of cellulase enzymes, though it is yet
unclear whether the royalty provision has a sunset. We have revised
our model to include a final $7.5 million FTE/milestone payment from
Shell in 3Q12, and ~$1 million in one-time expenses related to the
workforce reduction in 4Q12. In 4Q12 through the end of FY14, we
have included revenue contribution only from the pharmaceutical
segment.
• Although Codexis can now pursue global fuel opportunities, there
are likely no more prospects with or without exclusivity with Shell.
As far as Raizen goes, we believe the 2-year development window for
1st gen technology speaks volumes about the conservative nature of
Raizen’s management and operations. Cellulosic biofuels could take
2-3x the time to implement (at best) due to the complexity, the need
for an intermediate scale, and Raizen’s cautious approach. Projects
outside Brazil may take even longer than those with Raizen, since
the cellulosic ethanol plants currently under construction already
have a contracted enzyme producer, and the next slate of projects
likely won’t come on-line until 2016 at the very earliest.
Biofuel Digest’s reaction
We have two thoughts to add – one on the nature of strategic
partners and strategic partnerships as a whole. A second, some
thoughts on where we believe Shell, Raizen, Iogen, Dyadic and
Codexis are headed – in lieu of the companies being able to offer a
comprehensive roadmap at this time. We think this does not signal
that Shell is abandoning the field – rather, that it is centering
its efforts on sugarcane bagasse.
On Shell, Raizen, Iogen, Codexis and Dyadic
The second, first. Our thesis is that, rather than abandoning
cellulosic ethanol and the enzymatic path to advanced biofuels,
Shell is advancing from supporting R&D to supporting
commercialization, via Raizen, its joint venture in Brazil with
Cosan (
CZZ).
We note, for example, that Codexis can assign rights to an acquiror.
However, “any such assignee is required to undertake a certain level
of effort to further develop CodeXyme cellulase enzymes, make
certain payments to Shell, or otherwise elect to give up its
cellulase enzyme license grant from Shell.” We see that as clear
evidence of Shell’s intentions to have someone else take up the
long-term R&D effort while Shell focuses on commercialization.
(We also note, in another signs of its intentions in Brazil, that
Shell built its own pilot plant in Houston to work with Virent’s
technology. Now, Virent has its own pilot, so why build one? Our
take is that Shell is unwilling to stand in line as Virent juggles
campaigns for a variety of investors and clients, such as Coca-Cola)
We expect that Raizen will announce that it will utilize (presumably
Codexis-based, and expressed through the Dyadic (
DYAI)
C1 platform) a C6 enzyme for sugarcane bagasse – and that
Raizen and Iogen will ultimately build a plant to support that
technology path in Brazil. We further expect that there will be a
second path announced with respect to C5 sugars – and that
additional partners may well be involved.
Ourselves, we don’t see conservatism in the Brazilian market or at
Raizen in particular – we see all kinds of urgency, tempered only by
the fact that they are hard-nosed business people who work in two
brutally competitive commodity markets.
First order of urgency, sugar prices are high – producers would like
to maximize output. But the Brazilian government has lately, through
ANP, acquired substantial regulatory influence over biofuels, and
that means that to extent that it has acquired some influence over
the global sugar trade. Brazil is the world leader in sugar
production, and that production occurs at integrated sugar/ethanol
facilities.
Diverting as much production to sugar as possible? That’s not the
solution that Brazil wants to hear. It puts pressure on oil imports
and fuel prices – unpopular.
Long-term, Brazil needs cellulosic production and producers need it
too if they are to take advantage of good sugar prices and meet the
home fuel needs, too – and make a case that production expansion is
a good thing not only for producers, but the country as a whole.
Codexis as acquisition target
Let’s face it – Codexis has invested $375 million in developing
cellulase enzymes, the company has a small but lively business in
pharma enzymes – it now has freedom to operate anywhere excepting
Brazil where it has a mighty partner/investor in Raizen. Management
has been rebuilt. Painful steps to maintain liquidity have been
taken. All that, and the company’s market value is $81 million. If
ever there was a ripe takeover target in biofuels enzymes, this is
it.
On strategic partners
Here’s the problem with big strategic partners for small,
early-stage companies – and one of the reasons that, for many years,
VC firms didn’t want strategics along for the ride in venture
development: strategics change strategy, and small changes at big
companies result in big changes for small companies. What is a
ripple in the water to a giant is a tsunami to a fly.
Often, strategy must shift as the result of weak earnings, weak
economies, or large-scale acquisitions that come with collateral
businesses that must be rationalized, cleaned up, or otherwise
fitted under the corporate umbrella. Personnel changes at strategics
can have colossal impact on small companies, too. Or just painful
rounds of rationalizing investments, after the pleasant couple of
years making them.
You can see it with Shell, for example. There were the fun years.
Shell invested in Cellana, Iogen, Codexis, and Virent, just to name
several high-profile advanced biofuels ventures. We’ve seen big
changes with the first three – that end up causing headaches for the
other partners, or management, trying to explain why the
relationship has changed – constrained by confidentiality,
disclosure rules – often, a highly beneficial change is practically
impossible to explain in the positive light it can and should be
seen in.
For the last couple of years, strategics have been the darlings of
biofuels companies – who have been waving them like crazy at
investor and industry presentations. Well they should be proud of
them, as those relationships are hard to gain, hard to sustain. They
have brought not only dollars, but access to markets, and validation
of the technology.
But we expect that we have not seen the last round of
rationalization by a major strategic – perhaps not even the last
major announcement this month. Watch those companies that have had
their strategics on board for three-years or more. It’s hard for
strategics to make shifts in less than three years without looking
unserious – without the data to make decisions – but three-year time
windows are usually enough for portfolio rationalization to occur.
Not to mention that effective corporate godfathers often move up or
out within three years.
For the smaller company, it is often a blessing in disguise. Though
as Winston Churchill was wont to observe, “as a blessing, it is very
effectively disguised.”
The most vulnerable of strategics – generally, upstream.
Strategics who are investing because they wish to provide new
technologies and products to their existing customer base – well,
that is a little like a financial investor, isn’t it – the decision
to invest is driven by customer demand than can be readily
monetized.
Strategics who are investing because they see opportunities to
commercialize their feedstock – these would be broadly more
vulnerable to shifting strategy based on a) finding other
technologies, or b) feeling that downstream markets, which involve
other partners, are not evolving as fast as envisioned, putting a
strain on the ROI case for the ongoing investment.
So – it is a double-edged sword. Broadly, it is near-to-impossible
to complete a Series C or D venture round these days without a solid
strategic partner in the mix. But, companies might well watch that
three-year window.
Disclosure: None.
Jim Lane is editor and
publisher of Biofuels Digest where this
article was originally published. Biofuels Digest is the most widely read Biofuels
daily read by 14,000+ organizations. Subscribe
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