Codexis IPO: Why It Needs Shell & Other Fast Facts

When a startup files an S-1 form with the Securities and Exchange Commission to launch an initial public offering, it opens up info galore about the private company’s history, finances and strategy. We dug through the more than 230-page document filed yesterday by biocatalyst developer Codexis, and found tidbits on just how much the startup has had to pay the drug development company it spun out of seven years ago, how heavily it’s banking on oil giant Shell to commercialize biofuels, and what happened to the chief financial officer that the company once considered so valuable he was the only exec earning above market rate.

Reliance on Shell: Codexis has a lot of chips riding on its work with Shell. If the startup succeeds in developing viable biocatalysts for biofuel production, it would rely on Shell (or other companies selected by the oil giant), “to design and build the commercial scale fuel production facilities and to distribute the final fuel product.” If the fuels take off, Codexis could reap big rewards: “If Shell commercializes our biofuels technology, we will collect a royalty for every gallon of fuel that Shell produces using our technology.”

Time to first revenue: Founded in 2002 as a spin-out from drug developer Maxygen, Codexis focused on building its team and developing its technology for three years. The company saw its first revenue from product sales in 2005.

Handful of customers: During 2008, just five customers accounted for 79 percent of Codexis’ total revenues. For the first nine months of this year, the startup’s top five customers accounted for an even larger portion of Codexis’ revenue: 90 percent. Shell alone accounted for 60 percent or revenue in 2008 and 75 percent of revenue in the first three quarters of 2009. Codexis emphasizes that it’s working in a variety of industries and markets (including the U.S., Singapore, India, Japan, Hungary and others), but it acknowledges that its dependence on a limited number of customers is risky: “The loss or reduction of business from one or a combination of our significant customers,” Codexis writes, could hurt the company’s revenue and financial condition.

R&D, the fickle cash cow: Codexis says “a substantial portion” of its revenue so far has come from R&D agreements with collaborators like Shell, and it expects to continue that trend. Here’s how it works: Shell makes bi-monthly payments to Codexis based on the number of full time employee equivalents that work on the collaborative research (different rates are set for employees working in the U.S. and Hungary). If Shell decides to cut the number of people working on that project, Codexis’ cash stream will likely shrink. And starting in November 2010, Shell can pull the plug on the project “for any or no reason,” as long as it provides nine months notice.

Milestone payments in the pipeline: Codexis says its agreement with Shell includes milestone payments of an undisclosed amount if it meets certain technical and commercial goals, starting in 2009.

Exclusive agreement: When it comes to converting cellulosic biomass into sugars for biofuel production, Codexis has agreed to work exclusively with Shell until November 2012. But Shell can have other partners. “For example,” Codexis says, “Shell is currently working with Virent Energy Systems to develop a thermo-chemical approach to developing biogasoline.”

Manufacturing build-out: Codexis needs to expand its production capacity, and it’s looking at two means of doing that: establish long-term supply contracts with contract manufacturers and invest in its own manufacturing facilities.

How many people?: As of September 2009, the company had about 300 employees, up from just 40 employees at the end of 2002.

Eye on oil prices: If and when Shell opts to commercialize biofuels with Codexis’ technology, the average price of oil in coming years will affect how much revenue Codexis gets from the product. As Codexis explains, its royalties under the agreement with Shell are indexed to the price of oil and will generally increase as the price of oil increases. But the index is based on average prices between November 2007 and the date of first commercial sale.

History of losses: Codexis has seen major net losses for each of the last four years: $18.7 million in the calendar year 2006, $39.0 million in 2007 and $45.1 million in 2008. For the first nine months of 2009, Codexis reports a net loss of $15.1 million, and an accumulated deficit of $154.4 million.

Payments to Maxygen: Codexis has had to make fat payments to Maxygen as part of its technology licensing deal. Codexis paid Maxygen $7.8 million in 2007, $1 million in 2008 and $4.2 million during the first three quarters of 2009. These are taken as a percentage of payments from Shell development project.

Who owns what?: Maxygen owns about 21.6 percent of outstanding shares and Shell owns nearly 20 percent of outstanding shares. Biomedical Sciences Investment Fund, CMEA Ventures, CITV Investments and FirstMark Capital all own between about 6 and 12 percent of the shares.

Key CEO: CEO and President Alan Shaw took a salary of $425,000 in the calendar year 2008, up nearly 10.5 percent from 2007. He earned a total of $950,000 including option awards and an approximately $150,00 bonus. Codexis says the loss of Shaw could prevent it from developing and commercializing its products for target markets and entering into collaborations or licensing arrangements.

The competition: Competitor Novozymes also licenses technology from Maxygen, an agreement that may restrict Codexis’ use of the tech.

What happened to the CFO?: Robert Breuil held the post of Senior Vice President, Finance and Chief Financial Officer at Codexis starting in early January 2006. But he turned in his resignation and ultimately left in June 2009. He had been the only executive officer earning a salary above the 50th percentile for the life sciences industry — a reflection, according to the prospectus, of “his significant individual contributions to our company during 2007 and the critical nature of his skills and expertise for our company at its stage of development in 2008.” (Breuil earned a total of $540,558 last year, including bonus and option awards.)

The prospectus does not say why Breuil resigned, but his departure seems to have been on good terms: Codexis says Breuil “agreed to be available to consult with us on a paid and as-needed basis for three months following his termination of employment, and has continued to consult for us beyond that three-month period.” Robert Lawson, a former Intuit executive, joined Codexis as CEO last month.

Reality check on cellulosic biofuels: “As of the date of this prospectus, we believe that there are no commercial scale cellulosic biofuel production plants in operation,” Codexis writes. “There can be no assurance that anyone will be able or willing to develop and operate biofuel production plants at commercial scale or that any biofuel facilities can be profitable.” Among the remaining hurdles for the industry is an infrastructure buildout. According to Codexis, additional rail capacity, storage facilities, truck fleets for transporting ethanol, refining and blending facilities, and vehicles capable of running on ethanol blends are needed in order for the ethanol market to grow.

What’s next?: Codexis says it is “actively pursuing opportunities in other bioindustrial markets” beyond biofuels and pharmaceuticals, “including through self-funded research in carbon management and the pursuit of funded collaborations in carbon management, water treatment and chemicals.”

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