Fueling Tomorrow: Codexis

By Maxxwell A.R. Chatsko - February 13, 2012 | Tickers: AMRS, CDXS, CZZ, PFE, RDS-A | 0 Comments

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If you think Solazyme is a tough act to follow, then you certainly aren’t familiar with the next company in the FuelingTomorrow series. Despite being severely underappreciated and undervalued, Codexis Inc. (NASDAQ: CDXS) can hang with the best of ‘em.

As TheStreet’s Eric Rosenbaum correctly noted, biofuels IPOs may be a worse investment than social media IPOs. However, he incorrectly threw Codexis into the group of unsuccessful biofuels companies. The company has fallen far from its IPO price of $13, but I’ll explain why that has nothing to do with the company itself and everything to do with Wall Street’s impatience and misunderstanding of the industry. Although the company has better developed products in other markets, Codexis is also far beyond its peers when it comes to access to biofuels production facilities (24 in Brazil alone). So sit back and read up as we explore the industry’s dark horse.

A Natural and Logical Progression

Founded in 2002, Codexis began its journey producing pharmaceutical enzymes by utilizing gene-shuffling technology to manipulate biological pathways. We saw a similar beginning in pharmaceuticals for Amyris Inc. (NASDAQ: AMRS) with the malaria drug artemesinin. In a lot of ways it is a natural and logical progression for bioprocess companies to go from producing pharmaceuticals to producing biofuels. The pharmaceutical industry has taken advantage of microbes for producing valuable products for decades. In fact, the first synthetic human insulin manufactured in bacteria occurred all the way back in 1977. Today we are on the verge of coaxing microbes – bacteria, yeasts, fungi, algae – into producing large quantities of the chemicals that make everyday life possible.

Digging Deeper: CodeEvolver™ Technology

Nature can do some pretty amazing things, but wild-type microbes are almost never used on an industrial scale. With ten years of performance the CodeEvolver™ technology platform developed by the company is a solid answer. Whereas other companies may be restricted to using their proprietary yeast or algae – a potential liability in this quickly evolving industry – Codexis’ CodeEvolver™ technology can be used in any type of host, ensuring they will never be left in the dust for biological IP.

The company’s enzymes are already being used in industrial processes around the world. The CodeEvolver™ platform is a directed evolution technology used to create enzymes and biological pathways in microbes that are optimized for a given process. If an enzyme is a protein on steroids, then the company’s CodeEvolver™ enzymes are capable of pulling an airplane, an 18-wheeler, and a school bus full of children at the same time. We will discuss the eye-popping improvements made to wild-type enzymes below.

Enzymes are the catalysts that make microbial production of chemicals possible on an industrial scale. You may not be aware of it, but enzymes are used by all chemical processes. From the smallest of ethanol plants to the largest industrial facilities, enzymes are at the core of each process.

Digging Deeper: Pharmaceutical Enzymes and Intermediates

Pharmaceutical enzymes and intermediates produced by Codexis are used by over 50 companies, including Merck and Co. Inc., Pfizer Inc. (NYSE: PFE), and TEVA. The molecules aren’t pharmaceutical compounds themselves, but are instead used in the production of pharmaceutical compounds. The company’s enhanced enzymes can be used to speed up production of active pharmaceutical ingredients (APIs), improve yield, and reduce waste – allowing pharmaceutical companies to recover soaring research and development costs of approved drugs more quickly.

Codexis created an enhanced enzyme for producing atorvastatin, the API in Pfizer’s cholesterol drug Lipitor, with a 4,000 fold increase in activity over the standard enzyme. As another example, Merck and Codexis created a new process for manufacturing sitagliptin, the API in Januvia ® for Type 2 diabetes. The company’s website states:

“In a paper in Science on the project, Merck and Codexis reported a 10-13% increase in overall yield, a 53% increase in productivity and a 19% reduction in total waste. (Science, June 17, 2010)”

As a result of these production breakthroughs, Codexis was awarded the U.S. EPA Presidential Green Chemistry Challenge Award with Pfizer in 2006 and again with Merck in 2010. In 2011, Codexis pharmaceutical enzymes and intermediates generated $49 million in revenue, a 49% increase from 2010.

Digging Deeper: Chemicals

The downstream processing of Chemtex (named PROESA) combined with the enzymes of Codexis (specifically CodeXyme™ cellulases) will create the CodeXol™ product line. These detergent alcohols make up a $6-$8 billion global market opportunity and include everything from laundry detergent, shampoo, toothpaste, and mouthwash to industrial chemical foaming agents.  A large-scale 40,000 metric ton demonstration facility is currently under construction in Crescentino, Italy and is expected to be operational in 2012.

Both companies aim to replace palm-kernel (70% of detergent alcohols) and petroleum (30%) feedstocks with cellulosic feedstocks and biomass waste streams. As discussed in the Solazyme piece, many companies are eager to introduce sustainable and cost-effective measures in their supply-lines. 

Codexis is also creating enzymes with increased activity for use in carbon capture systems. Well, if “increased” is the correct word. Last August the company, along with partner Alcoa, announced that they had increased the activity of carbonic anhydrase by about 2 million-fold. Even more impressive was the fact that it was achieved in a 4 M (very strong) amine solvent at temperatures exceeding 90 Celsius. In other words, enzymes only work under very strict conditions, so the fact that Codexis achieved it at these industrial conditions is extraordinary.

This never-mentioned market opportunity could be significant for Codexis as the EPA cranks up emissions regulations on coal-fired power plants or as China and India seek to reduce emissions.

Digging Deeper: Fuels

If you don’t believe the pharmaceutical intermediates and enzymes and detergent alcohol products separate Codexis from the pack, then get ready for their biofuels. Codexis formed Raizen, a joint venture with Brazil’s Cosan Limited (NYSE: CZZ), to develop its biofuels products. Also backed by Royal Dutch Shell (NYSE: RDS-A), Raizen is one of the largest biofuels producers in the world with over 2 billion liters of annual ethanol production, 24 production facilities, and 4,500 fueling stations.

The Brazilian government has stated that the country’s ethanol market needs to double (from 6 billion gallons to 12 billion gallons) in the next ten years to keep up with demand. In order to help reach that goal, Codexis is working with Cosan and Shell (via Raizen) to develop CodeXyme™ cellulases.  A cellulase is an enzyme that can break down cellulose into fermentable sugars. The lack of commercially available and functional cellulases is one of the major reasons cellulosic feedstocks have yet to make it mainstream. Codexis could be ready for lift-off when cellulosics catch-up.

CodeXyme™ cellulases are a “cocktail” of enzymes that can be optimized for various feedstocks. About 60% of production costs are attributed to the cost of feedstock. First generation feedstocks, such as corn and sugarcane, cost up to $400 per ton while second generation feedstocks, such as cellulosic crops and biomass waste, will cost about $200 per ton. The switch is inevitable and Codexis stands to benefit – perhaps more than the producers themselves.

Codexis estimates that the cellulase enzyme industry will be a $1 billion a year market opportunity by 2020 – and that’s only when accounting for Shell and Raizen. While the company has a much lower market cap than its peers today, it may turn out that Solazyme, Amyris, and other major sustainable chemical companies will need to use the enzymes produced by Codexis in the future.

I always laugh when I read comments along the lines of “my biofuels company is better than your biofuels company”. We must realize that successful, economical, commercial-scale production of sustainable chemicals will only be possible by working together. Luckily, key people at these companies are very aware of that fact.

Foolish Bottom-line

Investors and Wall Street may focus on pharmaceuticals or biofuels, but specially tailored enzymes are needed to make their production a reality. The importance of companies such as Codexis is not well-defined or well understood by Wall Street. Codexis has a well-developed technology platform that is severely undervalued at a market cap under $170 million.

In 2011 Codexis reported $123.9 million in revenue, an increase from $100.7 million in 2010. By contrast, Amyris generated $277.3 million in revenue from 2004 to September 30^th, 2011. Solazyme (NASDAQ: SZYM) has yet to break $100 million in revenue. Amyris and Solazyme have market caps of $318 million and $687 million, respectively.

I realize that Codexis is not yet in the green, but that is an equalizing factor when investing in this industry. While I never explicitly endorse companies, I believe Codexis is investment-worthy right now. Therefore, I will make my first CAPScall with Codexis (to be triggered at market open today). While the share price could certainly slip lower towards its 52-week low, I believe the company is undervalued at its current price.

Are you listening yet, Wall Street?

Up Next: Synfuels International or Synthetic Genomics (both privately held companies)

Did you enjoy this article? Follow me on Twitter to keep up with my future posts on biofuels and energy @BlacknGoldFool.

BlacknGold

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