Rising siRNA Manufacturing Risks May Delay Profitability Yet Long-Term Upside Remains

Catalysts

About Codexis

Codexis develops and scales enzymatic manufacturing technologies for siRNA and small molecule therapeutics.

What are the underlying business or industry changes driving this perspective?

• Although the Merck supply assurance agreement provides nondilutive cash and validates Codexis as a strategic partner, concentrated dependence on a few larger agreements could expose revenue to timing slippage and milestone risk, limiting the predictability of top line growth and pushing out earnings inflection.
• While the industry wide shift toward siRNA and other genomic medicines is expanding the addressable market for ECO Synthesis, the capital intensive build out of a GMP facility and potential delays in scaling to kilogram production volumes may compress net margins and extend the company’s path to sustainable profitability.
• Although the pipeline of 40 ECO Synthesis opportunities and 11 active revenue contracts suggests a growing customer base, many programs remain in early stages with uncertain progression to late clinical or commercial scale. This could slow the expected ramp in high margin service and royalty revenue.
• While the heritage small molecule biocatalysis portfolio benefits from 14 Phase III drugs that could drive high margin product sales with limited incremental spend, the decision to pull back commercial investment in this segment may accelerate volume and pricing erosion, restraining overall revenue diversification and cash generation.
• Although partnerships with established CDMOs such as Nitto Avecia could enable efficient scaling into Phase II and Phase III manufacturing, integration complexity and customer preference for established chemistries may delay broad adoption of enzymatic oligonucleotide synthesis. This may dampen the near to medium term impact on revenue and operating leverage.

Assumptions

This narrative explores a more pessimistic perspective on Codexis compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Codexis's revenue will grow by 27.7% annually over the next 3 years.
• The bearish analysts are not forecasting that Codexis will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Codexis's profit margin will increase from -120.8% to the average US Life Sciences industry of 15.5% in 3 years.
• If Codexis's profit margin were to converge on the industry average, you could expect earnings to reach $17.1 million (and earnings per share of $0.15) by about December 2028, up from $-64.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $-30.5 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.6x on those 2028 earnings, up from -2.4x today. This future PE is lower than the current PE for the US Life Sciences industry at 34.6x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.68%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The transition from an enzyme supplier to a full service oligonucleotide manufacturing solutions provider may take longer and prove more complex than management anticipates. This could delay scale up milestones for ECO Synthesis and restrain revenue growth for several years, limiting earnings improvement.
• Codexis is becoming increasingly reliant on a concentrated set of large agreements such as the Merck supply assurance deal and a relatively small number of ECO Synthesis service contracts. Any delay in customer manufacturing schedules, clinical progression or partner onboarding could create continued revenue volatility and push out the timing of net margin expansion.
• The decision to de emphasize new commercial effort in the legacy small molecule biocatalysis segment comes at a time when that market is seeing rising pricing pressure. This increases the risk that this historically important business underperforms expectations, which could reduce high margin product revenue and slow the company’s path to stronger earnings.
• The capital intensive build out of a new GMP siRNA facility and higher ongoing research and development spending to perfect and scale ECO Synthesis may exceed current plans. If ECO service and royalty revenue ramps more slowly than expected, cash burn could remain elevated and net losses could widen again toward the end of the current runway.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Codexis is $2.0, which represents up to two standard deviations below the consensus price target of $6.58. This valuation is based on what can be assumed as the expectations of Codexis's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.0, and the most bearish reporting a price target of just $2.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $110.1 million, earnings will come to $17.1 million, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $1.71, the analyst price target of $2.0 is 14.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.