First published in the Quoted Cleantech Newsletter July 2010. Copyright Cleantech Investor Ltd 2010

by Anne McIvor

While conditions remain difficult for companies aiming to list on European markets, NASDAQ has seen several high profile cleantech IPOs this year. The listing of electric car manufacturer, Tesla, at the end of June was perhaps the most notable. The positive reception for Tesla would appear to be an endorsement for electric vehicles as the future of transport. However, the jury remains out – and indeed it is probably fair to say that while electric cars will take a share of the market, there will also be an important role for biofuel. Another significant new cleantech arrival on NASDAQ, which is pinning its business model around the growth in the biofuel market, was  biofuel catalyst producer, Codexis Inc.

In April Codexis issued 6 million shares at a price of $13, the lower end of the range, raising $78 million gross and valuing the company at $443 million. Since then, the shares have drifted lower, ending June at $8.76 and pushing the market value below the $300 million level.  

Codexis, which is based in Redwood City, California, was founded in 2002 as a subsidiary of NASDAQ-listed Maxygen Inc. (MAXY). The company licenses its core technology from Maxygen, which owned 21.3% of the shares before the IPO. Other significant investors, prior to the listing, included Shell, Chevron Corporation, Pfizer and General Electric.

Biocatalysts, or enzymes which initiate or accelerate chemical reactions, are widely used in industry. Naturally occurring biocatalysts have limitations: Codexis’ technology platform aims to overcome some of these limitations to manufacture biocatalysts capable of performing chemical reactions on a commercial scale. Biocatalysts, it is argued, can operate at room temperatures and pressures and require less complex manufacturing equipment than chemistry-based manufacturing processes.
 
Codexis’ technology platform uses advanced biotechnology methods, including gene shuffling and proprietary bioinformatic software tools, to identify and quantify the potential value of beneficial mutations and avoid detrimental mutations.

The biocatalysts produced by Codexis have already been commercialised in the pharmaceutical industry, where customers include Merck and Pfizer. Opportunities for biocatalysts in the biofuel market are being developed in conjunction with Shell. Codexis will receive royalties from Shell if the oil company commercialises any technology developed under the research and development collaboration between the two companies.

The focus with Shell is on next generation ethanol, produced from cellulosic biomass feedstocks – and also on the conversion of sugars into biohydrocarbon diesel.  Codexis expects that its biocatalysts will be able to convert both sugar derived from cellulose and cane sugar into diesel fuel.

The latter could open up a significant opportunity in Brazil: Shell recently announced a joint venture with Brazilian sugarcane producer, Cosan. Shell is contributing its equity assets in Codexis to the Cosan joint venture, which is in the final stages of receiving approval. However, the precise role for Codexis within the Cosan joint venture remains to be seen.

In conjunction with the relationship with Shell, Cosan entered into an agreement with Iogen Energy Corporation, which focuses on converting cellulosic biomass to ethanol for commercial scale production (Shell is also an investor in Iogen).

Codexis also expects to apply its technology platform to develop solutions in other bioindustrial markets such as carbon management, water treatment and chemicals. The company has the right to use any intellectual property developed in collaboration with Shell in fields outside of fuels. Meanwhile, it is continuing to develop its technology platform for pharmaceutical products.

Significant competitors in the ethanol space include Novozymes, Danisco/Genencor, DSM (which has received grant funding from the US Department of Energy to lead a technical consortium that includes Abengoa Bioenergy, to develop cost-effective enzyme technologies), Mascoma Corporation (which has a joint venture with Chevron) and Verenium (which has a joint venture with BP).

Codexis also competes with companies developing other forms of biofuels being developed by companies such as Butamax (a joint venture between BP and DuPont), Viren Energy (which is linked to Shell), Range Fuels Inc. and Coskata Inc.

The company’s income is derived primarily from licence revenues for research and development and include related party collaborative research and development revenues (from Shell) as well as income from other collaborators. Codexis also derives revenues from product sales (biocatalysts etc.) and government grants.

The US Energy Independence and Security Act of 2007 mandates that 36 billion gallons of liquid transportation fuels must be derived from ‘alternative sources’ by 2022. Next generation biofuels clearly offer a massive opportunity. Codexis still faces many technical hurdles before we see a large commercial scale cellulosic ethanol plant in operation – but the company looks well placed to provide the technology behind at least some of the fuels of the future.

In May, Codexis announced first quarter results showing revenues of $25.7 million, up 32%, and a net loss of $1.4 million, or $0.50 per share. The company revealed spending of $13 million on research and development in the quarter, down from $15.1 million in the first quarter of 2009. Cash in the bank at the end of March was $39.3 million, $55.6 million less than at the end of December 2009. That cash balance will have been boosted significantly by the $78 million injection from April’s IPO.

Codexis is forecasting full year 2010 revenues of between $94 million and $98 million, which would represent growth of 13% to 18% compared to 2009. The company has also stated that it expects adjusted EBITDA to be positive for the full 2010 financial year.  However, Codexis looks set to remain loss making at the net level for some time – a fact which is likely to have contributed to the selling pressure on the share price of late, in this difficult market. Longer term, however, Codexis may be one to watch!

Market: NASDAQ
Symbol CDXS
Price: $8.76
Market cap: $298.6m
12 month high/low: $14.98/$8.76