Codexis: Market Strategy Justified

The unusual has become reality.  Long at first base with little revenue and only losses to explain, the management of renewable chemicals developer Codexis (CDXS:  Nasdaq) has issued new, higher sales and profit guidance for 2021.  The company has received a new purchase order valued at $13.9 million for one of its proprietary enzymes from an undisclosed pharmaceutical company. 

The enzyme will be used by the pharmaceutical company in the formulation of an active ingredient in one of its drug products.  The use of enzymes in such formulations speeds up production time, creates production efficiencies and sometimes even enhances active ingredient performance.  It is a market that Codexis has long targeted precisely because the value proposition in drug production is large enough to pass along good profits to suppliers of foundational chemistries like Codexis.

After years of struggle Codexis has proven the merits its strategy to move beyond the biofuel market.  Apparently, the pricing on this new enzyme order is favorable enough to deliver a higher profit margin than other sales expected in the year.  In addition to increasing product sales revenue guidance to a range of $45 million to $48 million (from a range of $36 million to $39 million) management also increased guidance for the product gross margin to a range 60% to 64% (from the previous range of 54% to 58%).

Over a decade ago, Codexis launched its CodeXyme cellulase enzymes for use in producing biofuel from sugar cane.  Despite dramatically improving the amount of fermentable sugars from cellulosic biomass, selling enzymes to the biofuel industry has never led to sufficient sales volume or profit margins to deliver profits to Codexis bottom line.

However, the 600-basis point margin improvement expected from just this one order from the pharmaceutical industry could deliver an additional $7 million to $8 million to gross profits.   At the recent spending rate, the incremental gross profits from adding just one order to the mix could cover as much as 10% of operating expenses.  The path to profitability becomes conceivable for Codexis if the company can navigate the road through the pharmaceutical industry.    

CDXS shares are currently valued at 18.9 times sales and 8.9 times book value, suggesting traders have already given the stock much credit for its future potential.  After getting turn away twice at a line of price resistance at the $26.00 price level and then another rejection at another even more robust resistance line at the $24.00 price level, the shares have retreated slightly.  Most might consider the stock has still overvalued.  However, at prices below $20.00 we suggest traders take more interest  -  at least the traders that can tolerate risk and have a lengthy investment horizon to wait for profits.

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.