Pfizer (PFE) may have used artificial intelligence and advanced computational modeling to more quickly develop Paxlovid, but that never guaranteed commercial success.
Indeed, the pandemic star may have quietly hinted at reduced expectations for its oral antiviral pill. That's bad news for a popular growth stock.
Codexis (CDXS) announced a restructured supply agreement for a key ingredient for Paxlovid. Specifically, Codexis supplies an enzyme that improves the efficiency of and reduces waste products created by the manufacturing process for Paxlovid.
The small company was leaning heavily on Pfizer for revenue growth in 2022 but had to reduce revenue guidance. The decision will hurt 2023 and 2024 sales, too. What should investors make of the development?
Pfizer Reduces Its Supply Commitment
Codexis has a world-class technology platform. Based on a Nobel Prize-winning technology called directed evolution, the company can engineer enzymes in weeks or months instead of the thousands or millions of years typically required by natural evolution.
Enzymes are molecules that speed up chemical reactions. They power all living things – and are themselves powered by quantum mechanics.
Codexis monetizes its technology platform by supplying enzymes to power manufacturing processes across pharmaceutical production, food ingredient manufacturing, DNA sequencing tools, and other applications. Pharmaceutical customers represent the bulk of Codexis's revenue. And Pfizer represents the bulk of that revenue.
The business reported $30.7 million in first-quarter 2022 product revenue, including $21.3 million supplying an enzyme used to manufacture Paxlovid. That equated to 69% of total product revenue.
The enzyme company originally set full-year 2022 revenue guidance at $152 million to $158 million, representing year-over-year growth of 50% at the midpoint. But the growth rate dropped to just 10% when the Pfizer supply agreement was excluded. That was before Pfizer decided to reduce its supply commitment.
Although Codexis attempted to reframe the supply agreement in a positive light, the reality is less cheery.
An SEC filing reveals Pfizer canceled all orders for early 2023 and opted instead to pay a $25.9 million retainer fee, which can be used against orders through 2024.
Codexis still expects to take in about $75 million in revenue from Pfizer in 2022, but it may not find the customer as reliable in future years. The pandemic star has struggled to live up to expectations for Paxlovid, which emerging data suggest has more limited use than originally thought.
A Historical Headwind Reappears for Codexis
Codexis now expects full-year 2022 revenue of $135 million to $141 million, but only $5 million of the reduction can be traced back to Pfizer.
Management placed the remaining disappoint at the feet of all other current companies and potential customers in the sales pipeline. Simply put, existing relationships are generating less revenue than expected at the halfway point of the year.
To be fair, even the low end of restated guidance represents solid growth over last year. Delivering $135 million in revenue during 2022 would represent year-over-year growth of 28%.
But it appears the numbers would be negative without Pfizer's contributions. Wall Street will also need to readjust revenue models for 2023 and 2024 revenue to include less revenue from Pfizer.
The disappointing turn of events highlights one of the historical headwinds for Codexis: choppy revenue.
While enzymes can deliver real-world efficiency gains to a number of manufacturing processes, they're needed only in small amounts. That means customers place orders only sparingly – sometimes less than once a year – which has resulted in choppy revenue.
Hitching the financial wagon to a single customer wasn't necessarily sustainable to begin with, but now investors are facing the consequences much sooner than expected.
On the one hand, Codexis appeared to be turning a corner with operations. A multiyear supply agreement with Pfizer promised to buy enough time to diversify revenue across numerous customers.
On the other hand, investors may have to contend with the reality of the company's business model, which relies almost exclusively on ultra-niche products.
That will require significant scale and diversification to drive sustainable revenue growth. Achieving that milestone may be a few more years away.
