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Shell grants Codexis rights to commercialize cellulase enzymes for biofuels as research agreement ends

Codexis, Inc., a developer of processes for the production of biofuels, bio-based chemicals and pharmaceuticals, has signed an agreement with Shell to expand Codexis’ ability to commercialize its CodeXyme cellulase enzymes. In the context of the ending of the company’s research agreement with Shell (earlier post), the Board of Directors also approved a short-term shareholder rights plan, and the company announced a workforce reduction.

Under the new agreement, which is effective 31 August 2012, Shell granted Codexis a royalty-bearing, non-exclusive license to develop, manufacture, use and sell cellulase enzymes developed under the companies’ Amended and Restated Collaborative Research Agreement, effective 1 November 2006. The scope of the new agreement is worldwide, except Brazil, for enzymes used in the biofuels field. Codexis already has exclusive rights to commercialize its cellulase enzymes in other fields.

Codexis has developed some of the most cost effective and competitively advantaged cellulase enzymes in the world. Securing the rights to market these enzymes to advanced biofuel companies outside of Shell is a major milestone for the company. We also remain focused on the Brazil market, where our discussions with Raízen continue regarding commercialization of our cellulase enzymes for second generation ethanol production.

—John Nicols, President and CEO of Codexis

In exchange for these new rights, Codexis will be obligated to pay Shell a low single-digit percentage royalty on net sales of CodeXyme cellulase enzymes to customers other than Shell and its affiliates. Codexis will also be obligated to pay Shell a low single-digit percentage royalty on Codexis’ own use of cellulase enzymes in the biofuels field. Shell is also entitled to preferential pricing on purchases of cellulase enzymes from Codexis should the companies mutually agree to enter into a future supply arrangement.

Under the agreement, Codexis and Shell have agreed to an early termination of the Shell Research Agreement, effective as of 31 August2012, except for certain provisions related to intellectual property rights, confidentiality and indemnification that survive termination.

Shell will pay Codexis approximately $7.5 million in satisfaction of the remaining full-time employee equivalents (FTEs) and milestone payments that would have been due under the Shell Research Agreement and Codexis will have no further research and development obligations under that Agreement. The Shell Research Agreement would have expired on 1 November 2012 if not for the early termination effected by the new agreement.

Shell has also agreed not to sell any cellulase enzymes to third-party biofuel customers using technology developed by Codexis after the end of the Shell Research Agreement. Shell retains its right to use and manufacture such enzymes, including those enzymes that result from Codexis improvements during the ten-year period beginning on 31 August 2012, for Shell’s own use and use by Shell affiliates, as well as to sub-license the right to manufacture such enzymes to third parties for Shell’s own use.

Shell remains subject to existing royalty obligations to Codexis for use of technology developed under the Shell Research Agreement that remains exclusively licensed to Shell. Codexis also remains eligible to receive a one-time $3.0-million milestone payment upon the first sale or use by Shell of such enzymes in the biofuels field in Brazil, or in other fields of use previously specified in the Amended and Restated License Agreement between Codexis and Shell.

The new agreement may be assigned by Codexis to a third party as part of an asset sale or sale of the company. However, as a condition of maintaining the license grant provided to Codexis in the agreement, any such assignee is required to undertake a certain level of effort to further develop CodeXyme cellulase enzymes, make certain payments to Shell, or otherwise elect to give up its cellulase enzyme license grant from Shell.

Any such assignee will not be required to make any payments or commitments to Shell if the company or any third party continues to fund the development of the microbes or biocatalysts for use in the Field of Use at specified levels prior to the assignment.

Shareholder rights plan. The Board of Directors of Codexis also announced that it has adopted a short-term shareholder rights plan, which is scheduled to expire on 2 September 2013.

The rights plan is intended to guard against inadequate or unsolicited takeover offers. The rights are not being distributed in response to any specific effort to acquire control of Codexis. The rights are designed to ensure that the Board of Directors has sufficient time to consider any proposal and make sure that all stockholders receive fair and equal treatment in the event of any proposed takeover of Codexis. In addition, the rights plan will guard against partial tender offers, open market accumulations and other coercive tactics aimed at gaining control of Codexis without paying all stockholders a full control premium for their shares.

Under the plan, one preferred stock purchase right will be distributed for each share of common stock held by stockholders of record on 18 September 2012. Subject to certain exceptions, the rights will be exercisable if a person or group acquires 15% or more of the Company’s common stock or announces a tender offer for 15% or more of the common stock.

Workforce reduction. Codexis also announced a workforce reduction as part of its effort to control expenses and conserve cash for its ongoing and future programs following the termination of the Shell Research Agreement and the corresponding loss of ongoing funding for FTEs under the Shell Research Agreement. This action will reduce Codexis’ workforce by approximately 133 employees effective 30 October 2012. All affected employees will receive advance notice of their employment loss in accordance with applicable law.

These unwelcome measures were necessary in order for us to maintain a healthy balance sheet in light of our recent loss of funding from Shell. We remain focused on operating our business efficiently and are confident that our remaining employees will help the company take advantage of its opportunities in the biofuels, bio-based chemicals and pharmaceutical markets.

—John Nicols

Codexis estimates that it will incur total charges of up to $3.6 million in the second half of 2012 as a result of this workforce reduction, including $2.9 million in continuation of salary and benefits of the affected employees until their work is completed and their positions are eliminated and $0.7 million of one-time termination and miscellaneous costs, all of which will result in future cash expenditures.

Codexis’ product lines include CodeXyme cellulase enzymes and CodeXol detergent alcohol. Partners and customers include companies such as Merck, Pfizer and Teva.

Comments

Henry Gibson

Most substances suited for production of biofuels can be used as food or can be processeed into food by man or animal. Large quantities of petroleum, natural gas and coal are now being used in agriculture, food processing and transportation of food products. India ships many tons of glass jars of very low calorie foods to other contries. China ships many tons of canned fruit and other products to other countries. The energy in the iron of the can exceeds that of the food inside. Except for government mandates, based on false views, biofuels would not be produced to supplant fossil fuels. Far greater and less expensive reductions in the use of fossil fuels can be obtained but the required use of more efficient automobiles and other vehicles. All highway and other road vehicles could use Hydraulic hybrid technology from Artemis or others to cut fuel consumption in City traffic to half and motorway traffic to 70 percent. Electric series hybrids can do the same at higher costs. Much smaller engines can reduce even more fuel consumption as demonstrated by Parry People Movers. ..HG..

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