What happened

Shares of Codexis (CDXS 4.63%) rose nearly 10% today after the company announced it had extended and updated a licensing deal with pharma giant Merck (MRK 0.81%). The small-cap biotech had originally licensed its enzyme engineering technology platform, CodeEvolver, to the industry leader in 2015. That agreement brought Codexis up to $18 million and allowed Merck to use the technology package to ultimately make its drug manufacturing processes more efficient -- saving both time and money, as well as regulatory scrutiny by avoiding toxic byproducts.

The new agreement will provide the latest tools to Merck, namely novel machine-learning software upgrades and general improvements based on the cumulative experience gained in the last several years. While the financial terms were not announced, Codexis said the upgraded licensing deal will last for a multiyear term. Previous licensing agreements in pharmaceuticals have included milestone payments ranging from $18 million to $25 million, although it's not clear how that might change for a repeat customer such as Merck.

As of 3:10 p.m. EST, the stock had settled to a 5.9% gain.

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Image source: Getty Images.

So what

Codexis and Merck have worked together for many years. In fact, the pair won the Environmental Protection Agency's 2010 Green Chemistry Award in Greener Reaction Conditions for their novel manufacturing process for sitagliptin, the type 2 diabetes drug sold under the brand name Januvia. Codexis has won the award three times, while Merck has won the award four times since the honor first debuted in 1996.

The CodeEvolver technology platform has played a role in each Green Chemistry Award for Codexis. It's based on a method called directed evolution, which won the 2018 Nobel Prize in Chemistry for allowing scientists to leverage the typically slow process of beneficial mutations to design better proteins and enzymes for various uses. Codexis uses the novel method to engineer enzymes to more efficiently produce pharmaceutical and food ingredients, to make clinical and life-sciences diagnostics function, and even to serve as medicines aimed at treating diseases.

Check out the latest Codexis earnings call transcript.

Now what

While Codexis has quietly started to execute in the last two years or so and could make a great addition to your portfolio, today's announcement doesn't seem to be worth the nearly $65 million bump in market cap. It appears the market got a little carried away. Whether or not the extra market cap proves sustainable on today's news alone, investors will be watching for more important developments in 2019. Those include the pace of product sales, the signing of new technology licensing deals, the successful conclusion of a phase 1b clinical trial, and the results from market testing activities for a novel suite of enzymes for diagnostic applications.