By digging through SEC filings of institutional shareholders, investors can unearth promising stocks hidden to most. Codexis (NASDAQ:CDXS) fits this bill. With a business focused on developing enzymes, Codexis has built a growing revenue stream through partnerships and licenses to its platform technology. 

As of Sept. 30, institutional investors held over 86% of the outstanding shares. These include big names like BlackRock, Vanguard, and Fidelity as well as healthcare specialist funds including Vivo Ventures and Opaleye Management.

Several scientists working in a lab

Codexis created a platform technology that modifies proteins to carry out different functions. Initially, the company set out to create enzymes that cause specific chemical reactions to occur. This holds significant benefits for streamlining manufacturing processes in pharmaceuticals, where using enzymes can lower the cost of manufacturing while increasing the amount of drug made. Codexis claims to work with 21 of the top 25 pharmaceutical companies doing just that. 

Multiple paths for growth

Beyond pharmaceutical manufacturing, industrial enzymes can also be used to develop molecular diagnostic tests and to aid in food production. Codexis will see its first sales in the diagnostics space this year. 

In the food industry, Codexis partnered with Tate & Lyle, a global provider of food and beverage ingredients, to create a new stevia product. After identifying a trace amount of an organic compound in the stevia leaf, Codexis optimized its enzymes to release that compound to produce the sugar-like product. Tate & Lyle introduced that product, dubbed Tasteva-M, to food and drink manufacturers in the third quarter of 2018. This year, Codexis should begin to reap the financial rewards from that collaboration. 

Codexis expands into biopharmaceuticals

Going a step further than optimizing the manufacturing of existing drugs, Codexis leverages its platform to create novel therapeutic drug candidates. Its first foray in the space yielded CDX-6114, an orally administered enzyme to treat phenylketonuria (PKU). PKU is a birth defect in the gene that makes the enzyme responsible for breaking down the amino acid phenylalanine. An excess buildup of that phenylalanine can lead to severe brain damage, according to the Mayo Clinic. Patients with PKU must modify their diets to limit phenylalanine by avoiding protein and the sweetener aspartame. CDX-6114 serves as the replacement enzyme allowing patients to eat a normal diet. 

Codexis partnered with Nestle Health Science on CDX-6114. Nestle paid $14 million up front and has paid another $8 million in milestones since the pact was forged. Up to $335 million in additional milestones may be achieved, plus Codexis earns tiered royalties on sales. During his presentation at the Stifel Financial 2019 Healthcare Conference, CEO John Nicols said the money from Nestle has more than covered Codexis' investment in the program.

Five additional R&D programs round out the pipeline. Details remain scant, but two of the programs focus on lysosomal storage diseases. In these diseases, patients, often children, lack a specific enzyme to carry out a function. Treating patients with replacement enzymes created in the lab has proven to be a successful strategy. This approach formed the foundation of former biotech heavyweight Genzyme, which Sanofi acquired for $20.1 billion in 2011. Codexis claims that two of its R&D programs should be ready for partnering by the end of this year.

What about the numbers?

Codexis expects to earn between $69 million and $72 million in revenue this year. However, it expects R&D and operating expenses to be in the range of $68 million to $69 million. That basically makes 2019 a wash. It has $92.1 million in cash on hand plus access to $15 million under a credit facility as of Sept. 30. Assuming no major increase in R&D and no substantial drop in sales, which have been steadily growing, then Codexis should be well-positioned to march toward profitability. If another deal emerges on the R&D side, or milestones from existing collaborations such as those with GlaxoSmithKline, Merck, and Novartis, then Codexis should see a boost in valuation.

What does this mean for investors?

One challenge that may tamp down potential stock increases will be how to properly value the company. On one hand, Codexis is a service business, creating specialized enzymes for its partners, and on the other, it undertakes early-stage drug discovery and development.

Sometimes smart investing means following investors with greater due diligence resources and access to the company management. The huge institutional interest in Codexis is a green light to everyday investors, even those who may not understand enzyme engineering.

Codexis appears to be a hidden gem for healthcare investors. Its stock continues to steadily grow following a sharp decline after the second-quarter earnings. This stock appears to be an emerging long-term hold to buy on any pullbacks.