Have you heard of this company? Codexis (CDXS)

image: Codexis company website.

At Taylor Frigon Capital, we practice what we describe as a "narrative-based investment philosophy," in which we identify specific macro-trends shaping the direction in which certain businesses or industries or even society in general are moving, and the "narratives" or story-lines which describe what we believe will take place over the next several years in specific industries based on those driving forces.

One of our important investment narratives involves the application of the incredible advances in technology in novel ways to industries outside of what we traditionally think of as "tech" -- and an important aspect of that narrative specifically includes the application of massive computational advances to drive advancements in biology and chemistry.

California-based Codexis, Inc. (ticker CDXS)* is a company we identified as fitting this narrative, and which we own for our investors. Codexis is using advances in computational power, machine-learning algorithms, and lab equipment to analyze proteins and to discover and synthesize new biological enzymes (the proteins which act as catalysts in the body or in biological reactions)  for applications in a variety of industries, including the manufacture of pharmaceuticals, the flavoring of food, and the treatment of disease.

Proteins are chains composed of between 200 blocks of amino acids (at the low end) to over a thousand blocks of amino acids (at the higher end). Each block in these enormous chains can use one of twenty different amino acids in living organisms, creating an almost infinite number of possible combinations. A protein chain of 500 amino acids, with twenty to choose from at each block, could conceivably have permutations which would number -- not 20 times 500 -- but rather 20 raised to the power of 500! 

There are thus nearly infinite numbers of alterations that can be conceived for every known protein -- and while the majority of these alterations are not helpful in achieving a function that may be desired for creating some type of reaction, some of these permutations will enable the engineering of enzymes that can do things which are extremely beneficial, and even life-saving.

Since 2002, Codexis has been perfecting their proprietary CodeEvolver protein engineering technology platform which allows increasingly accurate predictions for the properties of different possible protein permutations, while also building an ever-growing library of protein variants and their various properties and capabilities. They license this technology to industry partners, as well as using it to develop their own novel enzymes for various applications, including for therapies to treat inherited disorders in which certain enzymes are deficient.

A large percentage of Codexis revenues comes from customers in the pharmaceutical industry, which uses various enzymes in the bio-reactors in which biopharmaceutical therapies are manufactured. Several bio-pharma companies of various sizes also license Codexis' CodeEvolver technology platform to search for enzymes themselves.

Very recently, some observers have seen evidence which leads them to conclude that pharmaceutical giant Merck may be using enzymes supplied by Codexis in the manufacture of molnupiravir, which is still in trials but which Merck is hoping will become the first pill-form oral anti-viral for treating Covid-19, described by the Wall Street Journal as potentially acting as "a kind of Tamiflu for Covid-19, dispensed to patients when they first develop symptoms, slowing the spread of the virus in the body and potentially preventing people from becoming seriously ill" (story dated 01 October 2021).

While such a development could cause significant revenues for Codexis if it is indeed true that their enzymes are used in the production of molnupiravir (and if molnupiravir is eventually approved for treatment of patients), to say nothing of the possible lives it could save and the suffering it could relieve, we do not pursue an investment process that is based on predicting such individual therapeutic successes. 

Instead, as explained at the beginning of this post and as we have written about in this blog for many years (going back indeed to 2007), we emphasize owning well-run businesses aligned with important narratives, and we believe that Codexis is an innovative company whose business lines up with an investment narrative that will play out over the the course of a decade or more and across more than one industry.

We certainly hope that molnupiravir can have a positive impact and save lives -- and we would be thrilled to learn that enzymes from Codexis are an important part of its manufacture. But we believe that investors are best served by looking to bigger trends and developments -- which we call narratives -- and these individual successes along the way can serve as confirmation that a narrative is correct and that it will help people in many additional ways over the years ahead.

* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Codexis (CDXS). 

Previous companies featured in our long-running "Have you heard of this company?" series include:

• Tractor Supply Company (TSCO)
• Vapotherm (VAPO)
• Vuzix (VUZI)
• Kornit (KRNT)
• Boot Barn (BOOT)
• Carvana (CVNA)

and

• ClearPoint Neuro (CLPT)

(among many others)**

** At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Tractor Supply Company (TSCO), Vapotherm (VAPO), Vuzix (VUZI), Kornit (KRNT), Boot Barn (BOOT), and Carvana (CVNA).

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

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The Disease, the Cure, and the New Cure

Most people who are paying attention recognize that things in the world are not going particularly well these days.  We certainly recognize this and are challenged with helping our clients manage through the vast amount of data and information that comes out each day in order that they can make sound financial decisions.  In difficult times it is our long-held belief that sticking to your discipline in investing is crucial.  In fact, an investor's very survival depends on it, in our view. 

As such, we would be remiss for not pointing out when things go awry, and we did just that in March of 2020 with our blog post entitled "Time For A Pushback".  We later followed up in April 2020 with "Still Pushing Back".  We urge our clients and others to read those posts if you haven't already.  We fully stand by all we said in those articles, despite at the time receiving some pretty negative feedback.

Today, another sage voice in the world of economics, Brain Wesbury, posted in his blog an article in which he gives an overview of our current economic circumstances brought about largely by the response to the COVID virus.  In "The Cost of Lockdowns", Brian outlines the myriad problems caused by the exact types of actions we highlighted almost a year and a half ago.  Unfortunately, it is going to take years to undo the damage that has been done, and, as we said in our pieces, the most vulnerable of the world's population are the ones who are most negatively impacted.  This is extremely sad and unfortunate, but it is important to keep one's wits about oneself and stay focused on the challenges ahead.  

Well-managed, innovative businesses will still succeed -- and in many cases thrive -- while navigating these challenges.  We would argue that these companies are the bright lights that will help guide the way back from the precipice.  It is our intention to stay fully invested in such companies, and continue to seek out new ones that will also drive the effort.  This is the "New Cure" that is needed.  And it is on its way, as we have now added a plethora of new companies in the past year and a half, reversing the "8000-to-4000 problem" (the decline in the number of publicly-listed companies on US exchanges) that we have lamented at length over the last several years.  

We now stand at a count over 5,800 public companies on US exchanges.  Thanks to a little-understood vehicle called the "special purpose acquisition corporation" (SPAC), we are witnessing a resurgence in new innovative public companies for the first time in years.  This increase in new company formation and growth is what leads us out of this malaise (NOT a guarantee), and we see no reason this trend can't continue.   And it can't happen soon enough!

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

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Investment Climate July 2021: Return of New Public Companies

We have long believed in the power of free enterprise.  Now in our fourth decade of managing money, we have never ceased to be amazed at the creativity of brilliant people who have an idea, invention, or process and turn that into a solid business that serves what other people want and need.  It is what has defined Western Civilization and is a very good thing.  That idea of being focused on what others want and need, when accompanied by “rules of the road” that adhere to Natural Law, is purely inspired.  Often, in history, the rules of the road have become overly cumbersome, notwithstanding all the best intentions of those who define them -- most often government -- and have stultified those who would be creators and innovators. 

We have lived through such a time in the last couple of decades.  We have called it “the 8,000 to 4,000 problem”. Readers of this commentary, and certainly our clients, know what that means.  It is the trajectory of public companies in the U.S. from the late 1990s/2000 era to roughly 2020, during which the number of public companies declined from over 8,000 to a low near 4,000.  There have been many different reasons offered for why this has happened, but we have spoken to enough small, entrepreneurial private companies over the last 15 years to squarely put the blame on government regulations that have made it too cumbersome and expensive to become a public company.  From Sarbanes/Oxley to Regulation Fair Disclosure to even the NASDAQ trading settlement of the late 1990s, and more – all these have had a role.  We won’t take the space here to describe each one because it would require volumes.  We suggest readers inform themselves about the nature of those rules on their own.  Suffice it to say, these onerous burdens on entrepreneurs have kept larger companies in control, forced more acquisitions of promising private companies by existing public companies, and perhaps have even kept some entrepreneurs from getting off the ground due to lack of capital.  This is not conjecture:  we have seen it.  We have lived it. 

This negative landscape has been changing for the better more recently.  Entrepreneurs have found their way back through the use of an old, obscure and little understood vehicle known as the special purpose acquisition corporation (SPAC).  They are also known as “blank check companies”.  Originally used in the oil and gas industry years ago, a SPAC is essentially a shell corporation that is formed for the purpose of acquiring a functioning, operating company, and thereby allowing that company to become a public company.  We won’t get into detail about the reason investors put money into a special-purpose vehicle when they have no idea what it is in which they will ultimately be investing, but there are incentives built into the structure that can make it very attractive.  While the SPAC is not always less expensive than going public through the traditional route, the regulatory burden and requirements that tax a small company trying to go through the traditional initial public offering (IPO) process make the SPAC route extremely attractive for many small companies, particularly in the technology space.  A great way of simply describing the point is that much of the paperwork is already done!  The acquired company slips into the existing corporate structure of the SPAC. 

We are not suggesting that the rise of SPAC popularity is a panacea for every small company out there.  Companies must still be well prepared to be public and they must still be deserving of being a public company.  And certainly, the IPO process is still the best option for some companies.  Even the “direct listing” route where a company simply lists on the public exchange without raising funds is best for a few companies.  But due to the realities of the marketplace, and all the reasons given above, those options tend to be suited for larger, more established companies. 

But the SPAC has been a welcome breath of fresh air to public markets sorely needing more publicly-traded, small companies that can be an investment opportunity for everyday people trying to get a return on their hard-earned money before these companies become huge.  And, of course, these companies going public through the SPAC process are often the innovative young guns that will challenge the oligarchic mega-companies that have thrived in the preceding period of drought for small companies coming public, allowing those oligarchic titans to dominate all levels of our culture, politics and everyday life in ways that are not always desirable.  Look out Amazon, Apple, Google, Microsoft, Facebook, et al: here comes your competition!

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

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Have you heard of this company? ClearPoint Neuro (CLPT)

image: Company investor materials.

Today we're highlighting another innovative company of which many of our readers have probably never previously heard -- ClearPoint Neuro, Inc. (ticker CLPT)*. 

ClearPoint is a medical device company providing real-time visibility for brain surgery procedures. 

If you think about it, minimally-invasive surgery has transformed many procedures throughout the body (such as heart-valve replacement which can now be performed by surgeons working through a small incision to access an artery rather than by cutting open the chest as was previously necessary for open-heart surgery) -- but in order to enable minimally-invasive procedures, real-time visibility is necessary so that the surgeon can guide the instruments to the targeted part of the body. 

For a variety of reasons, real-time imagery of the brain has been unavailable for brain surgeons, creating an obstacle to the development of true minimally-invasive procedures in brain surgery. The primary obstacle has been the fact that real-time brain imagery uses an MRI (magnetic-resonance imaging) machine, but because an MRI uses a powerful magnet, surgeons could not use any metal instruments on a patient at the same time that they are looking at the patient's brain under the MRI. 

Therefore, an MRI would be taken prior to the procedure, and then the surgeons would use that MRI to guide them during a procedure -- knowing that the imagery itself was not real-time (it was taken in the past) and that the brain might have shifted slightly in the interim, thus preventing the levels of precision and sub-millimeter accuracy that could be possible with real-time imagery, and which could make all the difference in such delicate procedures.

ClearPoint has developed the ClearPoint Neuro Navigation System, which is a platform that consists of both hardware and software which enables MRI-guided, minimally-invasive brain neurosurgery procedures, including deep-brain stimulation (used for Parkinson's patients), laser ablation procedures (including laser interstitial thermal therapy, or LITT, used for some epilepsy and tumor-related treatments), and for drug delivery to parts of the brain using inserted cannulas (there are presently a number of bio-pharma and gene-based treatments moving through trials). ClearPoint markets a SmartFlow cannula which enables real-time imagery for more accurate placement and delivery of therapeutics to treat serious neurological disorders).

The ClearPoint's neurosurgery navigation business (approved for use in the US and the EU and in countries that follow the lead of those two)  follows the well-known "razor and blade" business model, in which healthcare sites purchase capital equipment (the system itself) and then disposable components which are used for each procedure (the "blades" that must be replaced, in the razor-and-blade analogy).

ClearPoint has their capital equipment in use at about sixty hospitals or functional neurosurgery centers in the US, Canada, and the EU at present, although they estimate that the total number of hospitals with MRIs which perform the types of procedures for which ClearPoint's neurosurgery navigation products would be appropriate may be around 400 to 500.

ClearPoint presently has commercial relationships with approximately 25 biologics and drug delivery companies who are either evaluating or using ClearPoint products for the delivery of their therapies. These therapies are in varying stages of development, from preclinical research all the way to late-stage regulatory trials. 

It is important to note that developing therapies to treat the brain is especially challenging due to the "blood-brain barrier," which limits the ability to deliver compounds through the bloodstream and have it reach the brain. Therefore, new biotech or even gene-therapy treatments which are being designed to treat serious neurological disease in the brain must be delivered directly to the brain (such as through a cannula), and that's why ClearPoint's real-time guidance capabilities are so critical to the new therapies being tested today. We believe that ClearPoint's capabilities may well prove to be essential for the delivery of new therapies based on revolutionary discoveries such as gene therapy, which are already beginning to transform treatment in other areas of healthcare outside of the brain.

ClearPoint generally has arrangements which involve "milestone payments" as treatments progress pass various milestones during the research and clinical testing process. Also, the ClearPoint products are used during the testing process and would likely be used in the delivery of any therapies which make it past clinical trials into commercial use (and in fact, the clearance of such therapies may mandate the use of the same delivery methodology after approval that was used during the trial period).

We believe that ClearPoint is an important company enabling the application of new and promising therapeutic developments to an extremely difficult part of the body -- the brain -- with the potential to help people suffering from some of the most debilitating neurological diseases.

* Disclosure: At the time of publication, the principals of Taylor Frigon Capital owned shares of ClearPoint Neuro (CLPT).

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

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And the Correction Continues!

image: Wikimedia commons (link).

Over the last few months, we have seen a continuation of significant volatility in our portfolios, in both directions, up and down.  In our recent Investment Climate quarterly commentary, we described it as wild.  Well, in the first couple weeks of May the correction in growth companies' stock prices has returned to the downside, again mostly based on the "rotation" by traders (speculators, and sometimes outright gamblers) out of "growth" stocks and into "cyclical" stocks.  

In what we view as an oxymoronic type of "conventional wisdom," the idea is that higher inflation will cause an "outperformance" of cyclical companies which might fare better, albeit on a short-term basis, due to an over-heating economy driven by plentiful money being supplied by the US Federal Reserve.  

While more cyclical industries may well demonstrate higher earnings growth for a short period in an overheating economy (think for example of a company which produces commodities)  -- as opposed to businesses which grow over longer periods lasting through many economic cycles --  the very cyclical nature of those companies means that their fortunes will be short-lived.  Ultimately, the investor is forced to become a trader, picking the bottoms and tops of economic cycles: a very difficult task to say the least.

Taking this a step further, inflation will eventually lead to a steep and aggressive tightening of the money supply by the Fed.  This ultimately results in slower economic growth, thereby forcing the cyclical trade in the opposite direction.  

And let's go one step further than that.  We are hearing the geniuses that run the U.S. Government politicians saying they want to increase tax rates significantly.  Combine the effects of massive tax increases with higher interest rates and you are looking at a serious hit to economic growth. Good luck with trading that!

Regardless, as we have said before regarding corrections in the values of our companies, the reasons for cyclical market swings are almost irrelevant to us.  They are bound to occur, especially after periods of strong performance.  Yes, the values of our companies can get ahead of themselves.  And, as we counseled previously: when values become stretched, it is wise to raise cash if there are needs for that cash in the shorter-term outlook (1-3 years).  

However, these corrections are definitely opportunities to buy with long-term investment capital.  We have no idea if we are at the end of the current corrective phase or not.  What we do know is that the vast majority of our portfolio just came off of very positive earnings reports and, in general, those businesses are doing what we ask of them.  

We believe the values of our companies will reflect those positive prospects over time, as they always have in the past.  Time to start stepping up the buying!

Disclosures: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Taylor Frigon Capital Management LLC (“Taylor Frigon”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Taylor Frigon. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Taylor Frigon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Taylor Frigon’s current written disclosure Brochure discussing our advisory services and fees is available upon request. If you are a Taylor Frigon client, please remember to contact Taylor Frigon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

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