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Senomyx Inc (NASDAQ:SNMX)

Q4 2013 Results Conference Call

March 13, 2014 / 11:00 A.M. E.T.

Executives

Gwen Rosenberg – VP of IR & Corporate Communications

John Poyhonen – CEO

Sharon Wicker – SVP & Chief Commercial Development Officer

Tony Rogers – SVP & CFO

Analysts

Jonathan Feeney – Janney Montgomery Scott

Justin Ruiss – Sidoti & Company

Scott Henry – ROTH Capital Partners

Operator

Good morning. We will now begin the Senomyx conference call. At this time I would like to inform you that this conference call is being recorded and that all participants are in a listen-only mode. At the request of the Company, we will begin the conference – we will open the conference for questions and answers after the presentation.

(Operator Instructions)

I will now like to turn the call over to Gwen Rosenberg, Senomyx's Vice President of Investor Relations and Corporate Communications.

Gwen Rosenberg

Good morning and welcome to the Senomyx fourth-quarter and year-end 2013 earnings and corporate update conference call. Participating in this call from Senomyx will be John Poyhonen, Chief Executive Officer; Sharon Wicker, Senior Vice President Chief Commercial Development Officer; Tony Rogers, Senior Vice President and Chief Financial Officer; and Don Karanewsky, Senior Vice President Discovery and Chief Scientific Officer.

Before we begin please note that during the course of this call we may make projections or other forward-looking statements regarding future events or financial performance as a Company that involve risks and uncertainties. The Company's actual results may differ material from the projections described in the press release and this conference call.

Factors that might cause it to difference include, but are not limited to, those discussed in our quarterly and annual reports filed with the SEC. Copies of these documents are available upon request from investor relations at Senomyx or may be accessed via our website at www.senomyx.com.

I would now like to turn the discussion over to John Poyhonen, CEO of Senomyx.

John Poyhonen

Thank you, Gwen. Good morning to everyone and thank you for joining the Senomyx management team for our conference call and webcast.

This is an exciting time for Senomyx. We are beginning 2014 significant progress towards our vision of leveraging our proprietary taste discovery technologies to become a leading commercial provider of novel flavor ingredients to the food, beverage and ingredient supply industries.

In 2014 we will focus our efforts in three key areas. First, we will continue to grow, protect and maximize our unmatched expertise in taste science technologies. Using our proprietary technology platform, Senomyx has discovered innovative flavor ingredients in the areas of sweet, savory, bitter and cooling taste.

We're making headway exploring additional taste sensations such as salty taste and, importantly, our efforts have expanded into the discovery of natural flavor ingredients. We are also adding to a robust intellectual property portfolio to protect our most important core competencies.

Senomyx's second area of focus is the expansion of our flavor ingredients pipeline for our collaborators and flavor industry customers. Senomyx's flavors can create a competitive advantage by enabling an improved nutritional profile, better taste or lower cost in a broad range of food and beverage products. Our new S617 Sweetmyx flavor ingredient is the most recent and potentially the most valuable of our flavor ingredients discovered to date, with utility for a broad range of nonalcoholic beverages as well as food product categories. In addition, over the past year we have added three of Senomyx's novel flavor ingredients to our direct sales portfolio.

Senomyx's third area of focus is a successful implementation of our direct sales program as measured by our ability to drive commercial revenues. Our customers are flavor companies that create proprietary flavor systems for their food and beverage company clients. Our goal is to increase the flavor companies usage of Senomyx's ingredients and our flavor systems, thereby increasing the inclusion of our ingredients in food and beverage products.

To this end, we are working with flavor companies to expand our reach to end users by increasing their promotional activities, including conducting demonstrations of flavor systems containing our innovative flavor ingredients. Successful execution of our direct sales program will ultimately allow our customers to win new and repeatable business with food and beverage companies globally.

I would now like to turn our discussion to some tangible recent results that support our areas of focus. My remarks will be followed by Sharon Wicker who will address the commercialization activities and Tony Rogers who will review our financial status and outlook.

Starting with our recent news, we were especially pleased to announce earlier this week that our S617 Sweetmyx flavor ingredient was granted generally recognized as safe, or GRAS, regulatory status. This ingredient is a flavor with modifying properties that is used as part of a flavor system. It can be used to maintain the taste in a wide variety of foods and beverages in which a sweetener has been reduced, enabling the creation of lower calorie, great tasting products.

A compelling attribute of this Sweetmyx flavor ingredient is its versatility since this is the first Senomyx flavor ingredient that allows for the reduction of either sucrose or fructose in foods and beverages. Its utility with both of these widely used sweeteners could allow our partners to focus their flavor system efforts on a single sweet taste modifier, thereby potentially increasing efficiency and cost-effectiveness.

Receiving regulatory approval for the new Sweetmyx flavor ingredient is a significant milestone for the Company. Sweetmyx S617 was determined to be generally recognized as safe, or GRAS, by the expert panel of the Flavor and Extract Manufacturers Association, also known as FEMA. The FEMA GRAS designation, which has been granted to all of Senomyx approved flavor ingredients, is recognized by a number of countries and assists with approvals in other regions of the world.

GRAS status for the new Sweetmyx flavor allows usage in a broad range of nonalcoholic beverages, including carbonated soft drinks, sports drinks, coffee and tea products and beverage concentrates. The new flavor may also be used with alcoholic beverages and a wide variety of foods including baked goods, cereals, dairy products, confectioneries, snack foods and condiments.

With this in mind, the GRAS designation opens up a considerable new revenue opportunities for Senomyx as it allows our partners to pursue commercialization of the Sweetmyx flavor ingredient in the US and a number of other countries. PepsiCo has exclusive rights to use Sweetmyx flavor worldwide in all nonalcoholic beverages. Firmenich has lifetime rights to commercialize this flavor for food product categories and alcoholic beverages with exclusive rights until March, 2018.

Senomyx is fully engaged with our partners as they evaluate potential product opportunities for the new Sweetmyx flavor. While we cannot discuss details regarding possible usage and specific products or the timing of our partners product launches, we are excited about the potential value for Senomyx. We look forward to updating you on commercialization plans to the extent possible in the future while balancing our partners desire to maintain their competitive advantage and the parameters of our confidentiality obligations.

Senomyx now has 13 flavor ingredients developed as part of our savory, sweet and bitter programs that have received FEMA GRAS determinations. Several of these flavor ingredients have also received regulatory approvals in additional regions in the world.

In another recent regulatory accomplishment for the Company, the European Food Safety Authority has completed its review of our S6973 sucrose modifier, which can now be marketed in the European Union. S6973, also known as Sweetmyx SR69, is a flavor with modifying properties that is used as part of a flavor system to restore the original taste profile in products in which sugar has been reduced. It can be used in essentially all food product categories as well as certain beverages.

The EU approval, in conjunction with the previous FEMA GRAS approval and other regulatory approvals, will allow commercialization in virtually every major country. As Sharon will discuss, Sweetmyx SR69 is currently being marketed by her partner, Firmenich, and, importantly, will soon become part of Senomyx's direct sales portfolio. This addition of Sweetmyx SR69 to our direct sales effort will allow our flavor company customers to expand their sales activities into food product categories.

Senomyx's discovery and development of these novel flavor ingredients is facilitated by the disruptive technologies that differentiate us from other companies in the flavor industry. We are continuing to employ our capabilities to identify additional new flavor ingredients that meets the needs of food and beverage companies.

In our sweet taste program, we have identified new modifiers of sucrose and fructose that possess alternative physical properties that may help expand the potential market for our sweet flavor modifiers. Evaluations and prioritization of new sweet flavor modifiers that are candidates for development are ongoing.

We're also making meaningful progress toward the discovery of novel no-calorie or low-calorie natural high-intensity sweeteners and natural sweet flavor modifiers. Most notably, we achieved the taste proof of concept with the identification of a natural sucrose modifier as well as a natural high-intensity sweetener. The taste proof of concepts are important milestones in this program and we hope to share additional progress during future calls.

Turning to our cooling taste program, we are moving forward with the identification of new cooling agents that have advantages over currently available agents, including menthol. Definitive safety studies and other developmental activities in preparation for future regulatory filings are underway for S2227, a new cooling agent for which Firmenich has exclusive commercialization rights. Additional new cooling agents are also being evaluated for potential future commercialization.

Senomyx's salt taste program is an important research focus for the Company's longer-term pipeline. We are using analytical approaches to evaluate a large proprietary database of proteins found in taste buds in order to find the specific proteins, or group of proteins, that function to detect salt in foods. This protein, or proteins, can then serve as a research target to discover new salt flavor modifiers using Senomyx's novel flavor technology.

As an update, we have identified a small group of proteins that meet certain criteria for potentially being involved in salt taste. We have begun more advanced tests to determine if a function to detect salt.

Each of these target candidates is being further evaluated to see if it modulates salty taste, which would provide a taste proof of concept. If we are able to validate a target through this taste proof of concept then we can conduct broad screening of our collection of potential flavor ingredients with a goal of finding a salt taste modifier candidate that may be advanced into development.

In summary, Senomyx has important research and discovery accomplishments over the past year. Our ongoing efforts continue to yield valuable new additions to our growing portfolio of novel flavor ingredients.

Sharon will now discuss commercialization activities and I will return after Tony's comments for a few closing remarks to an the call. Sharon?

Sharon Wicker

Thanks, John. The direct sales program that Senomyx initiated last year continues to gain momentum. As a reminder, this program increases Senomyx's influence over the commercialization of our flavor ingredients. We have begun selling certain of our peer – also commonly referred to as neat ingredients, to flavor companies that in turn incorporate them into proprietary flavor systems through their customers.

Our Complimyx taste modulation ingredients brand currently includes three offerings. Two of Senomyx's Sweetmyx – sweet taste modifiers and a Savorymyx savory flavor.

We are executing our plan and achieved all of the milestones that we sell for 2013. Importantly, a sales organization was established and has been building awareness of our brand while conducting evaluation of Senomyx's first offerings with many flavor companies. Feedback from the flavor companies has been encouraging and we are continuing to expand the evaluation of our Complimyx ingredients.

We believe our innovative flavor ingredients can help food, beverage and ingredient companies to differentiate their products from the competition. In addition, we have established relationships with contract manufacturers for our Sweetmyx products and Savorymyx UM80 and we have finalized supply chain and distribution services.

Looking at the individual offerings, the Sweetmyx ingredients are taste modifiers that are used with other flavors in order to restore the desired sweet taste of products where sugar has been reduced. Being able to reduce carbohydrate-based sweeteners, such as sucrose, without sacrificing taste helps manufacturers address demand or lower calorie, healthier products that consumers enjoy.

Decreased sweetener usage may also allow manufacturers to achieve sustainability and cost saving benefits. Having multiple Sweetmyx modifiers allows Senomyx to address specific food or beverage requirements and broadens the potential applications for Senomyx's flavor ingredient portfolio.

Sweetmyx SR96, also called S9632, is a sucrose modifier that is being evaluated by flavor companies for end use in nonalcoholic beverages. Initial commercial sales quantities of Sweetmyx SR96 received from our contract manufacturer the fourth quarter of 2013. The current market potential for Sweetmyx SR96 is based on a number of targeted non-alcoholic beverage product categories, including ready-to-drink and powdered forms of coffee, tea and flavored milk, powdered soft drinks and dairy beverages.

According to our research, these product categories use more than 5.2 million metric tons of sucrose on an annual basis. Based on our assumptions for average sucrose content of the targeted beverages, the anticipated use level of SR96 and our anticipated selling price to flavor companies, we estimate that each global market share point is worth approximately $8 million to us in direct sales revenue. Furthermore, we estimate that our current regulatory approvals allow for commercialization of SR96 and approximately 30% of the target market opportunity at this time.

As John mentioned, a second sucrose modifier, Sweetmyx SR69, which is also known as S6973, will be added to our direct sales portfolio during the second quarter of this year. We have already started early introductions of SR69 to several flavor companies with promising responses. We expect to receive initial commercial scale quantities of SR69 by mid-year 2014.

SR69 will be the first Sweetmyx flavor ingredient in our direct sales portfolio that can be used in virtually all food product categories as well as certain beverage products. Global use of sucrose across all food categories is 25.4 million metric tons on an annual basis. Key targeted food categories for use of SR69, which includes baked goods, confectionery's, dairy products, sweet sauces and condiments, represent about 65% of its volume.

The average sucrose content of the targeted food products, the anticipated use level of SR69 and the potential sucrose reduction level vary considerably by these product categories. This makes it difficult to calculate a generalized dollar value of sales – direct sales revenue for each global market share point received. We estimate that our existing regulatory approvals allow for commercialization of SR69 in more than 90% of the target market opportunity.

Our Savorymyx flavor provides a distinct new savory, or umami, taste sensation and can be combined with other ingredients to create unique new savory flavor blends. It is applicable for a variety of products, including sauces, frozen foods, cooking aids, soups and snack food, and can be used to reduce or replace added monosodium glutamate, or MSG.

Savorymyx UM80, also known as S807, has regulatory approval in the US as well as nearly everywhere else in the world. It is currently being evaluated by flavor companies for use in numerous food and beverage product category. Commercial scale quantities of UM80 have been produced by global manufacturer and are on track for delivery to Senomyx by the end of first quarter of 2014.

We use the global MSG market to estimate the direct sales potential of Savorymyx UM80. MSG consumption during 2012 was more than 2.4 million metric tons. Based on our assumptions for average MSG content of the target product categories, the anticipated use level of UM80, and our anticipated selling price to flavor companies, we estimate that each global market share point is worth approximately $2 million to us in direct sales revenue. We estimate that our existing regulatory approvals allow for commercialization of UM80 and more than 90% of the target market opportunity.

The total global savory flavors market also includes ingredients other than MSG. Savorymyx UM80 could be used in combination with, or in place of, many of these other savory flavor ingredients. Our estimate for the UM80 market opportunity does not include direct sales revenues from the $1.9 billion global savory flavors market.

Lastly, regarding our direct sales program, we intend to add other Senomyx taste modulation ingredients to our complement product portfolio. For example, following limited periods of exclusivity for Firmenich, new sweet modifiers will become available to Senomyx for direct sales to flavor companies for use in all foods and alcoholic beverages. We are also conducting evaluations of other Senomyx flavor ingredients with flavor companies to determine their level of interest.

Turning to our royalty-based collaborations, Senomyx continues to receive commercial revenues from Firmenich, Nestlé and Ajinomoto on sales of their products incorporating our flavor ingredients. In brief, as indicated in our earlier press release, our partners are currently conducting commercialization activities with Senomyx's S6973 and as S9632 sucrose modifiers, S2383 sucralose modifier as well as S336 savory flavor and our S6821 bitter blocker.

I will now turn the discussion to Tony Rogers, Senomyx's CFO, who will provide an overview of our 2013 financials and our outlook of the next two years.

Tony Rogers

Thank you, Sharon.

Senomyx ended 2013 with $33 million in cash, cash equivalents and investments available for sale and no debt. Our financial results for 2013 were in line with our financial guidance. Revenues in 2013 were $29.3 million compared to $31.3 million in 2012. The difference is primarily due to one-time milestone payments received in 2012.

Operating expenses were $41.2 million in 2013 compared to $40.6 million in 2012. The increase is primarily due to cost related to the implementation of our direct sales initiatives. Based on these results, the net loss for the year ended December 31, 2013 was $0.29 per share compared to $0.23 per share in 2012.

I would like to refer our listeners to the earnings release and the 10-K we file this morning for additional details on our 2013 financial results. Looking forward, today we are reiterating the commercial revenue guidance announced last quarter and providing additional insight into our expectations for 2014.

For the full-year 2014, Senomyx expects total revenues of $32 million to $35 million, of which approximately $10 million are commercial revenues; total operating expenses of $44 million to $46 million, of which approximately $6 million is non-cash stock-based expense; net loss of $10 million to $12 million; and basic and diluted net loss of $0.23 to $0.28 per share. We anticipate ending the year with more than $25 million in cash, cash equivalents and investments available for sale.

Development revenues in 2014 are anticipated to be $22 million to $25 million, which are comprised of approximately $17 million in committed development revenues from existing collaborations, plus another $5 million to $8 million from a combination of additional R&D funding, milestones and cost reimbursement. Commercial revenue opportunities are compartmentalized into three categories: the Company's royalty-based collaborations with Firmenich, Nestlé and Ajinomoto, direct sales and the PepsiCo collaboration.

Commercial revenues are modeled based on projections from Senomyx's collaborators plus current estimates for sales potential from the direct sales initiative. From these three categories of commercial revenue opportunities, Senomyx continues to expect approximately $10 million in commercial revenue in 2014 and approximately $25 million in commercial revenues in 2015, with gross margins on commercial revenues to range between 75% and 85%.

This growth in commercial revenues will be primarily driven by the sweet program collaboration with PepsiCo and direct sales. Commercial revenues from direct sales and commercialization of the new S617 Sweetmyx flavor ingredient will be heavily weighted toward the end of the year.

Turning to expense projections, Senomyx's operating expenses are divided into three categories: cost of commercial revenues, research development and patents, or RD&P, selling general and administrative, or SG&A. Our first category, cost of commercial revenues, is comprised of royalty payments made by Senomyx related to end-licensed technologies and the cost of goods sold related to direct sales. This is expected to increase in 2014 based on an expected increase in commercial revenues.

We anticipate cost of commercial revenues to be 15% to 25% of commercial revenues. The Company expects the other two expense categories, RD&P and SG&A, to be generally in-line with our expense trends over the past few years except for non-cash stock-based expense, which is projected to be approximately $2 million higher in 2014 due to the recent increase in our stock price.

In summary, Senomyx continues to maintain a healthy balance sheet. As I mentioned earlier, we began 2014 with no debt and $33 million in cash and highly liquid investments. Going forward, we also have additional sources of cash under current collaborations, including $17 million in committed development payments, $18 million in potential development payments related to expansion options and $28 million in potential milestone payments.

We continue to be well positioned to achieve our discovery, development, commercialization objectives and we have no plans to raise money through the issuance of equity or debt to fund the current scope of our operations. Furthermore, we continue to anticipate achieving profitability in 2015.

I will now turn the call back over to the Operator to open up for questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will begin at this time. (Operator Instructions) Your question will be taken in the order they are received. Please stand by for your first question.

Mr. Poyhonen, our first question comes from the line of Jonathan Feeney from Janney Capital Markets. You may begin.

Jonathan Feeney – Janney Montgomery Scott

Good morning. Thank you very much.

John Poyhonen

Good morning, John.

Jonathan Feeney – Janney Montgomery Scott

John, can you walk me through the differences in the achievements you are mentioning in the salt program today? And put that in a context of where we've been in the history of the salt program, what identifying these new proteins means and a little bit about the science there – maybe the likelihood that we get some commercial activity.

John Poyhonen

Sure. I will do my best, Jon. I think it's been very clear that it has been a very challenging research activity that we have been involved with for some time. And for some time we have been describing the proprietary database that we have of proteins.

I think our team has done an outstanding job of really working through just an enormous database and really prioritizing the ones that appear to be most interesting as being potentially involved with salty taste. So I think what I would say is, there is no guarantee until we get a taste proof of concept. But we feel that by working through this database that we now have a manageable number of proteins that we are working with, we are conducting activity with them and we hope to, at some point, announce a taste proof of concept because that would be a huge step for us and really allow us to initiate screening in earnest.

So I would love to give you a timing, Jon, but you don't know until you find it is the challenge. And I think the team is doing a great job and we wanted to let everyone know that we believe we are making headway by really focusing in and prioritizing the proteins we are working with.

Jonathan Feeney – Janney Montgomery Scott

Thanks. And you did mention some – where you were with the direct sales initiative. But could you explain a little bit how close you are to having some significant direct sales – the kind of quantities maybe involved?

It seems like, given your – the PepsiCo partnership and as that product – potential product comes more and more into focus, there should be – there seems to be a greater level of attention to Senomyx. Are you getting incoming calls? Are you getting better relationships with potential customers because of that? Thanks.

John Poyhonen

Yes. Maybe I will start off and ask Sharon to add any comments at the end, Jon. So I believe the direct sales is going very well. I'm a great believer in actions speak louder than words. And we're seeing flavor companies routinely bring in our flavor ingredients.

They're spending a tremendous amount of effort on them internally to evaluate them. We have started to get some small orders that they will use for additional work as well as hopefully solutions that they will share with their food and beverage clients. They're asking us for price quotations of meaningful quantities.

So we think all the signs right now are very positive. But the actual timing is really dependent on how quickly they can get a win with one of their food and beverage clients. So, Sharon, do you have additional thoughts for that?

Sharon Wicker

I don't think so. We really are getting good traction, as John said. We are out actively calling on all of the US, and beyond the US, flavor houses. And there is interest and they clearly see them as being very innovative and that they can be used in a very much complementary way to their kind of traditional approaches to flavor solution delivery.

Jonathan Feeney – Janney Montgomery Scott

Great. And I guess just one last question. I'm not sure at this point in the collaboration how much information gets shared between the two of you. But when you – do you – in the work you have done with PepsiCo, do you get feedback as to the kind of products that may be your compounds, and particularly S617 – or I guess that's not the proper nomenclature anymore – the artist formerly known as S617…

John Poyhonen

(LAUGHTER)

Jonathan Feeney – Janney Montgomery Scott

The kind of products that it's applicable to. And could you give us some detail as to what exact kind of products you think it's applicable to and how that's going, any feedback you've gotten, how much they like it and the prospects for commercialization?

John Poyhonen

Boy, Jon, that is a great question. I'm sure that's the – probably the top question on everyone's –

Jonathan Feeney – Janney Montgomery Scott

I thought I would throw to first so you wouldn't be too put on your heals. Warm up a little bit.

John Poyhonen

(LAUGHTER)

Yes, so PepsiCo has exclusive rights to Sweetmyx flavor and all nonalcoholic beverages. So I think that it is a bit premature. We have visibility to the types of products that it may work in.

But they are really working on completing their evaluation before they are in a position to really make decisions internally. So it would really be premature at this time to describe any specific product categories.

I think they have issued their own statement indicating that they believe it is very promising. But short of that, I don't think we can say really anything else today, Jon.

Jonathan Feeney – Janney Montgomery Scott

Okay. I understand. Thank you very much.

John Poyhonen

Okay. Thanks.

Operator

Your next question will come from the line of Justin Ruiss from Sidoti. You may begin.

Justin Ruiss – Sidoti & Company

Good morning. Just a few questions. Just for the goals for this Sweetmyx, the Savorymyx or any of the other kind of enhancers, are you setting any kind of goals for development of any kind of new enhancers for 2014 and 2015? I know 2013 is pretty much the portfolio right now but is there a goal to get to 2015, 2017, 2020 by the end of certain years?

John Poyhonen

So let me just clarify that question. Is that in respect to our direct sales portfolio? Is that we you're referring to?

Justin Ruiss – Sidoti & Company

Yes. Yes.

John Poyhonen

Okay. I think what we're attempting to do with that is when we have new opportunities, we bring them out to flavor companies. And we ask them for their feedback and also what incremental value they can bring.

So for example, we have Sweetmyx SR96 that works in nonalcoholic beverages and we've targeted some key ones. We're really excited to be able to add now Sweetmyx SR69 because that opens up the food product categories for us. So that's a very large incremental opportunity. It has virtually global regulatory approval. So that can expand the market.

So to get your question, Justin, what we're really looking at is what are the needs of our customers in trying to find the best way to fill them? I don't believe that we have a specific number in mind.

We have different types of taste sensations that we're interested and we're continuing in pursuing that. But there's not a specific number of flavors that we want to sell.

Justin Ruiss – Sidoti & Company

Got it. And then with the salt – with more fleshed out version of the salt program that is going on, are you accelerating that process now? That once you get this next stage where there is a proof of concept, is that just – do you put that at the forefront at this point?

John Poyhonen

Just to clarify, we are still working with proteins that could be target receptors for our salt modifier program. Until we have that, we won't devote additional resources.

But certainly once – maybe I should say, better, at this point because it has been so challenging. If we are able to actually validate a taste target, then we will assign additional resources. And I think we can do that with existing headcount by moving resources around.

Justin Ruiss – Sidoti & Company

Okay. Perfect. Thank you very much.

John Poyhonen

Sure. Thanks.

Operator

Your next question will come from the line of Scott Henry from ROTH Capital.

Scott Henry – ROTH Capital Partners

Thank you. And, first, congratulation on a lot of accomplishments over the past three months. It's certainly been impressive to watch.

John Poyhonen

Thank you.

Scott Henry – ROTH Capital Partners

A couple of questions. First, when – and I'm traveling so I don't have everything in front of me – but when you speak about the $10 million in 2014 sales, can you break that into the amount for direct sales of that initiative?

John Poyhonen

I'll ask Tony to address that, Scott.

Tony Rogers

Hi, Scott. No, we have not broken that down. I think the – what we've provided is the gross margin information. We are estimating 75% to 85%. And if you look historically on our royalty-based collaborations, that gross margin has been constant at about 93%.

So I think you can look at industry – flavor industry sort of margins and maybe triangulate to get a sense of it. But, no, we have not provided any specific guidance on what constitutes the $10 million.

Scott Henry – ROTH Capital Partners

Okay. Fair enough. And I guess, directionally, you go from 2013 to 2014 – product sales look like they should jump up from about $5 million to $10 million. I'm surprised the loss isn't going down. Why is that? It seems kind of flattish. Is that because you're spending more on R&D or what's – why isn't that lever having that impact?

Tony Rogers

I think one of the key reasons that I mentioned on the call is our stock based compensation expense and non-cash stock-based comp is going up, we anticipate this year, really driven by the increase in our stock price. So that will be – we project $2 million higher than it was in 2013. So that's a key driver their, Scott.

Scott Henry – ROTH Capital Partners

Okay. Thank you. That's helpful. And then, as well, so now that S617 is approved, my question is, do have greater visibility into the Pepsi relationship today than you did on the last quarterly call?

And I'm also wondering, what level of confidence you have in profits in 2015? At some point I imagine you will start to get orders and you'll get greater visibility. I'm wondering if you have greater visibility today or if that still six months away?

John Poyhonen

Scott, this is John. I will start by addressing – we have a great working relationship with PepsiCo. I think there is a great amount of sharing of information and transparency in our relationship. As I mentioned when Jon asked the question a bit earlier, we are a bit early to get into any specifics around what that might look like.

On your second question, what's our confidence level on profitability in 2015, we still feel very optimistic. That's why we're reiterating the guidance today. And I think you're right, Scott. As the year goes on, because we're expecting our commercial revenues this year to be heavily backloaded, we will have a much better feel as we come into the third quarter or thereabouts on what 2015 looks like.

Scott Henry – ROTH Capital Partners

Okay great. Thank you for taking the questions.

John Poyhonen

Okay. Thank you very much, Scott.

Operator

At this time, there are no further questions. I would like to turn the call back over to Mr. Poyhonen to conclude.

John Poyhonen

I would like to thank you all for participating in our call today and leave you with a few highlights about Senomyx's and ours three key areas focus.

Starting with Senomyx's technology, our technology engine continues to be highly productive. Our screening assays allow us to discover and test the efficacy of potential new ingredients with remarkable speed and sensitivity that cannot be achieved using traditional flavor discovery methods, setting us apart from other flavor companies.

This expertise fuels an expanded pipeline of new flavor ingredients that can address several of the most significant challenges faced by the food and beverage industries. Most recently, the FEMA GRAS designation for S617, our new Sweetmyx, sucrose and fructose modifier and the European Union regulatory approval for Sweetmyx SR69 open up new markets for Senomyx's direct sales program and our partners collaboration efforts.

Lastly, the successful implementation of Senomyx's direct sales program is critical for driving commercial revenues for the Company. In less than the year we have established a sales organization and supply chain services, engaged contract manufacturers and began introductions of three of our Complimyx ingredients. Our outreach to the flavor industry continues to gain momentum and our customer base as indicating receptivity to Senomyx's novel product portfolio.

In summary, we believe that Senomyx is in an excellent position to leverage our technologies, increase our commercialization prospects and grow shareholder value. We thank you for your interest in Senomyx and look forward to updating you on our next earnings call.

Operator

Ladies and gentlemen, this concludes our conference call for today. All parties may now disconnect. Enjoy your day.

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