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Senomyx, Inc. (NASDAQ:SNMX)

Q1 2011 Earnings Call

April 29, 2011 11:00 am ET

Executives

Gwen Rosenberg - VP, IR and Corporate Communications

Kent Snyder - CEO

John Poyhonen - President and COO

Tony Rogers - VP, CFO

David Linemeyer - VP, Biology

Analysts

Jonathan Feeney - Janney Montgomery Scott

Andrew Vaino - Roth Capital Partners

Dalton Chandler - Needham and Company

Operator

We will now begin the Senomyx first quarter 2011 conference call. (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 first quarter 2011 earnings and corporate update conference call. Participating in this call from Senomyx will be Kent Snyder, Chief Executive Officer; John Poyhonen, President and Chief Operating Officer, Tony Rogers, Vice President and Chief Financial Officer and David Linemeyer, Vice President, Biology.

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 of the company that involve risks and uncertainties. The company's actual results may differ materially from the projections described in the press release and this conference call.

Factors that might cause such a 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'd now like to turn the discussion over to Kent Snyder, CEO of Senomyx.

Kent Snyder

Thank you, Gwen. Good morning to everyone, and thank you for joining the Senomyx management team for our conference call and webcast. During this call, we will provide you with a general business and financial update for the first quarter of 2011. This will be followed by a question and answer session.

Senomyx is off to a strong start in 2011. As we'll discuss during the call, our partners continue to make good progress with the commercialization activities, and we continue to advance our Discovery & Development program. In addition, Senomyx has maintained a strong balance sheet with approximately $66 million in cash as of March 31.

We are especially encouraged by Firmenich's activities with S6973, which allows sucrose to be reduced in products by up to 50%, while maintaining the taste of natural sugar desired by consumers.

Firmenich has produced commercial quantities of S6973 and they expect to record their first commercial sale to a major brand customer during the second quarter. These activities are concurrent with Firmenich's sales of S2383, which can be used in numerous products to enable up to a 75% reduction in the concentration of sucralose. Importantly, Firmenich has found that use of S2383 improved the taste of certain products.

We believe that Firmenich is highly motivated and well positioned to take advantage of the market opportunities for S2383. John will discuss Firmenich's commercialization activities regarding S2383 and S6973 in more detail shortly.

As we announced earlier this week, we are very pleased to have been granted a U.S. patent that includes composition claims covering S2383 and its analogs. A new patent was issued on April 19, 2011 and has a term through June 8, 2027.

In addition to providing IP protection and exclusivity in the marketplace for a long period of time, the patent is an important validation of our research capabilities, which represent some of the most innovative work in the field of flavor technology. We believe the patent is an indication of Senomyx's leadership in the identification and development of valuable products that can substantially reduce the use of added sweeteners and a broad range of food and beverage applications.

Our current research activity for the Sweet Taste Program include continuing work on new sucrose enhancers that have distinct physical properties which may be advantageous for a broad range of beverages and other product applications. We are assessing a number of very interesting new sucrose enhancers that have significant enhancement activity along with desirable taste and initial safety profile. These activities could lead to a selection for development later this year.

We are also having an ongoing effort to discover and develop new flavor ingredients that amplifies the sweet taste of fructose, a key component of high fructose corn syrup. We have identified enhancers that demonstrated activity in Senomyx's proprietary fructose screening assays. Optimization of these enhancers, further screening, and taste tests are ongoing.

As we discussed previously, Senomyx's activities to discover and develop natural high-potency sweeteners are an important new focus for the Sweet Taste Program. We have expanded our natural products library and high-throughput screening of the library has begun. The screening is proceeding well and we have already identified several plant-derived samples from the library that have significant activity in the assay. Current activities include preparing these plant extract samples for in-house taste tests.

I would also like to draw attention to impressive breakthroughs in our Cooling Flavors Program. The goal of this program is to identify novel cooling flavors that do not have the limitations of currently available agents. We have now identified new cooling flavors that mimics the time-intensity profile of agents that have rapid onset and short acting cooling effects, as well as agents with slow onset and longer acting cooling effects.

Many of our lead Cooling Flavor candidates have demonstrated approximately tenfold greater potency than a commonly used agent in taste tests. These new cooling flavors are currently being evaluated in a variety of product prototypes by Senomyx and Firmenich, our partner for this program, which could lead to a decision to begin development activities.

As we discussed previously, Senomyx has made important strides with our Bitter Blockers program. The primary goals of this program are to reduce or block bitter taste and to improve the overall taste characteristics of foods, beverages, and ingredients. Two of Senomyx's bitter blockers, S6821 and S7958 have received GRAS regulatory status. S6821 has demonstrated activity against bitter tasting foods and beverages that include soy and whey proteins, menthol, caffeine, coco and Rebaudioside A, also known as Stevia.

S7958, a related bitter blocker with similar functionality has alternative desirable physical properties that may be useful for these and other product applications. S6821 is currently under evaluation by Senomyx's collaborators for potential future commercialization. We cannot name the collaborators at this time due to confidentiality considerations, but we will provide additional information about their activities when possible.

Senomyx's Salt Taste Program continues to be an important focus for our research efforts. The goal of this program is to identify flavor ingredients that allow a significant reduction of sodium in foods and beverages, yet maintain the salty taste desirable to consumers. Senomyx has assembled a proprietary database of proteins found in taste buds and is exploring the role of a number of these proteins that may function as receptors or co-factors responsible for salt taste perception. In addition, Senomyx is working on other biology-intensive approaches for this high-priority program.

We continue to believe that discovery of the protein or proteins that function as a salt taste receptor could lead to identifying an enhancer of salt taste that would enable a meaningful reduction of the salt content in consumer products. As you know, medical professionals and governmental authorities have cited excessive sodium intake as a major health issue.

In response, food and beverage manufacturers as well as major retailers such as Wal-Mart have stated their intentions to offer lower salt products to their customers. This situation has created a large unmet need for an ingredient that will have salt reduction without sacrificing taste.

Lastly, regarding our discovery and development activities, as demonstrated by our newly issued patent, Senomyx continues to be diligent in seeking protection for our intellectual property. As of March 31, 2011, the company is the owner or exclusive licensee of 239 issue patents and several hundred pending patent applications related to proprietary taste receptor technologies in the U.S., Europe, and elsewhere.

Technologies covered in our patents include taste receptor sequences and functions, screening assays, new flavor ingredients, and product applications.

I'll now turn the discussion over to John Poyhonen, who will provide an update on commercialization and business activities.

John Poyhonen

As Kent mentioned, we are encouraged by Firmenich's commercialization activities, with our S6973 sucrose enhancer. They had been introducing S6973 to lead customers with very positive feedback regarding its ability to enable significant sucrose reduction while maintaining the taste of fully sugar sweetened products.

Firmenich's clients are investing considerable effort and money to conduct recipe development and taste tests with S6973. Importantly, their clients are looking to launch reformulated established products, rather than the line extensions we saw with our Savory Flavors, which should accelerate S6973 usage levels.

Firmenich expects to achieve the first commercial sale of S6973 to a major brand client during the second quarter of 2011 with their client's products on the shelves in the second half of 2011.

As a reminder, Firmenich has exclusive worldwide rights to commercialize S6973 for virtually all food and specified beverage categories. The GRAS designation for S6973 allows usage in numerous food products, including baked goods, cereals, yoghurts, gum, confectionaries, frozen offerings, desserts and sauces. Various individual product types are included in each of these broad categories.

In addition, S6973 can be used with dairy beverages such as chocolate flavored milk, instant coffee and tea, as well as imitation dairy products such as non-dairy creamers and whiteners.

I noted during our last call that we believe that S6973 is in an excellent position to benefit from current market dynamics. These include pressure on manufacturers to reduce sugar in their products, the high price of sugar, and the positive impact on sustainability and cost that can be achieved as a result of reduced water usage and lower transportation expenses.

Given S6973's taste and function attributes, we believe, as well as Firmenich's global capabilities for providing flavor systems in major consumer companies, we are encouraged by the prospects of S6973 in the marketplace.

We are also pleased with Firmenich's commercialization activities with S2383, our extremely affective enhancer of the high intensity sweetener sucralose, Firmenich's exclusive worldwide rights to market S2383 as either a standalone ingredient or as part of a flavor system in all food and beverage product categories.

S2383 is applicable for all food and beverage product categories, including baked goods, cereals, desserts, dairy products, confectionaries and a wide variety of beverages. Firmenich is building market interest in S2383 for products sold in North America. By enabling the reduction of sucralose, S2383 may allow manufacturers to decrease their cost of goods and improve the taste of certain products.

Turning to the commercialization activities of our other partners, as we've discussed previously, Nestlé, the world's largest food and beverage company, has been conducting marketing activities with products that incorporate Senomyx's Savory Flavors. These flavors are intended to reduce or replace added monosodium glutamate or MSG in foods. Nestlé is currently marketing both new and reformulated established products that contain our Savory Flavors.

Ongoing commercialization activities include launches of new and reformulated products that incorporate our ingredients in countries in Asia, Latin America, Africa, and the Middle East. During the past quarter, Nestlé expanded its marketing efforts into additional countries in these regions.

As we discussed previously, the European Food Safety Authority, also known as EFSA, has provided a favorable opinion for Senomyx's S336 and S807 Savory Flavors, which means that no further evaluation is required. Final regulatory approval and commercialization in the European Union is contingent upon the ingredients being included in the EFSA Union List of Flavouring Substances.

Unfortunately, the timing for publication of the Union List still remains uncertain. Approval to use Senomyx's Savory Flavors in Europe could create a new market opportunity for Nestlé.

Ajinomoto, a leading company and manufacturer of food and culinary products, has been introducing products that contain a Senomyx flavor ingredient in China and elsewhere. Ajinomoto is continuing to expand their penetration in the Chinese market, and their customer base has been increasing. In addition, Senomyx earned a milestone payment in the first quarter of 2011 based on Ajinomoto's first sales in North America.

Regarding business development activities, Senomyx started the year with a new agreement with Kraft and the extension of our sweet enhancer collaboration with Firmenich.

We continue to be active in discussions with potential new collaboration partners. We appreciate the interest in our Flavor programs that we have received from these global companies, which are leaders in their respective fields.

This completes my update. Tony Rogers, Senomyx's Chief Financial Officer will now provide a financial overview of the company.

Tony Rogers

Revenues were $8.7 million for the first quarter of 2011 compared to $7.7 million for the first quarter of 2010, and increase of 13%. The increase in revenues for the first quarter was primarily due to the recognition of license fees and R&D funding revenue related to the company's August 2010 collaboration with PepsiCo.

License fees and R&D funding related to this collaboration contributed $3.9 million for the three months ended March 31, 2011.

This increase was partially offset by a reduction of revenues associated with the Company's Sweet Enhancer collaboration with Firmenich compared to the first quarter in 2010, when this collaboration contributed $1.8 million in non-recurring milestone payments and cost reimbursements.

Included in revenues were $913,000 in commercial revenue for the first quarter of 2011 compared to $810,000 for the same period in 2010, an increase of 13%. Commercial revenue included non-recurring commercial milestones of $250,000 and $500,000 in the first quarter of 2011 and 2010 respectively. Excluding these non-recurring milestone payments, Q1 2011 commercial revenue grew significantly compared to Q1 2010.

Research and development expenses, including stock-based expense were $7.3 million for the first quarter in 2011, compared to $6.4 million for the first quarter of 2010. The increase was primarily due to increased costs for personnel-related expenses and increased expenditures for compound acquisition and related screening activities.

General and administrative expenses, including stock-based expense were $2.7 million for the first quarter of 2011 compared to $3.1 million for the first quarter of 2010. This decrease was primarily due to lower non-cash stock-based expense.

The net loss for the first quarter of 2011 was $0.03 per share compared to a net loss of $0.05 per share for the first quarter of 2010, representing a 40% improvement.

The first quarter financial results were in line with management expectations. Furthermore, we remain on track to achieve our 2011 financial guidance as provided in March.

For the full year 2011, Senomyx continues to expect total revenues of $30 million to $34 million, total expenses of $42 million to $44 million of which approximately $4 million to $5 million is non-cash stock-based expense, net loss of $8 million to $10 million, basic and diluted net loss of $0.26 per share and year-end cash, cash equivalents and investments available for sale balance of greater than $50 million.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from the line of Jonathan Feeney of Janney Montgomery Scott.

Jonathan Feeney - Janney Montgomery Scott

Just one question I had. I thought the release was pretty straightforward. I wanted to talk about what the process is like to expand your natural products library in the Sweet Taste Program. How often have you done that in the past? And when we move from this space of sort of identifying potential compounds through high-throughput screening to the significant activity in the assay, as you say to these in-house taste tests, how often does that happen and what does that tell us about progress against the Sweet Taste Program?

Kent Snyder

John, is your question concerning the natural program or synthetic or both?

Jonathan Feeney - Janney Montgomery Scott

Natural high potency sweeteners. Yes, it's the Natural Products Library, last sentence of the Sweet Taste Program, second paragraph.

John Poyhonen

We have been working on our natural library. We probably first started working with it about five years ago and we have, really during that time period, picked up a tremendous amount of experience. I think one of the things that's a key priority for us in looking for natural libraries is a source that's reproducible. So it doesn't do you any good to find a natural high potency sweetener if you are not going to be able to commercially scale that.

One of the other things that we found is the ability to break down those natural extracts and look at them in smaller segments as it's important to the accuracy of our screening technique. So over the last five-years, we have learnt an awful lot lot about it. Right now we have the equivalent of probably about 300,000 to 400,000 natural ingredients in our library. We'll continue to rapidly expand that.

I don't want to get into too much about the sourcing of that John, just based on competitive reasons. But I can assure you that those are some of the key parameters that we are looking at.

And with respect to the program, actually we are making very good progress with that. We are seeing hits in our assay system which need to be re-fractionated or broken down then to smaller pieces and look forward to the type of effect that we are looking at.

So we have a number of those that we are following up on currently.

Jonathan Feeney - Janney Montgomery Scott

And just so I'm clear John, how often has this sort of thing happened in the history of the Sweet Taste Program?

John Poyhonen

As far as hits in the assay?

Jonathan Feeney - Janney Montgomery Scott

Yes.

John Poyhonen

In all of our programs, it tends to be a small percentage, and that's why it's somewhat of a numbers game, John. But right now we certainly have a number of things that are encouraging, but until we do further fractionation, that may be a one-step process or could be even finer fractionation beyond that. It's a bit difficult to say. But I think it's a small percentage, certainly less than 1%.

Operator

Our next question will come from the line of Andrew Vaino of Roth Capital Partners.

Andrew Vaino - Roth Capital Partners

Could you just go over again what the commercial revenue was for Q1?

Tony Rogers

Commercial revenue for Q1 of this year was $913,000 compared to $810,000 prior year.

Andrew Vaino - Roth Capital Partners

And then what's your expectation for commercial revenue for all of 2011?

Tony Rogers

$4 million.

Operator

Our next question will come from the line of Dalton Chandler of Needham and Company.

Dalton Chandler - Needham and Company

I think you mentioned that Firmenich will be launching S6973 with one customer. I was just wondering, if you talk about how many more customers could be in the pipeline and how quickly you expect this to scale up, and ultimately how many customers there could be for that particular compound.

David Linemeyer

We focus on the one customer that will accept. Firmenich will receive their initial commercial order during Q2. As we mentioned in the past, Firmenich has spent a lot of time calling on some very large and very key customers regarding S6973, and we believe they are making very good progress in terms of working with potential new customers.

We didn't comment on the timing of additional customers at this point because it's a little bit uncertain, but we would expect that additional progress will be made by Firmenich in talking with other customers besides just one as we move through the balance of 2011 and into 2012. And in terms of timing of commercial orders, we are not really in a position to comment on that at this point in time.

Dalton Chandler - Needham and Company

Well, speaking of timing, it sounds like from your comments on the Cooling Program, you're getting pretty close to a commercial product there. Can you give us any sense of what that timing might be?

Kent Snyder

Well, actually, what we're getting close to is having cooling flavors that could be selected for development by Firmenich. So we have a ways to go for Firmenich to make that selection, and then we have to go into the various product development work that they will do, the safety evaluation that we will conduct.

So we're not real close to commercialization with the Cooling Flavors Program, but we are making very good progress in terms of having a number of agents that fit the criteria that we and Firmenich desire. But it will be a bit of time before we see commercial activity or commercial sales coming out of that program.

Dalton Chandler - Needham and Company

Okay, and last question; you mentioned Ajinomoto is now selling in North America. Is that end product that's already on the shelf, or they've made sales to manufacturers and product is coming?

David Linemeyer

The flavor ingredient that Ajinomoto is working with is a part of a broader ingredient that they sell to manufacturers. And unfortunately with all of our partners, there is not a lot that we can say about what they are doing as far as their ingredients that they're selling to their customers because of the confidential nature of their agreements.

And I think as far as monitoring that we would just look at what we are doing on a go-forward basis based on the (inaudible) that we give at our next earnings call. So I can't be specific on that at this point.

Operator

At this time, there are no further questions. I'll turn the call back to Mr. Snyder for closing remarks.

Kent Snyder

I'd like to thank all of you for participating today. 2011 is beginning very well for Senomyx; commercialization of our S2383 Sucralose Enhancer is underway, and our S6973 Sucrose Enhancer is in an excellent position to be well received by major food and beverage companies.

Our discovery and development efforts have resulted in the issuance of a new key patent, outstanding advances with our Cooling Flavors Program and notable progress with other Flavor Programs as well.

On the financial front, we are pleased to report increased revenue and improved net loss compared to the prior year.

In addition to the commercialization activities with S6973, S2383, and our Savory Flavors, there are a number of other potential value drivers for Senomyx. Our partners are continuing to evaluate the S6821 Bitter Blocker, which has demonstrated the ability to reduce bitterness in a variety of products.

We are also looking forward to the development activities for a new Sucrose enhancer, selection of a Fructose enhancer for development and advances in our Salt Taste Program. Importantly, our Flavors programs continued to draw interest from prospective collaboration partners.

We believe our business model and proven discovery and development expertise can provide potential new revenue opportunities for Senomyx. Our current cash position and committed collaborated funding provide us the flexibility to wait until further advances in our programs, increase the value to new partners before entering into new collaborations.

This concludes our update call. We appreciate your time and interest in Senomyx. And if you have any additional questions, please feel free to contact us directly or through our website. Thanks very much.

Operator

Thank you, sir, and thank you for your participation in today's conference. You may now disconnect. Have a great day.

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