Senomyx: Coiled Or Broken Spring?

| About: Senomyx, Inc. (SNMX)

Summary

Senomyx shares have taken a beating and are primed for a sharp rebound, with several identifiable catalysts on the near-term horizon.

Potential catalysts include a national rollout of the S617-infused Mug Root Beer, new S617-inside product launches by PepsiCo and non-dilutive R&D financing from new collaborators.

The macro trends supporting SNMX's product portfolio are only getting stronger, with the UK the latest country to roll out a sugar tax.

Senomyx (NASDAQ:SNMX) has been a frustrating story. After rising above $7 in a brief burst of optimism late last summer, the stock is now languishing near 52-week lows. The rout accelerated after last quarter's earnings report, when management declined to provide guidance for 2016 - and backtracked on the previous pledge to reach profitability by the second half. The company's efforts to ramp up direct sales of flavor ingredients are yet to bear much fruit (in revenue terms at least) - and Pepsi's limited rollout of the sweetness booster S617 remains on a test scale.

In short, the revenue rampup is happening at a much slower pace than many of us expected. There is little visibility over the magnitude and the timing of the future earnings trajectory. Pity the poor analyst who has to figure out what to put in cell C57 of his spreadsheet for the next quarter. Yet herein lies the opportunity. There are five very real potential upside catalysts for SNMX - any of which on its own could light a rocket under the severely depressed share price. (Note: this is just a very quick take ahead of the first quarter earnings report on Thursday - see my previous articles on SNMX for the full thesis.)

I am very confident we will see at least a couple of the below play out over the coming months:

  1. Mug Success: Pepsi launched a test balloon last October with two S617-infused beverages: a nationwide launch of Manzanita Sol and a restricted launch of Mug Root Beer in two trial markets: Philadelphia and Denver. Since then it has been radio silence. A look at the share price would suggest this is a sign of impending disaster. Yet the lack of newsflow is exactly what PepsiCo would want. The biggest concern about the use of S617 was a potential consumer backlash about a "scary" new ingredient. This has not happened, which will likely give PepsiCo more confidence about future new product launches - provided, that is, consumers are satisfied with the taste of the reformulated products. Senomyx CEO John Poyhonen said on the last earnings call that Neilson scanner data on Mug sales in the two test markets were "encouraging" - and they were waiting to hear from Pepsi on a decision to go national. It's now almost six months since the trial started. We should be hearing something very soon. A decision to go national with the reformulated Mug - a top 20 soda brand in the US -- would be a major validation of S617.
  2. New Pepsi Products: PepsiCo has strongly suggested we will get more product launches (of both carbonated and non-carbonated beverages) containing S617 in 2016. CEO Indra Nooyi in October: "We've rolled out a couple of products this year in Manzanita Sol and Mug with somebody's tools. You'll start seeing more of that as next year rolls by." Patience, my friends. Patience.
  3. New Collaborations: Senomyx's research collaboration agreements with Firmenich and PepsiCo expire in July and August of this year respectively. This is important because the company is not yet profitable - and both collaborators have been funding SNMX's R&D work in exchange for exclusivity on any products developed under their watch. Senomyx still had $23 million of cash on its balance sheet as of last quarter end - enough to get them through a few more quarters. How will they keep the lights on beyond that? The good news is that management is in negotiations with several potential suitors including consumer product companies, flavor companies and ingredient suppliers. CEO Poyhonen said at the recent Needham investor conference there was "tremendous interest" in collaborating with SNMX, and that he was "very confident" and "very comfortable" that the company would sign up new partners. Importantly, he also emphasized the company was seeking nondilutive financing to support its R&D efforts. I'll leave you to judge but this is pretty confident language. As an aside, I would not rule out a deal with Coca Cola.
  4. Natural Sweetener: Senomyx has been working for years now on the holy grail - an all-natural zero calorie sweetener. The company claims to have identified a number of natural sweeteners with superior characteristics (greater potency with fewer lingering off-tastes) to Stevia. It is currently working on a scalable manufacturing process, likely involving fermentation. Senomyx expects to decide by the end of Q2 whether it will move into the product development phase. We should get an announcement on this in the summer. An effective natural sweetener to address the $1 trillion non-alcoholic beverage market would obviously be a very big deal.
  5. Firmenich Commercialization: Unlike PepsiCo, Firmenich is yet to commercialize S617. We have no disclosure on how close they may be, other than the quarterly reassurance from Senomyx that both its collaborative partners continue to do development work on potential product launches. I think this one is a when, rather than an if. Firmenich has an incentive to move fast here as it loses its exclusivity in 2018 (at which point Senomyx can start selling S617 directly to flavor houses for food and alcoholic beverage use).

Bottom line: There are some very real potential catalysts on the near-term horizon. SNMX shares are currently priced as if none of the above will occur. Investing at such times of extreme pessimism often pays off.

Consider that the company's current market cap ($114 million) is less than half the life-to-date R&D funding that Senomyx has received from its partners (resulting in 530 U.S. and foreign-issued patents).

And the underlying macro trends that make this collection of call options potentially very valuable are only getting stronger. The UK, for example, is the latest country to implement a sugar tax, which starts in 2018. The beverage manufacturer will pay the tax, which is a two-tier system depending on the amount of sugar in the product. Food and beverage manufactures need to move fast on this - and there are no easy ways to reduce sugar without sacrificing taste.

This is a global trend. PepsiCo, Coca-Cola and Dr. Pepper have all pledged to cut the calories in their soda 20% by 2025. Senomyx has one of the few viable solutions to make this happen.

I, for one, am willing to bet they will be part of the solution.

Disclosure: I am/we are long SNMX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.