Senomyx's (SNMX) CEO John Poyhonen on Q1 2016 Results - Earnings Call Transcript

| About: Senomyx, Inc. (SNMX)

Senomyx, Inc. (NASDAQ:SNMX)

Q1 2016 Earnings Conference Call

April 28, 2016 17:00 ET

Executives

Megan Knight - Investor Relations & Corporate Communications

John Poyhonen - President and Chief Executive Officer

Sharon Wicker - SVP and Chief Commercial Development Officer

Tony Rogers - SVP and Chief Financial Officer

Analysts

Serge Belanger - Needham & Company

Mike Malouf - Craig-Hallum Capital

Operator

Good day, 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 open the conference up for questions-and-answers after the presentation. [Operator Instructions]

I would now like to turn the call over to Megan Knight with Investor Relations & Corporate Communications at Senomyx.

Megan Knight

Good afternoon and welcome to the Senomyx First Quarter 2016 Earnings and Corporate Update Conference Call. Participating in this call from Senomyx will be John Poyhonen, President and Chief Executive Officer; Sharon Wicker, Senior Vice President, Chief Commercial Development Officer; and Tony Rogers, Senior Vice President and Chief Financial Officer.

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 today's press release in 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 will now turn the discussion over to John Poyhonen, President and CEO of Senomyx.

John Poyhonen

Thank you, Megan. Good afternoon to everyone and thank you for joining the Senomyx management team for our conference call and webcast. Senomyx is off to a strong start in 2016 with commercialization progress under both, our royalty-based collaboration, as well as our direct sales to flavor houses resulting in an increase in the first quarter commercial revenues of over 200% compared to the prior year.

First quarter highlights include the initial commercialization of our novel cooling flavor S2227, by Firmenich in an oral care product. This commercialization was earlier in the year than expected and it trigged the achievement of a milestone during the quarter. This novel cooling flavor provides a clean long-lasting taste profile, and is being marketed by Firmenich under the free-storm brand.

Moving to an existing product, our flavoring ingredient Sweetmyx S617 was first commercialized by PepsiCo and made available to consumers during the fourth quarter of 2015. The reformulated concentrates containing Sweetmyx are being used in Manzanita Sol nationally and Mug Root Beer in two test markets; Denver and Philadelphia. Senomyx continues to monitor the Mug Root Beer test market performance through Nielsen scanner data which reflects retail sales of the product in both test markets. In order to measure performance, we evaluated sales trends for the 52-week preceding the launch compared to sales trends after watch.

In reviewing the most recent numbers, we continue to be encouraged by the post launch sales volume trends in both test markets. Based on recent feedback, the Mug Root Beer test market plan remains on-track. We understand there are questions around the timing of a potential Mug Root Beer national launch. However, our partner is solely responsible for the national launch decision and we are unable to provide any additional details or analysis at this time due to confidentiality requirements and competitive considerations.

Finally, with respect to Sweetmyx S617, recent feedback from our partners indicates that further product development work is ongoing to evaluate potential new product launches, although the specific timing remains outside of our control. We hope to report additional details in future earnings calls. From a research and development perspective, our sweet taste discovery program has been productive in the identification of natural high intensity zero calorie sweeteners. As part of this initiative we have identified a number of novel natural sweeteners from certain plant sources. In taste tests, many of these sweeteners have demonstrated greater potency and fewer off taste than Rebaudioside A.

Last quarter we reported several of these natural sweetener candidates have met our internal stability and solubility requirements. Our current efforts are focused on further characterization of the sensory profile including the sweet taste quality attributes. Based on this valuation, we expect to determine whether to initiate preliminary product development for one of these natural sweetener candidates by the end of the second quarter. If we proceed with a unit sweetener candidate from this particular plant source, the next critical step will be continued investigation and evaluation of potential methods to manufacture commercial scale quantities. In addition to the evaluation of these leads sweetener candidates, we have a significant parallel effort where we are evaluating potential sweeteners from other plant sources. The discovery and development timeline is uncertain but we remain optimistic that we will identify a commercially viable natural high intensity sweetener with competitive advantages to currently available sweeteners.

Regarding our salt taste program, we are continuing our efforts to determine the specific protein or group of proteins responsible for human salty taste perception. We have prioritized our database of proteins expressed in taste buds and are conducting screening with two proteins of interest. Our current efforts are focused on optimizing our assay screening to improve the potency and viability for further sensory evaluations. The path we are following is consistent with our prior experience utilizing other taste targets but we need to improve the potency of our hits to potentially validate a protein and taste tests that is specific for salty taste.

From a business development standpoint this is a pivotal year for Senomyx with the R&D funding period of our sweet taste program collaboration scheduled to come to their natural conclusion this summer. There continues to be significant interest in the reduction of calories in foods and beverages driven by pressure from NGOs, law makers, and consumers. We are actively pursuing collaborative relationships for our sweet taste program and we remain optimistic in our ability to deliver on this important goal this year. This is an exciting time for Senomyx and I look forward to reporting on our business development progress as we move forward through the year.

I'll now turn the call over to Sharon Wicker who will discuss the direct sales progress and activities. She will be followed by Tony Rogers who will review our financial status and outlook. And I'll return after the Q&A at the end of the call. Sharon?

Sharon Wicker

Thank you, John. Since our last earnings call two months ago, Senomyx's direct sales program has shown good progress as the adoption of our five complex flavoring ingredients continue to gain momentum with our flavor house customers. We now have 11 wins across our customer base. As a reminder, a win occurs when a flavor company orders a sufficient amount of volume of one of our ingredients to support use in a commercial product. This means it will be formulated into a consumer product good or CPG, client's food or beverage offering that will be sold on the market.

We're tracking wins by flavor company by product, so each flavor house customer has a potential to achieve five wins; i.e., one for each of our current portfolio ingredients. Over the past quarter another of our existing customers achieved a second win for a different flavor ingredient, meaning that nine flavor companies account for these 11 wins. We are very encouraged that we're starting to realize multiple wins for additional Complimyx ingredients by our existing customer base. As this demonstrates the value and differentiation our offerings can bring in the development of their flavor solution.

To provide some additional perspective, nearly all of the flavor houses accounting for these 11 wins have reordered material. More specifically, we're happy to report that we've received a total of 44 orders from these labor company customers in support of business opportunities generated by their wins. Our sales team continues to show good progress in their promotional activities with both; labor house customers and CPG clients. We have now met with 98 flavor company customers on a global basis. We continue to focus the majority of our sales activities on our highest volume potential accounts. However, our sales team also maintains contact with small and medium sized flavor houses. This sales coverage strategy ensures that we are reaching a broad-spectrum of end users as these flavor companies frequently focus their business efforts on different market segments such as regional and private label food and beverage manufacturers.

About three quarters or 73 of the flavor houses we have met with are actively conducting. Internal evaluations across our Sweetmyx, Savorymyx, and Bittermyx ingredients. Importantly, 43 of our flavor house customers have presented sample flavor solutions including our ingredients to at least one but most likely multiple of their CPG clients for possible use in an food or beverage product. These flavor companies are sampling an average of two and a half or five Complimyx offerings. Our customers are investing considerable resources in the evaluation of our ingredients including flavor formulation work in a variety of food and beverage product prototypes. We believe this is indicative of the added-value our ingredients can bring to their flavor system offerings.

We have now completed a 111 Introductory CPG presentations including taste test of our complex flavoring gradient with a broad range of food and beverage manufacturers and food service providers. This effort has been effective in creating awareness of our portfolio products by the student beverage manufacturers which in turn is leading them to contact the preferred flavor house suppliers for additional information and requests for samples. We believe that this ongoing interaction with CPG companies is contributing to the growing number of flavor houses that are using Complimyx ingredients within the flavor solutions they are developing and response to their client's project brief. Therefore, our sales team will continue to prioritize the expansion of these meetings with a wide range of retail and food service companies.

To summarize, since our last call we've achieved one additional flavor ingredient win for a total count of eleven wins across nine of our flavor house customers. There are now also 43 flavor houses who have sampled an average of two and a half of our five novel compliments offerings to their CPG clients. Further we have conducted 111 poll meetings with consumer product companies. The sales cycle timing is difficult to predict, but we are particularly encouraged by our recent progress. We remained confident that our efforts will continue to translate to additional wins which will result in meaningful future commercial revenues. I look forward to reporting additional progress for our direct sales program during our next earnings call.

I'll now turn the discussion to Tony Rogers who will provide an overview of our financial status and outlet. Tony?

Tony Rogers

Thank you, Sharon. Senomyx is off to a good start in 2016 as first quarter financial results exceeded expectations, specifically commercial revenues were higher and expenses were lower than anticipated leading to net results that are $1.1 million better than the guidance we provided earlier this year.

Commercial revenues in the first quarter were bolstered by an earlier than anticipated achievement of a $500,000 milestone. This milestone is related to the commercialization of our novel cooling flavor that john described earlier. In terms of expenses, favorable variance to guidance resulted from a combination of managing expenses to the low end of our internal targets and timing associated with projected 2016 outsourcing activities. Regarding first quarter results, total revenues for the three months ended March 31, 2016, were $6.3 million compared to $5 million for the same period in 2015. Commercial revenues increased over 200% to 2.1 million dollars for the first quarter 2016 from $657,000 for the first quarter of 2015. This improvement primarily resulted from three factors; higher royalties from our sweet flavor ingredients, the cooling flavor commercial milestone, and higher direct sales from our flavor ingredients to flavor houses.

Turning to first quarter expenses, research, development and patent expenses decreased $5.4 million in Q1 2016 from $6.4 million in the first quarter of 2015. This reduction was primarily attributable to lower personnel and depreciation expenses. Selling, general and administrative expenses decreased to $3 million dollars in the first quarter 2016 compared to $3.1 million for the same quarter in 2015. Approximately $1.2 million or 14% of these first quarter 2016 R&D and SG&A expenses were non-cash stock-based expenses. The net loss for the quarter ended March 31, 2016 improved to $2.4 million compared to $4.6 million for the quarter-ended March 31, 2016.

Regarding our financial outlook, at this point we will continue to provide only quarterly guidance due to the limit to control we have over commercial revenue timing and variability around ongoing business development activities. For the second quarter 2016, the company expects a net loss that will not exceed $3 million or $0.07 per share on total revenues of at least $6.1 million. We project commercial revenues anticipated to be comprised entirely with royalties and direct sales will be at least $2 million in the second quarter excluding a $250,000 commercial milestone earned in the second quarter of 2015. We anticipate commercial revenues will increase at least 50% in the second quarter of 2016 compared to the same period of 2015.

In terms of expenses for the full year 2016 we continue to project research and development, and SG&A expenses will be around $36 million which is approximately $1 million lower compared to the same expenses in 2015. Regarding the company's cash position, Senomyx ended the first quarter with $19.1 million dollars in cash and no debt. As we anticipated, cash utilization was higher in the first quarter compared to recent quarters, primarily due to cash flow timing. As accounts receivable increased $2.1 million and accounts payable decreased $1.1 million, for $3.2 million net change.

Regarding cash inflow going forward, over the remaining three quarters of 2016, we are scheduled to receive $8.7 million and committed payments from our collaborators and customers. In addition, Senomyx will also receive other commercial payments in cost reimbursement, and has the opportunity to earn milestone payments under its existing collaborations. Business development activities may also provide an additional source of funding this year. Our balance sheet remains strong but our future cash requirements are inextricably linked to commercial revenue growth and our partnering initiatives.

In conclusion, we had a very good first quarter with significant improvement in both commercial revenues and net results compared to 2015. I look forward to reporting on our progress as we move through the year.

I will now turn the call back over to the operator.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Mr. Poyhonen, our first question comes from the line Serge Belanger with Needham & Company. Your line is now open.

Serge Belanger

Hi, good afternoon. Just a couple questions, the first one on S617. John you talked a little bit about monitoring the Nielsen data for retail sales and looking at the 52-week period, prelaunch and post-launch, any additional color you can give us on trends between pre and post-launch? And is this one of the main metrics that you think Pepsi is using to evaluate whether these test market launches are a success?

John Poyhonen

Hi Serge, good question. So with respect to the Nielsen data, as you mentioned, we've get 52-weeks' worth of data that we set as a benchmark or baseline set, and in both, Philadelphia and Denver, we on our own have been monitoring the result of the Nielsen scanner level data. I would say that in both marketplaces we're encouraged by the results by that. We see the trends increasing to the baseline that were set on the 52-weeks prior to the launch. I really can't get into any specifics but of course, volume would be one metric that PepsiCo would be looking at as well as other feedback from consumers, market share data. They've got a very sophisticated way of looking at things. But we think this is a good proxy from our perspective to monitor the results.

Serge Belanger

Okay. And then, I guess around S617, we've spent a lot of time talking about what Pepsi is doing, and a lot less time talking about what Firmenich is doing. Can you provide us any update on your other partner and their activities?

John Poyhonen

Sure. Firmenich has also been looking at product development activities, they've got a number of prototypes that they developed and solutions, and they're presenting those actively to their customers which are the consumer product companies throughout the world where we have regulatory approval. So I think from their perspective, it's going well. As we've seen with our own direct sales efforts, it just takes time to get the CPGs to make decisions but I think they're pleased with the initial response they're getting thus far.

Serge Belanger

Okay. And then, just a couple questions on the new cooling flavor, S2227. Can you remind us what rights Firmenich had and has and when you expect this flavor to be part of the Complimyx portfolio for direct sales?

John Poyhonen

Yes, good questions, on both fronts. Firmenich has global rights on all flavor associated applications with S2227. So that would include foods and beverages, as well as oral care products which are primarily mouthwashes and toothpaste. They have global rights to that through the life of the patents and this was not covered under our agreement for the sweet program while we were able to regain rights after a first mover advantage. So it's a bit different in that regard.

Serge Belanger

Thanks for answering the questions. I'll get back in queue.

John Poyhonen

Sure, thanks.

Operator

And the next question is from the line of Mike Malouf with Craig-Hallum Capital. Your line is now open.

Mike Malouf

Great, thanks for taking my questions. I'm wondering if we can focus in on the collaborative relationships for just a second. I know that you've been talking pretty positive with regards to your expectations on that and I'm just wondering can you give us any color on how those have progressed since the last quarterly call couple of months ago? Have people dropped out? Have some people got more interested? And how broad-based are the negotiations with regards to type of companies?

John Poyhonen

All good questions. And of course Mike, with this, the most detail we're going to be able to report is one of deals actually done. So there is not a ton of detail I can give at this point but what I can say is we've known that our sweet research funding was coming to its natural conclusion in the summer of 2016 for some time. So last summer we began reaching out to companies. I think we cast what we would consider to be a broad nap including consumer product companies, flavor houses, as well as ingredients supply companies. We've been very pleased to see the high level of interest from third-party. We think that's a testament to our best-in-class technology, and also their desire to reduce calories from their products. So I think right now that it's going very well and what I can say is that we have a number of very interested companies that are still in the mix somewhere at the stage of actually discussing financial terms and narrowing down on what the specific rights of interest would be. But beyond that I really can't go much further other than saying that we've been doing this for a while, we've got a great track record of delivering on business development, and we're very confident that we're going to deliver on this important goal in 2016.

Mike Malouf

Okay, great. And then with regards to direct sales, maybe a question for Sharon, is there and a sense of what you can -- if you take a look at these 11 wins so far, what sort of range are we talking about from their small revenue per year win to the largest revenue per year win? Just to kind of give us a range of that and is that -- are you going after a larger and larger opportunities as you look in your pipeline and just try to give us a sense of that.

Sharon Wicker

Sure. So we do have the 11 wins across nine companies as we discussed. The nine companies are generally representative of the industry although within it the SKU towards the larger flavor companies. And then again, we discussed before just confidentiality concerns in respect of our business relationship where we can't get into a lot of detail. But it's certainly accurate to say that the revenues associated with the wins are driven by the larger flavor companies. So kind of think about it that way. In terms of moving forward, we have -- those kind of back to those 43 companies we talked about that are actively working with the material. We have a lot of projects in the pipeline and again they are representative across the industry but we obviously are focused primarily on where the larger wins we think can come from. So I think there is a lot of good potential for some of the wins that were -- and visibility, some of the projects, excuse me, that we have visibility to within the pipeline.

Mike Malouf

And when you have -- you met with 111 -- or you've had 111 meetings with the CPG companies, how -- what kind of feedback have you gotten from them and perhaps maybe you can give us a little bit of some of the negative feedback or pushbacks again because from the outside it's sort of one of those cheaper and better stories, so it seems so little bit too good to be true but I'm wondering what the CPG guys are telling you and why they -- what the pushback that they're giving you on the mark?

Sharon Wicker

Sure. So first of all, we've actually met with 111 companies and some cases we've had more meetings with them, we've had subsequent meetings with several of them that are particularly interested. I think that, Mike, in general we have a lot more positive feedback, I mean we are -- we have to take our call, we have to take the meeting if they are not interested to learn more they wouldn't do that because they're obviously very busy, and lots of people want to get in to see them to promote their ingredients. I think when we do the taste test which I think you know from doing them yourselves the products really speak for themselves. So we go through the background information, we do the taste test and it's always a wow, particularly, in the sweet modification area. So I think a lot of positives, I mean I think, I wouldn't say negative so much, it's really more about their product portfolio and kind of what can fit in where with them. We've got still some limitations for some regulatory approval, some holes in a couple of the product which -- that's not, we're working to close that gap, it's not really a negative but it's something that we hear about. So I think that we're products where they make sense in their portfolio it's been a lot more positive.

John Poyhonen

And I think the other thing Mike is there has been growing interest in natural solutions and I think we all recognize that. That being said though, there are is a very important place for artificial flavors in this marketplace. Both from a cost and use standpoint, from a sustainability, you're never going to be able to replace anywhere close to all your flavors with natural solutions and even if you could, the cost would be so absorbent that the market wouldn't really except that. So I think it's more of a factor of what product categories you're looking at, what type of consumers that you're targeting and the geographic scope of where you're commercializing your products. All those have very important impacts onto weather natural or natural and artificial flavors are preferred.

Mike Malouf

Great. And then just one final question with regards to the regulatory. What kind of regulatory gaps could be filled in this calendar year, I mean where can we -- do we have that kind of -- any kind of visibility on that, not the mix, six weeks but over the next six to nine months?

Sharon Wicker

Sure. We normally -- I think we'll talk about a major regulatory approval when it actually does occur. So there are some things that are inherently, with some of these regulatory bodies, a little difficult to predict. But I think that yes, we do expect to close some important geographic gap this year for – particularly, in one of our sweet modifiers and then another bitter blocker.

John Poyhonen

And just generally speaking though, the data that we generate for fema grass [ph] can be used in all the other regulatory jurisdictions. So really we get in the queue as rapidly as possible and I think in most every major jurisdiction were in the queue in one way or another.

Sharon Wicker

Right. And John's point is important. I mean we don't think there is any issue with getting it, it's just a matter of time and working through the process.

Mike Malouf

Okay, great. Thanks a lot for the help.

John Poyhonen

Sure. Thanks, Mike.

Operator

At this time there are no further questions. So I'll turn the call back to Mr. Poyhonen to conclude.

John Poyhonen

I'd like to thank all of you for participating in our call today. Senomyx delivered promising results in the first quarter with important progress on both, commercial and R&D goals. We appreciate your interest in Senomyx and look forward to updating you on our next earnings call.

Operator

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

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