Senomyx's (SNMX) CEO John Poyhonen on Q2 2016 Results - Earnings Call Transcript

| About: Senomyx, Inc. (SNMX)

Senomyx, Inc. (NASDAQ:SNMX)

Q2 2016 Earnings Conference Call

July 28, 2016 05:00 PM ET

Executives

Megan Knight – Investor Relations & Corporate Communications

John Poyhonen – President and Chief Executive Officer

Sharon Wicker – Senior Vice President and Chief Commercial Development Officer

Antony Rogers – Senior Vice President and Chief Financial Officer

Analysts

Serge Belanger – Needham & Company

Michael Malouf – Craig-Hallum Capital

Operator

Good afternoon. 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 Second 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 and 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 and this 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 on 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 had a very good first half of 2016 highlighted by strong commercial revenue growth along with significant R&D progress. Our commercial revenue grew by 92% during the first half of 2016 compared to the same period of 2015 driven by increases from our royalty based collaborations and our direct sales to flavor houses. Going forward, we are well-positioned to achieve key goals that we have set for commercial revenue growth, business development, and R&D.

I would like to begin with a brief update on our business development activities. One of our primary 2016 goals is to pursue new collaborative relationships for our Sweet Taste Program that maximize the commercial potential of the program.

In the marketplace, not surprisingly, we have seen continued significant interest in the reduction of calories in foods and beverages, driven by pressure from NGOs, lawmakers, and consumers.

Today, we announced we have entered into a letter agreement with PepsiCo, to extend the current terms and conditions of our Sweet Taste Program collaboration, for an additional 45-day period through September 30, 2016. Under the letter agreement, we have agreed to use best efforts to negotiate in good faith the definitive terms of a potential longer extension of our collaborative agreement. In addition, we were concurrently evaluating opportunities with other third parties and we're to remain confident in our ability to deliver on the Sweet Taste Program business development goal this year.

Shifting to our flavor ingredients, Sweetmyx S617, which was first commercialized by PepsiCo and made available to consumers during the fourth quarter 2015, the reformulated concentrate containing Sweetmyx, are being used in Manzanita Sol nationally and Mug Root Beer in two tests 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.

To measure performance, we evaluated sales trends for the 52-week period preceding the launch compared to sales trends after launch. In reviewing the most recent numbers, we continue to be encouraged by the improved post launch sales volume trends in both test markets. Our partners advised us that the Mug Root Beer test market plan remains on track. We understand there are questions around the potential timing of a 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, from our partners have indicated that further product development work is ongoing to evaluate potential new product launches, although the specific timing and scope remains outside of our control.

On the research and development front, we previously described the meaningful advances in our natural high-intensity, zero calorie sweetener discovery program. Our R&D team has identified multiple plant-derived novel sweeteners which have demonstrated greater potency and fewer off-taste than Rebaudioside A which is the primary source of sweetness in stevia. We have completed our internal evaluations of their performance and several of these natural sweetener candidates have met our internal sensory, stability and solubility requirements. Based on these results, during the second quarter, we initiated preliminary product development on one of the sweetener candidates with a project to determine the commercial feasibility of potential manufacturing scale of products.

We remain optimistic that we will identify a commercially viable, natural, high intensity sweetener with competitive advantages to currently available sweeteners, although the discovery and development timeline is uncertain. This has been another productive quarter for Senomyx, and we look forward to reporting additional progress in future earnings calls.

I will 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-and-A period at the end of the call. Sharon?

Sharon Wicker

Thank you, John. Senomyx's direct sales program has continued to show good progress since our last quarterly earnings call. The ongoing adoption of our line of Complimyx flavor ingredients by our flavor house customers is very encouraging as we now have 12 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 five ingredients to support use in a commercial product. This means it will be formulated into a consumer product good or CPG client food or beverage offering that will be sold on the market.

We are tracking wins by flavor company, by product so each flavor house customer has the potential to achieve five wins that is one for each of our current portfolio ingredient. At this point, 10 flavor companies account for the 12 wins we are reporting.

We are also very encouraged by the sales growth from our existing flavor house customers, including the growing number of repeat orders. These reorders are driven by our customers' initial win, as well as their expanded sales of the flavor ingredients to additional CPG clients for use in more food and beverage products. We believe these results demonstrate the value and differentiation our Complimyx flavors offer our customers in the development of their flavor solutions.

And to further quantify the growing momentum for our direct sales program, I'm happy to report that our year-to-date revenues as of this call exceed our total direct sales revenues for the full-year 2015. While these revenues trends are clearly heading in the right direction, we believe we are just scratching the surface in terms of the potential for our flavor portfolio product.

Our sales team also continues to show good progress in their promotional activities with both flavor house customers and CPG clients. We have now met with over 100 flavor companies on a global basis. 47 of these customers have presented sample flavor solutions, including our Sweetymy, Savorymyx, and Bittermyx ingredients to at least one, but in most cases, multiple of their CPG clients for possible use in end food and beverage products. This metric is very important in illustrating the growing pipeline of opportunities for our product line, specifically as it relates to the potential achievement of new wins by our flavor house customers.

We have now completed 118 introductory CPG presentations, including taste tests of our flavor ingredients with a broad range of food and beverage manufacturers and food service providers. This effort has been effective in creating awareness of our product offerings by these food and beverage manufacturers, which in turn is leading them to contact their preferred flavor house suppliers for additional information and request 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 in response to their clients' project brief.

To summarize since our last call, we have achieved one additional flavor ingredient win, for a total of 12 wins across 10 flavor house customers. Further, 47 flavor houses have now sampled our Complimyx offerings to their CPG client. And we have conducted a 118 full meetings with consumer product companies.

As previously mentioned, the sale cycle timing is difficult to predict, but we're encouraged by our current progress. We remain confident that our efforts will translate to additional wins, as well as reorders by our customers in support of both their existing and expanding client base which will result in meaningful future commercial revenues for Senomyx.

I look forward to reporting additional progress of 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 outlook. Tony?

Antony Rogers

Thank you, Sharon. Senomyx delivered very good financial results for the first half of 2016, and second quarter results exceeded expectations. Specifically, net results in the second quarter were nearly $900,000 better than the guidance we provided. This favorable outcome resulted from lower than anticipated expenses, and higher than anticipated direct sales. The favorable variance with expenses primarily resulted from managing cost to the low end of our internal targets.

Regarding second quarter results, total revenues for the quarter ended June 30, 2016 were $6.6 million compared to $6.2 million for the same period in 2015. Development revenues were $4.3 million for the second quarter and $4.6 million for the same period in 2015. The $332,000 decrease was primarily attributable to lower cost reimbursement revenues related to our Sweet Taste Program.

Commercial revenues increased to $2.3 million for the second quarter 2016, from $1.6 million for the second quarter of 2015. This improvement primarily resulted from two factors, higher royalties from our sweet boosting and bitter blocking ingredients, and higher direct sales of our flavor ingredient to flavor houses. These increases were partially offset by a $250,000 reduction in one-time commercial milestone revenues compared to the second quarter of 2015.

Turning to second quarter expenses, research development and patent expenses decreased to $5.5 million in Q2 2016, from $5.7 million in the second quarter 2015. We also had lower selling, general and administrative expenses, which decreased to $2.9 million in the second quarter 2016, from $3 million in the same quarter 2015. Approximately $1.1 million or 14% of the second quarter 2016 R&D and SG&A expenses were non-cash stock-based expenses.

The net loss for the quarter ended June 30, 2016 improved to $2.1 million compared to $2.7 million for the quarter ended June 30, 2015.

Regarding our financial outlook, at this point, we will continue to provide only quarterly guidance for revenues and net results due to the limited control we have over commercial revenue timing, and variability around ongoing business development activities.

For the third quarter 2016, the company expects a net loss that will not exceed $3.1 million or $0.07 per share and total revenues of at least $5.7 million. Commercial revenues, anticipated to be comprised entirely of royalties and direct sales, will be at least $2.3 million in the third quarter. Development revenues will be at least $3.4 million in the third quarter. This development revenue guidance includes $1.1 million in funding associated with the 45-day PepsiCo Sweet Taste Program collaboration extension we announced today.

In terms of expenses for the full year 2016, we project R&D and SG&A expenses to be less than $36 million. Regarding the company's cash position, Senomyx ended the second quarter with no debt and $19.9 million in cash, an increase of approximately $800,000 compared to the end of the first quarter. For the remaining two quarters of 2016, we are currently scheduled to receive $3.2 million in committed payments from collaborators and customers.

The ongoing business development activities John mentioned may also provide additional meaningful source of funding this year. In addition, Senomyx will also receive other commercial payments and cost reimbursements and has the opportunity to earn milestone payments under its collaborations. 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 second quarter with a 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'll now turn the call back over to the operator.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will begin at this time. [Operator Instructions]

Mr. Poyhonen, our first question comes from Serge Belanger at Needham & Company. Your line is open.

Serge Belanger

Hi. Good afternoon. Just a couple of questions. I guess the first one for John on business development activities. Can you confirm that the Firmenich collaboration has ended or I guess would be ending over the next couple of day? And also, is the natural high-intensity sweetener parts of the PepsiCo collaboration that's been extended.

John Poyhonen

Okay. Sure, Serge. Happy to address both questions. First with respect to Firmenich. The research funding period of our sweet program collaboration with Firmenich came to its natural conclusion yesterday. Firmenich maintains all their commercial rights to S6973, S9632 and Sweetmyx S617, through the life of the patents and the royalty obligations will also continue during the patent life of our products.

Now as a reminder, Firmenich's rights were primarily limited to food and alcoholic beverage product categories. We've been aggressively pursuing partnerships with a significant number of consumer products, flavor house and ingredients supply companies since last summer for these product categories. And I guess I'm happy to report that the interest level is very high, but I can't comment on the specifics of any ongoing business development opportunities.

With respect to your question on PepsiCo, the answer in short is yes. The original collaborative agreement and the extension period both include our natural high-intensity sweetener program.

Serge Belanger

Okay. Great. I know in the past your collaboration have been mostly focused on R&D as you now evaluated additional business development opportunities. Is that still going to be the focus or are you looking for an environment that's more revenue opportunities?

John Poyhonen

Well, I think one of the things that we've consistently communicated is we knew that both of our collaborations, their R&D funding period were coming to their natural conclusions this summer. And as we started reaching out to companies last summer, we've really looked at opportunities to maximize the commercial potential of the programs that we have available. So I think with respect to our sweet program, we are still expecting to receive R&D funding. But we're also doing that in a way that would allow us to maximize the commercial potential of the discoveries from those programs.

Serge Belanger

Okay. And then a question on for Sharon on direct sales. I think in the past you've talked about that the opportunity was for about 100 flavor house companies. And from your update it seems like most of them penetrated and I guess 70% or high 70% have conducted internal evaluations. So at this point, do you think the sales cycle still remains a 12-month to 24-month period cycle? Or should we see decrease now that you've had contact with most of your flavor house company targets?

Sharon Wicker

Sure. So a little bit more background on that, Serge, you're right those metrics are correct in where we stand in terms of our target, number of flavor companies and how many are actively working with the agreement with the ingredients through an MTA agreement.

So the companies remain in various stages of their evaluation. So if you go back to when we started direct selling, about three years ago, we had some companies that came on sooner rather than others in terms of starting these evaluations. So you can think of those as being kind of ahead of the game, and in fact a lot of the wins that we talked about come from those kind of earlier adopters, if you will, in the evaluation process.

So I think on that side, we see things picking up, and slightly more predictable sales cycle, if you will. But we have continued, over time, to bring on additional flavor companies. And so they might have started their evaluations later; and so therefore, their cycle is probably still more in that 12- to 24-month period.

Serge Belanger

Okay. And so one of the focus to go straight to the CPG clients or is – maybe just still the flavor house companies remain the main target.

John Poyhonen

Yeah. So, no, our key – our customer target are the flavor houses. And they then in turn sell the ingredient along with other flavor solutions. It could be a compounded flavor or some type of flavor technology to their CPG client. However, to help facilitate that process, we still prioritize a good chunk of our account manager's time to go directly to the CPG companies out there to make sure that they're aware of our technology, and how they might be able to help them meet their various R&D goals in the area of health and wellness.

Serge Belanger

Okay. Thanks for the update. I'll get back in queue.

John Poyhonen

Thank you, Serge.

Operator

Thank you. And our next question will come from Mike Malouf of Craig-Hallum Capital. Your line is now open.

Michael Malouf

Great. Thanks, guys for taking my questions. John, maybe you could talk a little bit more about the natural product side. If you look out over the next, I will call it, 18 months or so, what kind of milestones, and what kind of things can we expect that you're shooting for with regards to, I guess manufacturer ability of the natural products and what kind of things can we look for?

John Poyhonen

Yeah. I think that's a great question, Mike. So as a reminder, we announced just during this call that in the second quarter, we initiate preliminary product development activities with a project to determine the commercial feasibility of potential manufacturing scale [indiscernible]. So in common language, what we're really looking for is a method to go through fermentations to produce commercial scale quantities of this product in a cost effective manner.

If you look at it because it is such a small component of the plant source that it's taken from, it would not be economically feasible to use this and if you try to just extract it from the plant alone. So, with that project, we have initiated work. I think that our third party vendor is making good progress on a path to potentially do that. If we are confident in that path, then the next step would be to actually move into a formal pilot project which I would expect that probably within the first, next 12 months, we would have a very good sense of whether that's possible based on a go, no go decision point. So that kind of gives you a sense that right now is probably the rate limiting factor. In parallel, we've actually developed a regulatory plan and we're working with an outside consultant to help us with that and we feel once we have enough material in place, we would be able to initiate the safety studies.

Michael Malouf

Okay. Great. And then with regards to your royalty-based collaborations or the legacy business, with Firmenich, Ajinomoto and Nestlé, can you give us the update on that, how that's going? And should we expect that to – basically that piece of your commercial revenues to be growing, flat, I mean, just give us a sense of how that looks over the next year or so?

John Poyhonen

Yeah. I think I'll ask Tony to address that point, Mike.

Antony Rogers

Yeah, Mike. Hi, Mike. So I think these three areas that drive our commercial revenue are collaboration with PepsiCo, the legacy royalty you mentioned and direct sales. We view of those the legacy royalty collaborations being the lower of the three drivers going forward contributing of those three sources. So we expect growth but we expect the big drivers to be our collaboration of PepsiCo as well as our direct sales.

Michael Malouf

And is there any seasonality associated with that particular part of the commercial revenues?

Antony Rogers

I don't know that we've seen at this point an ability to identify pattern on seasonality. I mean, there are some products and some seasonality we're seeing a little bit but nothing too remarkable.

John Poyhonen

I mean, you will see from time to time some spikes just based on the royalty, based on orders that one of our collaborative partners might play. So there may be some smoothing from quarter to quarter but we don't have any evidence that seasonality is what's really driving that.

Michael Malouf

Okay. Great. And then just my final question, maybe Tony, you can give us a little bit of color on how you kind of bridge to cash flow positive or at least increasing cash in the quarter, specifically on a working capital side. Just to understand what went on there in the quarter. Thanks.

Antony Rogers

So I'm not sure I understand the question, Mike, but I'll tell you with the announcement today that's going to contribute another $1.1 million during the quarter for cash. I think overall, we feel good about where we are from a cash standpoint. But of course, cash requirements are, as I mentioned, an inextricably linked to our commercial revenue growth and the partnering activity that are ongoing. And I expect [indiscernible].

Michael Malouf

So I guess I meant, on the second quarter and the June quarter, you mentioned that you increased cash from one quarter?

Antony Rogers

Yeah, right, right.

Michael Malouf

And I'm just trying to get a sense of, can you bridge us that. Mostly, as I look through the Q, it's a movement in the working capital but I just wanted some color on that.

Antony Rogers

Yeah. That's exactly right. So it's really the key driver is payment timing. So accounts receivable went down. Accounts payable went up during the second quarter. So it's really just all about payment timing. Nothing remarkable. I think the first quarter had unusually high cash burn because of those factors I just mentioned.

Michael Malouf

Okay. So maybe we're back at sort of a normal level now here at the end of the quarter?

Antony Rogers

Yes. Something like that.

Michael Malouf

Yeah. Okay. Great. Thanks a lot, guys. I appreciate it.

John Poyhonen

Thanks, Mike.

Operator

Thank you. And at this time, there are no further questions. So I will turn the call back over to Mr. Poyhonen to conclude.

John Poyhonen

I'd like to thank all of you for participating in our call today. Senomyx delivered strong results in the second quarter with continued commercial revenue growth and important progress on our 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 our conference call for today. All parties may now disconnect.

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