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Senomyx Inc. (NASDAQ:SNMX)

Q1 2012 Earnings Call

May 03, 2012 11:00 am ET

Executives

Gwen Rosenberg - VP, IR and Corporate Communications

Kent Snyder - CEO

John Poyhonen - President and COO

Tony Rogers - SVP and CFO

Analysts

Jonathan Feeney - Janney

Scott Henry - ROTH Capital

Dalton Chandler - Needham &Co.

Justin Ruiss - Sidoti

Operator

Good morning. We will now begin the Senomyx first quarter 2012 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 Gwen Rosenberg, Senomyx’s Vice President of Investor Relations and Corporate Communications.

Gwen Rosenberg

Good morning and welcome to the Senomyx first quarter 2012 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, Senior Vice President and Chief Financial Officer; Don Karanewsky, Senior Vice President, Discovery and Chief Scientific Officer; and Sharon Wicker, Senior Vice President and Chief Commercial Development 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 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’ll now turn the discussion over to Kent Snyder, CEO of Senomyx.

Kent Snyder

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

I’d like to start by announcing that during April Firmenich exercised its option to extend the research funding period of our Sweet Taste program collaboration. Under the terms of the extension, Firmenich will continue to provide research funding to Senomyx through July 2013 for discovery and development of new, natural and artificial flavor ingredients intended to enhance the taste of sucrose, fructose and various forms of the sweetener stevia.

We appreciate Firmenich’s support and we believe the funding extension not only demonstrates our continued confidence in the progress of our Sweet Program research activities, but also their confidence that our sweet enhancers will be successful in the market place. As with the sweet program more broadly, we continue to receive positive feedback from the ongoing marketing activities for S6973, the sweet taste modulator for sucrose reduction discovered and developed by Senomyx. Firmenich, our commercialization partner for S6973 has been introducing it to food and beverage companies for use in North America, Latin America and other areas around the world.

During our last earnings call, we noted that although it is difficult to determine the exact timing we expect to see progressive adoption of S6973 by Firmenich clients such as the anticipated expansion of the S6973 usage by additional companies across product lines to new product types and into new geographies.

As John will discuss later, we are encouraged to see this commercialization uptake begin to unfold. One of the early indicators is that during the first quarter of 2012 additional global food companies placed orders for S6973 in preparation for marketing their branded products that are reformulated with Senomyx sucrose enhancer.

Firmenich is also making progress with the commercialization of S2383 Senomyx sweet taste modulator that enables upto a 75% reduction in the concentration of the artificial sweetener sucralose and foods and beverages. As a reminder branded products that contain S2383 were first introduced in North America during 2011.

We are very pleased to report that new products we formulated to contain S2383 were launched in Latin America during the past quarter and additional new product introductions are anticipated in the US and Latin America later this year. Our ongoing research and development activities in the sweet taste program include final safety studies and other development activities in support of anticipated yearend GRAS regulatory approval for S9632, a new sucrose enhancer that enables the reduction of up to 50% of the sugar and product prototype, the GRAS or Generally Recognized as Safe designation allows usage in the US and a number of additional countries. Senomyx believes that that S9632 which may be beneficial for a broad range of beverages and other product applications will be complementary to S6973 in the market place, since each has distinctive beneficial properties, we expect that S9632 will expand our market opportunities by increasing the types of products that could utilize a Senomyx sucrose enhancer.

We also continuing evaluations of modulators that may be used to reduce the usage of high fructose corn syrup often known as HFCS which is widely used as sweetener for beverages and other products particularly in North America. We are currently in the process of assessing the amount of HFCS reduction we can achieve under various conditions in different product prototypes. We will provide additional updates regarding these programs throughout the year.

Our natural ingredients initiative is also moving forward as we use Senomyx proprietary technologies to identify potential new natural sweeteners and sweet taste enhancers. We have built and equipped a new highly specialized laboratory to support this important effort which has already provided a taste proof of concept with a natural high potency sweetener. Turning to our Bitter Blocker Program, I am pleased to report that Senomyx expects the initial commercial launch and a partner's retail product containing our S6821 bitter blocker to occur later this year.

We are not at liberty to name the partner or describe their product at this time due to confidentiality considerations. However we can tell you that we expect this first product launch to occur in a Southeast Asian country and that our collaborator is considering expanding the use of S6821 into other products and geographies.

In addition S6821 is being evaluated by third parties for possible new product applications. Our Cooling Taste Program is also progressing well. During the first quarter Firmenich, our partner for this program selected our S5031 cooling agent for regulatory-focused development which is now continuing. S5031 is very promising with a 10 times greater potency in taste tests and other advantageous properties such as longer cooling durations and lack of aroma compared to commonly used agents like menthol.

Lastly regarding our discovery and development programs we are also continuing discovery efforts with our Salt Taste Program with a goal of identifying flavor ingredients that allow a significant reduction of sodium in foods and beverages yet maintain the salty taste desirable to consumers. We are using a variety of analytical approaches including use of a newly identified novel blocker of salt taste to discover specific proteins that could be candidates for the receptors or co-factors responsible for Salt Taste.

In summary the first quarter of 2012 was very productive for Senomyx. We are particularly excited about the commercialization activities with our S6973 and S2383 Sweet Taste modulators and the upcoming marketing of a product that utilizes our S6821 Bitter Blocker.

In addition sales of products that incorporate a Senomyx savory flavor are ongoing by two of our partners. On the discovery and development front, our research programs continue to make important progress. As Tony will discuss, Senomyx’s financial position continues to be strong and allows us to proceed with both near-term objectives such as regulatory focus development activities and longer term objectives under our discovery and development programs.

I will now turn the discussion over to John Poyhonen, who will provide some additional information regarding S6973 commercialization activities. John?

John Poyhonen

Thank you, Kent. We discussed Firmenich’s roll out strategy for Senomyx’s S6973 sucrose enhancer in some detail during our March earnings call. So for the most part I am going to limit my remarks to an update on our marketing activities. As a reminder, Firmenich has exclusive worldwide rights to commercialize S6973 for use in virtually all foods and specified beverage categories.

They have established dedicated sales and technical resources to support their commercialization efforts which are ongoing with top-tier and mid-tier clients in North America, Latin America, Southeast Asia, Africa and Australia. Initial targeted product categories include spoonable, powdered and ready-to-drink dairy products. Powdered and ready-to-drink, coffee and tea products and baked goods.

Kent mentioned that we’re beginning to see the commercialization uptake scenario that we described previously. Firmenich’s first customers have placed additional orders and are starting to expand their evaluation of S6973 for use in additional products and new geographies.

At the same time other customers are placing orders for our S6973 to initiate product acceptance testing and in some cases beginning to scale up manufacturing processes for reformulated established process. We believe that their interest in S6973 is fueled by manufacturers need to address the growing pressure and interest for the lower calorie offerings.

Last month for example, a Cornell University study reported that obesity accounts for almost 21% of U.S. healthcare cost. Cornell concluded that this data will increase to economic rationale for governments to promote obesity prevention programs. We believe the unique ability of S6973 to allow manufacturers to remove up to 50% of the sucrose in their products while retaining the Sugar Taste consumers [inaudible] enjoy, coupled with the potential cost savings its creating an important opportunity for sucrose enhancer.

We’re sometimes asked to disclose the names of companies that Firmenich’s is working with and the brand names of products expected to contain Senomyx’s flavor ingredients.

Although, we have visibility into Firmenich activities, confidentially provisions restrict us from identifying specific clients or products. This is due in large part to the highly competitive nature of the food industry and the unwillingness of manufacturers to signal for the competitors what steps they are taking to reduce calories and their products while maintaining the desired taste. We can inform you that Firmenich currently has more than 60 active projects that are at different stages in the evaluation process.

Many of these projects involve multiple products within the broader product category. Based on the strong interests from numerous companies and the tendency for many companies to be fast forwards of successful new introductions by the market leading companies, Senomyx anticipates there will be additional commercial launches of product using our S6973 during the year which will build the base for future commercial revenue.

This completes my comments about Firmenich’s marketing activities. Tony Rogers, Senomyx’s CFO will now provide a financial overview of the company. Tony.

Tony Rogers

Thank you, John. Senomyx ended the first quarter 2012 with $51.3 million in cash, cash equivalents and investments available for sale. Revenue was $8.2 million for the three months ended March 31, 2012 compared to 8.7 million for the same period in 2011. Included in first quarter 2012 revenues were $1.1 million in commercial revenue compared to approximately $900,000 in the first quarter of 2011.

We will also point out that commercial revenue in the first quarter 2011 included a $250,000 milestone payment associated with our F336 Savory Flavor ingredients and there were no similar commercial milestone payments in the first quarter of this year. The decrease in total revenue was primarily due to lower upfront license fee revenue recognized in 2012 compared to 2011. Specifically, Senomyx recognized $893,000 and $2.3 million of upfront license fee revenue related to the company’s Sweet Taste collaboration with Firmenich during the three month ended March 31st 2012 and 2011 respectively.

There was no impact on cash flow as the related upfront payments were received prior to 2011. This decrease in upfront licenses revenue was partially offset by the earning of a $500,000 development milestone related to the cooling taste program during the three-month ended March 31st 2012.

Research and development expenses including non-cash stock-based expense were $7.1 million for the three-months ended March 31st 2012 compared to $7.3 million for the same period in 2011. General and administrative expenses including non-cash stock-based expense were $2.9 million for the three months ended March 31st 2012 compared to $2.7 million for the first quarter 2011. The net loss for the three months ended March 31st 2012 was $0.05 per share compared to $0.03 per share for the three months ended March 31st 2011.

Firmenich’s decision to exercise their option to extend the R&D funding period in additional year provides another source of committed funding. With no debt, a strong balance sheet and multiple sources of cash going forward, we continue to be well positioned to advance our programs.

In addition to the $51.3 million in cash and highly liquid investments at March 31st 2012, the company has committed and potential sources of cash going forward including on going royalty payments from collaborators and $24.1 million in funding commitments from current collaborators, $23.5 million of potential milestone payments under current collaborations and $21.7 million related to extension options under current collaborations.

We are reiterating 2012 financial guidance as initially provided on March 1st. For the full year of 2012, Senomyx expects total revenues of $30 million to $34 million. Total expenses of $39 million to $42 million of which approximately $5 million is non-cash stock-based expense, net loss of $7 million to $10 million, basic and diluted net loss of $0.18 to $0.25 per share and a year-end cash, cash equivalents and investments available for sale balance greater than $40 million.

This concludes my comments about the company's financial status. I will now turn the call back over to the operator to open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Jonathan Feeney from Janney. Please go ahead.

Jonathan Feeney - Janney

Just a couple questions. First, I am sorry if I missed it but I was just out the big, the FMI show, the food retailing show and it seemed like there was quite a bit of innovation out there particularly around flavor and particularly at PepsiCo. Could you update us on where things stand with PepsiCo and anything that's developed through the course of that deal over the past three months?

Kent Snyder

From our perspective, the PepsiCo collaboration continues to move along quite well. We are pleased with how its proceeding. I think the key thing, John, as you know, that collaboration is focused on research and development activities. We did talk about more recently 9632 the second generation sucrose enhancer, so that is part of the collaboration and that this development activities continue to move along and you know we believe that we’re making good progress on that collaboration.

Jonathan Feeney - Janney

And I guess when you think about -- refresh my memory, 9632 is the one that would work better in carbonated soft drinks; is that right?

Kent Snyder

Well, what we’ve said John is that 9632 compared to 6973, the new sucrose enhancer would be appropriate for a boarder range of beverages compared to 6973.

Jonathan Feeney - Janney

Chemically, is there are some chemical reason that’s the case that could hold up better and what is it acidity or what is that prevent the 6973 from being useable in a wider range of applications?

Kent Snyder

Well, what we commented on John is that the 9632 has some different fiscal characteristics compared to the first-generation enhancer which would allow to be used in a potentially boarder range of beverages; we haven’t really specified anything more than that.

Operator

Thank you. Our next question comes from Scott Henry from ROTH Capital. Please go ahead.

Scott Henry - ROTH Capital

I guess for starters, commercial revenues were pretty good in Q1 at $1.1 million. How should we think about that trajectory going forward or we are getting to the point where we should start to see that number increasing up sequentially quarter-over-quarter or is it still kind of a lumpy number depending on order timing?

John Poyhonen

Hi, Scott this is John. So, and good question; I think that at this point it’s a bit early to tell. I would think that as we are having Firmenich add new partners in placing orders with S6973, we’ll probably see some bumpiness in the short term.

And the reason for that is some of the orders that they are receiving currently are from market acceptance testing and also for their pilot plant work where they are actually conducting the manufacturing to make sure that it’s going to work throughout their processes.

Once we start seeing the actual commercial launches of additional products and we are starting to see some of those in the first quarter and expect that throughout the remainder of 2012. We probably will see a little bumpiness in that until we get to that point where there are more products that are actually have been launched in those repeat orders.

Scott Henry - ROTH Capital

And it hasn’t been a long time since your fourth quarter call, but I was looking at the programs in flavor ingredients and that you have and it looked to me as if the significant change there was on the Bitter Blockers that you’ve talked about, about having that product launch by year-end; that’s 6821. Any other changes in there that should jump out of me?

John Poyhonen

That’s probably -- the key, a new piece of information. In addition, we are continuing to make progress in the development of the cooling agent. We are also continuing with a good progress on development activities in the final safety studies for 9632.

So you are right. It’s only been about two months since we talk to you last. But we do think that we’ve had a number of positive developments across many programs. But you are right; I think the key new piece of information is the 6821 Bitter Blocker comments that we made.

Kent Snyder

Well, the other thing worth noting would also be with S6973 that Firmenich currently has over 60 active projects now Scott and that’s up from the over 15 number, just a couple of months ago. So there continues to be a very strong interest in the evaluation of that sucrose enhancer.

John Poyhonen

And also Scott of course the extension of Firmenich for the Sweet Taste Program which we mentioned earlier and we do believe that that extension shows our confidence not only in R&D activities but they expect from the commercial aspects of enhancers coming out of that program as well.

Operator

Thank you. Our next question comes from Dalton Chandler from Needham & Co. Please go ahead.

Dalton Chandler - Needham &Co.

You mentioned that Firmenich is taking additional commercial scale orders right now; could you just talk about what the lead time is on that like when they get an order in this quarter, when it would actually appear on shelves and when you would get to recognize the revenue from it?

Kent Snyder

So there are a number of components of that Dalton. As far as the actual recognition of the revenue, the way that it would work is when Firmenich actually ships the products to their client, they would invoice some and at that point, we would have earned the revenues.

So we would recognize that one quarter in arrears, so an example, that Firmenich receives an example in May from company ABC, they produce the order and actually ship it in June and invoice third client at that time. We will actually earn the royalty in June, but that rather than it will not be recognized until our third quarter, so the timeframe between July and September.

With respect to the timeframe, it’s somewhat dependent on the product that they are working with their clients. They are selling S6973 as part of a flavor system which makes it easier for their clients to use. So it’s a bit dependent on the complexity of the flavor solution that Firmenich is providing for their clients.

But it does take a bit of time to make up in actual flavor solution; I think probably four to six weeks as an average is about the right timing and that's why it’s very important for Firmenich to receive what their annual order requirements would be from respective client of theirs.

Dalton Chandler - Needham &Co.

And then on the Bitter Blocker product launch, I realize you can't disclose who the partner is, but there are a number of different categories of supplies, so can you talk about what category the product will be in?

Kent Snyder

Yeah, unfortunately we’re not able to at this time and with Bitter Blockers bitterness has tended to be seen as a negative by consumer product companies, so they don't necessarily want to identify their products as being bitter.

So they are very sensitive about the type of product that is going to go into. But we understand the importance of providing more visibility and more work with our partner on trying to share additional information as we go forward.

Dalton Chandler - Needham &Co.

And just a follow-up on the commercial revenue question. I realize it will continue to be lumpy for a while, but could we think about the $1.1 million as sort of a floor annualized run rate going forward?

Kent Snyder

It seems like its just too early to tell because in that number there were some reorders that was very encouraging and positive, but until we get more of a steady state on that, I think its just a bit early to tell whether there will be fluctuations beyond that level or not.

Operator

Thank you. Our next question comes from Justin Ruiss from Sidoti.

Justin Ruiss - Sidoti

I just had a question, could you provide more color on the Salt Taste Program. Well, how well that's going?

Kent Snyder

Well, aside from the comments that I mentioned, we haven't really provided any more detail, as you know we've been working on some basic research understanding what could be involved in salt taste perception and what the identification of the receptor might be or are there other cofactors that work along with receptor that’s salt taste. So we have a good portion of our biology very focused on the Salt Taste Program. From a biology perspective, it’s our number proprietary, but in terms of providing specific details beyond what we commented this morning, we really can't say much more than that.

Operator

Thank you. At this time there are no further questions, so I will turn back to Mr. Snyder to conclude.

Kent Snyder

Well, thank you very much for participating today. In summary, we are confident that Senomyx is in excellent position to increase shareholder value as our new flavor ingredients enter the marketplace.

We continue to strengthen our robust patent portfolio with new high carrier technologies that can be applied to discovery and development of new flavor ingredients and that address important issues facing the food and beverage industry. We have -- with our partners; we will consider additional opportunities to optimize return on our flavor program as we go along.

We look forward to updating your that Senomyx many value drivers which include continuing commercialization of Senomyx sweet enhancers and savory flavor ingredients by our partners. Initial market launch of the product containing our S6821 Bitter Blocker, anticipated year-end GRAS approval for our new sucrose enhancer S9632, development activities intended to lead to regulatory approval of our new cooling agent S5031 and achievements with our other research and development activities.

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

Operator

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

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