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Senomyx Inc. (NASDAQ:SNMX)

Deutsche Bank 37th Annual Healthcare Conference Call

May 8 2012 4:10 pm ET


Kent Snyder – Chairman and Chief Executive Officer

Tony Rogers – Senior Vice President and Chief Financial Officer


Good afternoon everyone. I’m Barbara Ryan and welcome to Senomyx. It’s our pleasure to host them here this year. It’s a company that’s focused on using taste receptor technology to discover and develop flavor ingredients for the food, beverage and ingredient supply industries.

Joining me here on the podium, we have two presenters from the company, Kent Snyder, the Chief Executive Officer and Chairman of the Board of Directors; and the Chief Financial Officer, Tony Rogers, and I think they are both going to give us an overview of the company, and then we will open it up to your questions, thank you.

Kent Snyder

Thank you, Barbara. Thank you for attending today. Before we get started I should make the obligatory statement about our presentation that we maybe making certain forward-looking statements, during the presentation and then we would ask you to refer to our most recent SEC filings for a complete disclosure of risk factors.

So we are a little bit different type of company. This is a health care conference, so we’ll talk a little bit about some of the science behind Senomyx, but we are a company that utilize the tools and techniques that were learnt from the Bio-tech industry and have developed into a nearly what we taste science and which has led to the discovery of novel flavor ingredients for the food, beverage and flavor industry and the reason why we think this is important for carrying out the science is there is lot of health concerns about the foods and beverages that we consume.

Food and beverages companies are looking for renovation they have to watch their costs and certainly they are very concerned about taste quality. So, we’ll talk a little bit about each of our program today, including the Sweet Taste Program, here the goal is to reduce the amount of added sugar or added sweetener to products. We have a Savory Flavor Program, which is aimed at reducing or eliminated added (inaudible) products.

We also look at flavor ingredients to block the bitter taste, we have a Cool Flavor Program and then also we have a Salt Enhancer Taste Program that I’ll touch as well. So before we get into a little bit about the business side and some more programs, it’s important to understand a little bit about the physiology of taste. And so we know where our taste buds are located on the tongue. We know that there are five basic taste, which are sweet, salt, bitter, sour, and savory, which is the taste of MSG. And we know that taste buds have specialized cells for each taste modality.

So if you take a cross section of a taste bud, you would see a bundle of cells, which is depicted on the right and each sweet taste or each taste modality has its own taste cell. So, there is sweet taste cell for example. And we’ll show you a little bit about the Science of Senomyx here in a moment.

So what we aim to do is to find flavor ingredients, which react with at the Taste Receptors on the surface of the tongue in terms of mimicking a specific taste or making a flavor or enhancing a specific taste like enhancing the sweet taste or blocking a taste such as our Bitter Blocker Program.

So, we have a little bit of animation to show you a bit more detail in terms of what we do.


So, hopefully that gave you a little bit of overview of what we do with the science of Senomyx. So, let me now turn to some of our programs and the processes that we use to discover new flavor ingredients. So when we begin, we started in the beginning by identifying the receptor of interest, we build an assay containing that receptor and then we do high throughput screening with our corporate library, which currently is about 800,000 different compounds and samples. Once we find something that interacts the receptor that we are targeting we will do the optimization. And leading to a candidate for selection and this is really where we have a strong IT position in terms of what we do at Senomyx.

Once we have a flavor ingredient selected for development, we start the safety assessment process with these regulatory focused activities, which in the U.S is called the GRAS or generally recognized as saved and that leads to regulatory approval, which in our hands, once you select a new flavor ingredient for development, it takes about 15 to 18 months to go through the GRAS regulatory approval process.

Once we have regulatory approval, we hand off to our partners. They do the commercial development, which includes product application work, the manufacturing scale up. And then once they are done with that they are ready to go to market and start selling the ingredients to their customers. And we’ll talk about the business model in a bit more details here in a few moments.

So, let me now turn to an overview of our various programs and I’ll start with a Sweet Taste Program, which I think most of us feel is a key to our future. Here the idea is to reduce the amount of added sugar or other sweeteners in the product like you have maintained the desired sweet taste that consumers like. This results in decreased calories, which improves the nutritional profile of the product, and also results in a potential cost savings as well. The collaborators of the Sweet Taste Program are Firmenich, a Geneva based Private Flavor Company, and then PepsiCo of course.

So, let me start with two GRAS approved sweet enhancers. First, 6973 and I’ll talk about the second one S2383 as well. The collaborator on the two GRAS approved sweet enhancers is Firmenich. And let me talk a little bit about 6973 first. This is a very interesting sweet enhancer. It allows you to enable a reduction of added sucrose in products by up to 50%. It maintains a sweet taste, as if you had a full load of sugar in the product, there are no off taste and clearly it results in an improvement of nutritional profile.

We have GRAS approval for most food categories and select beverage categories and we are also approving other regulatory approvals on a geographical basis. Firmenich began commercializing S6973 in the second half of 2011, and they are currently rolling out their marketing in North America, Latin America, South East Asia, Africa and Australia. And we’ll talk a little bit more about what Firmenich is doing on 6973 in a moment.

In addition, I’ll comment on S2383, which is a second approved sweet enhancer and in this case this is an enhancer of sucralose or Splenda. And we found that you can reduce the amount of sucralose in a product by up to 75% by use of 2383. Again this maintains a sweet taste and there is potential for taste improvement as well.

We do have GRAS approval in most all food and beverage categories. Again we are pursuing additional regulatory approvals as we speak. And Firmenich began commercializing S2383 in the first half of 2011. In terms of R&D activity on the Sweet Taste Program here the collaborators again are PepsiCo and Firmenich.

We’re pursuing several different avenues, including new sucrose enhancers, which we’ve selected S9632, has been selected for a development by Senomyx and the collaborators. What we found with this particular sucrose enhancer, you can also reduce added sucrose by up to 50% in tasters. We have development activities underway and we would expect GRAS approval by the end of 2012.

What’s key about 9632, it just has some alternative physical properties, which will be allowed to use this sweet enhancer in a broader range of beverages and food. So, we think this is going to be very complementary to S6973.

In addition, we’re working on enhancers of high-fructose corn syrup. We have demonstrated that we can reduce the amount of HFCS in product proto types. We’re doing additional optimization and valuations currently, and we think this is a very interesting opportunity, because high-fructose corn syrup is a very widely used sweetener, especially here in the US, with sales about $7.6 billion worldwide.

We also have a natural component to the Sweet Taste Program, where we are looking for natural enhancers, and also natural high-potency sweeteners. We have developed a corporate library of natural components and we have identified what we call a taste-proof-of-concept in the high-potency sweetener program. And we feel that although this is not ready for development it does validate the approach of finding natural high-potency sweeteners.

Turning to some of our other programs, we do have a Savory Flavor Program, which again is aimed at reducing our eliminated added MSG from products, we do have GRAS approval, as well as approval in China, we have what’s called JECFA approval and we are pursuing approval in the European Union as well. In this case the collaborators are Nestle and Ajinomoto, between the two companies that are caring out marketing in the Pacific Rim, Latin America, Africa, Middle East China and also North America.

We also have two new savory flavor ingredients that have been GRAS approved, S9229 and S5456. Those redeemed GRAS in late last year and we're currently presenting various alternatives looking at commercialization to those two savory flavor ingredients.

We also have our Bitter Blocker program that has two GRAS approved bitter blockers. The lead in this case is S6821 and those were deemed to be GRAS in November 2010. We’ve demonstrated that we can block the bitter taste of various foods and beverages, and we do have a partner who we’re not able to name at this point. That’s preparing for initial commercial launch of a retail product containing S6821.

We expect that launch to occur later this year, in a country located in South East Asia. And we hope to have more updates, as we move towards the end of the year and beyond on, on the Bitter Blocker program.

In addition, a program that we don't talk about too much is what we call our Cool Taste Program, again here our partner is Firmenich, and we have selected a cooling agent called S5031 that has been selected for development. In this case, this new cooling agent has improved properties compared to existing agents such as menthol with a great potency, a longer duration of the cooling sensation and also no aroma that you tend to get with menthol containing products.

We have initiated the safety evaluation for our S5031 and support a future Regulatory filing. Last, we're also working on a salt enhancement program; again reducing the amount of added salt here would be a major health benefit. We are exploring the role of various proteins from taste bud tissue from the tongue, which hopefully will lead to the identification of the definitive receptors that’s evolved in soft taste perception. We also found a blocker of salt taste, which we think would be a useful tool to help us to identify the receptor that’s involved in Soft Taste.

So in terms of summarizing the programs as you can see here this is a continuum of our discovery and development process. The arrows depict where each program is at on that continuum and our goal is to continue to move all of these arrows to right-hand side.

So, before I could turn it over to Tony, I’ll talk a little bit about the Senomyx business model. How we hope to take our R&D efforts into the commercial phase. So, what we do when we setup a collaboration? We grant either exclusive or co-exclusive rights to certain Senomyx flavor ingredients, and we tie to that to a specific development program in specific product categories in specific geographies. For example our work with Firmenich, one of our collaborations is focused on the Sweet Taste Program. It is a (inaudible) for example on the lead sucrose enhancer they have all approved GRAS categories and that’s a worldwide collaboration.

So, what we get back from our collaborators is R&D funding to help carry out the program, milestone payments occasionally upfront to access the program and license fees and of course royalties on any product that are sold in the marketplace that contain our flavor ingredients.

The collaborators are responsible for all manufacturing and sales and marketing costs and importantly all of our collaborations call for royalty payments coming back to Senomyx. This is either setup around a retail product model or an ingredient supply model and I’ll give you an example of how that works.

On the retail side, the way that works is that we grant a license right to our collaborators to use in this example a sweet enhancer. The collaborator then takes the sweet enhancer puts it into selected products. They sell to their distributors or retail customers and for every product that is sold that contains one of our flavor ingredients they would make a royalty payment back to Senomyx.

So, basically these royalties are based on a percentage of the net sales of the collaborator or the volume of the product that incorporates the Senomyx flavor ingredient. The royalty rate does vary by collaboration, but in some cases the royalty rate does go as high as 4% of the collaborators net sales.

On the ingredient supply model, this is again based upon the sales of the ingredient or the flavor system, an example here is Firmenich also Nestlé and Ajinomoto. And the way this would work is that we would grant for example in this case a license to S6973, the sucrose enhancer to Firmenich. Firmenich then will in turn sell this particular enhancer to their customers as an ingredient. And for every ingredient sale they would then make a royalty payment back to Senomyx.

In this case royalty rates on the ingredient supply model and the expected penetration rates are higher than the retail model, because Firmenich in this case can tap into and marketer this enhancer to all food and beverage companies. And we think that there is some very attractive markets in terms of the ingredient supply model. For example, the sucrose enhancer S6973 will compete in the sucrose market, which in the most recent information we have is about a $100 billion on a worldwide basis, enhancers of high fructose corn syrup will compete in the $7.6 billion market.

The savory flavor ingredients will compete in the $5 billion MSG market and the cooling flavor will compete in approximately $1.2 billion cooling flavor market. So that gives you a little bit of an overview of how the business model of Senomyx works and I’m going to ask Tony to now touch on a little bit more detail some of the commercial aspect and the financial aspects of the company. Tony?

Tony Rogers

Thank you, Kent. Good afternoon everyone. I’d like to begin by giving you an overview of where our partner Firmenich is in commercializing 6973 and Kent mention 6973 is our sucrose enhancer and we really view it as our number one product candidate at this point in terms of commercial potential. So our partner Firmenich has developed product formulation solutions or integrated 6973 in the flavor system to facilitate use in the food and beverages. They’ve established a dedicated sales and technical team. They are operating in some key geographies shown here.

Their target product category at this point are dairy products, baked goods, powdered and ready-to-drink coffee. They’ve built commercial scale inventory, the metric tons scale. And they’ve launched initial products using our consumer product using 6973 were launched late last year. And they currently have over 60 active projects at different stages with their clients.

Moving onto what we see as the potential drivers of growth for commercialization of 6973. First and important to understand, the food and beverage companies tend to incorporate a new ingredient into one or two products on limited basis. And then expand usage based on success and that expansion can take on a number of forums, including horizontal expansion standing into additional geographies, expanding into additional product categories.

And another variable that we see in the food and beverage industry is it tends to be fast followers. So, one company, company A has success, company B, C, and D wanted to get on and enjoy that success as well. So we see these as key drivers of commercial growth for 6973. And here we’ve a graphical illustration very simple illustration how that process I just described could work and this illustration will look at six hypothetical companies and products. Where we are now 2011, 2012? We have FEMA GRAS’ approval on this Regulatory approval on certain geographies generally depicted by the colors here.

As we forward, with additional geographies coming on line and getting approval, we see expansion in different products with our collaborators. And really growing out and having global expansion with 6973. So, we see we are in the early stages of a process that has a great upside potential. In-terms of thinking about modeling the opportunity, in this example we will look at ingredient supply scenario as Kent described. Retail model (inaudible) and this is (inaudible). We’re looking 6973 our sucrose enhancer and we are looking at one geography in this the U.S. and Canada

U.S. and Canada has about $12 billion annually in sucrose sales and this illustration will play a penetration rate, we use 10%. We won’t be at 10% immediately, but in certain geographies and product categories we certainly could achieve or exceed 10%.

6973 can replace 50% of sugar. Multiply these variables you get our collaborator sales in this illustration. Apply our royalty rate and then apply the royalty rate to their sales, you get our commercial income and its illustration. I think it’s important to point out that our commercial revenue is, really essential go straight to the bottom line it’s got another sales and marketing cost. We have no cost to goods sold. All of those are responsibility of the collaborator.

Moving onto where we are financially at this point, we are really in this process of transitioning from a development stage or commercial company. We’ve made a historical significant investment in R&D intellectual property.

To date, most of our revenues have been development revenues. But future profitability will be driven by royalty and commercial revenue. We have a strong balance sheet with several sources of funding going forward. We have over $51.3 million in cash and highly liquid securities.

And then under existing collaborations, we have another $70 million of potential R&D and milestone payments, including $24 million in committed R&D payments, $24 million in milestone payments, and another $22 million in extension options, under those existing collaborations. And in addition we expect to continue to receive quarterly commercial revenue payments and if we establish new collaborations you can see payments from there as well.

We have no debt, single cross common stock just under 40 million shares; we have no preferred stock or warrants. In terms of our guidance for 2012, we’ve guided to total revenues of $30 million to $34 million, expenses of $39 million to $42 million, of those expenses about $5 million we’ve guided will be non-cash stock based expense, [putting] to a loss of $7 million to $10 million, we expect to end the year with more than $40 million in cash.

So, in terms of potential value drivers over the next-year, year and half or so we looked for continued traction of 6973 sucrose enhancer sale, as well to 2383 the sucralose enhancer. New savory flavor product launches were our partners Nestle and Ajniamotto we’re looking at Kent talked about that is Bitter Blocker Product launch 6821. We’re looking for GRAS approval by the end of the year, on a next generation sucrose enhancer 9632, we continue to make progress on a high fructose corn syrup enhancer and are working toward ultimately selecting for development an enhancer in that area.

The 5031 selected by our partner for development in the first quarter of this year, we continued those regulatory activities toward regulatory approval within the next year or so. We continue to work on the Salt Taste Program to identify our receptor ultimately leading to taste-proof-of-concept.

And a very important program we have going is our natural high potency sweetener program, and we look to find compound of taste flavors come out of that for additional taste-proof-of-concept. And then we are always looking and evaluating collaborative opportunities, which can provide funding and a means to commercialize our products.

So with that I’ll turn it over to you for any question?


Thank you. [Ends Abruptly]

Question-and-Answer Session

[No Q&A session for this event]

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