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Senomyx, Inc. (NASDAQ:SNMX)

Citi 2012 Global Consumer Conference Call

May 24, 2012 08:15 am ET

Executives

Kent Snyder - Chairman and CEO

Gwen Rosenberg - VP, IR & Corporate Communications

Cath Bovenizer - Executive Director and Controller

Analysts

David Driscoll - Citigroup

David Driscoll

Good morning, everybody. My name is David Driscoll. I'm Citigroup's Food Manufacturing Analyst and I'm delighted to present our next company presentation today. Starting off this morning is Senomyx. Senomyx is a discovery company involved in developing innovative flavor ingredients for the food beverage and ingredient supply industries using the firm's unique proprietary technologies.

Presenting from Senomyx are Kent Snyder, CEO and Chairman of the Board; Gwen Rosenberg, Vice President, Investor Relations and Corporate Communications and Cath Bovenizer, Executive Director and Controller.

Mr. Snyder joined Senomyx in June of 2003 and has served as Chief Executive Officer and as a member of the Board of Directors since that time. Prior to joining Senomyx, Mr. Snyder held various marketing and sales management positions with Agouron Pharmaceuticals, a Pfizer company.

Cath Bovenizer is the Executive Director and Controller at Senomyx and she has been there since 2004 and previously Cath worked for Coopers & Lybrand. So with that I'd like to turn the presentation over to Kent. Thank you very much.

Kent Snyder

Thank you, David and thank you for your attendance this morning. As we go through the presentation, we may be making certain forward-looking statements and we would like for you to refer to our most recent SEC filings for complete disclosure of the risk factors.

Senomyx is a little bit different company than what you're going to see probably at the rest of the conference. We're a company that has taken a set of science that was discovered kind of the biotech pharmaceutical industry and we put it into what we called taste science and levied that body of science to come up with novel flavor ingredients and as David said, for the food, beverage and flavor ingredient companies.

The reason why we're doing this type of work that we're undertaking at Senomyx is that we're trying to address some of the challenges that food and beverage companies face such as health concerns, too much calories being consumed by consumers, the need for innovation, the need to control cost and foremost it's either to maintain an improved taste.

So at Senomyx we have five different programs. We'll cover with the Sweet Taste program in some detail later on but though the idea is to decrease the amount of added sweeteners and calories and products.

We have a Savory Flavors program, though the idea is to reduce or eliminate added MSG or monosodium glutamate from food and beverage products.

The Bitter Blocker program is just that to block the bitter taste of certain foods and beverages. We have a Cooling Flavor program where the idea is to discover novel cooling agents, improvements over menthol, if you will. And then we have a Salt Taste program, though the idea is to reduce added salted products again with health innovation being the primary driver of that program.

And we'll get into this in a little bit more detail but before we start talking about our individual programs, it's important to understand just a little bit about the physiology of the taste.

So we know where taste-bud are located on the tongue and we know that there are five basic taste. Sweet, salt, bitter, sour and the taste of MSG which is what we call savory, the Japanese call it umami. And so we know that, if you take a cross section of the taste-bud, you would see a bundle of cells and that's depicted on the right hand portion of the screen.

And each taste modality has its own individual cells. So there is a sweet cell or sour cell or salt cell et cetera and at the very end of these cells is a receptor and the receptor fits on the surface of the tongue. And so when a taste comes and activates or blocks that receptor, it sends a signal to the brain that you're tasting something sweet or something sour, whatever the case maybe.

So we use this physiology to discover either flavors which activate the receptor or flavor modulators, maybe idea is being to block bitter taste or enhance sweet taste. So to give you just a little bit more idea what it is that we do at Senomyx in terms of science, we have some animation that we'll go through.

Cath Bovenizer

Talin enhancer can actually reduce the amount of sweetener required in a product. Let's take a brief look at the physiology of taste. Taste buds are located at the front, back and far side to the tongue as depicted by the arrows. The surface of the tongue has several thousand taste buds located within small protrusions called papillae.

Each of the taste buds is comprised of about 50 to 100 taste cells. Each taste cells is specialized to recognize one of the five primary senses of taste which are sour, bitter, the taste of salt, savory also known as umami and sweet taste.

We'll take a look at the sweet cell to see how it functions. The tips of the sweet cells have proteins and service receptors for sweet taste sense such as sucrose or sucralose. We'll zoom in to see the receptors structure and function.

The sweet receptors have hinge structures known as Venus Flytrap that have a binding site for the sweetener, and as Senomyx discovered, a binding site for an enhancer. When a high amount of sucrose is present, the receptors are exposed to many sugar molecules. The high concentration of sugar causes a majority of receptors to close and become activated.

Having a large number of receptors activated in unison, they send the signal to the brain that we perceive as a strong sweet taste. In contrast, when a low amount of sucrose is present, fewer receptors are activated and a signal sent to the brain is weak. Senomyx's approach is to incorporate a sweet enhancer into a product that has a low amount of sucrose.

In the presence of the enhancer, the sucrose binds more tightly to the receptor so that even though the product contains low sugar the majority of the sweet receptors become activated and a sweet taste signal is strong. The Senomyx enhancer, therefore, allows the manufacture to reduce the sugar content of a product but maintain the desired sweet taste.

This is a science behind Senomyx's sweet enhancer program. We can also activate specific receptors to find new high potency sweeteners, savory flavors and cooling agents. In addition, we're going to improve the taste of products by blocking bitter taste receptors. Senomyx is sensing the future to renovation.

Kent Snyder

So hopefully that gave you a little bit idea of the science behind Senomyx and the work we do. So in terms of the discovery process, I'll spend just a minute on this before we start focusing on some of the programs.

So when we began a program, we take the taste receptor that were interested in such as the sweet taste receptor. We build an assay around it. Then we do, what we call, high-throughput screening in our corporate library of some 800,000 different compounds and natural extracts.

And once we find a potential flavor ingredient that interacts with the receptor that we're interested in, we'll take a look at it and if we need to optimize it, we'll do. Optimization means making it more potent, optimizing the physical characteristics to improve solubility, that sort of thing. And once we find the idea of flavor ingredient, we will take that and we will go into our development and safety studies approach.

Now in the U.S. the regulatory process for new flavor ingredients is called the GRAS process which means Generally Recognized as Safe. So you often GRAS and that's a process by which regulatory or flavor ingredients are approved in the U.S. and by getting that approval gets you the approval in some 20 other countries.

That process, once it's completed, that's when the formal hand-off normally occurs to our collaborators. They do product development work once consumer product testing, that sort of thing. Once they do that, then it's ready to go in to the marketplace.

So just to give you an idea where all of our programs are at in terms of this continuum, the Savory Flavor program is being sold by our partners Ajinomoto and Nestle.

We have two GRAS approved sweet enhancers. One is S2383 which is an enhancer of sucralose which is a blender. That is being sold by our partner Firmenich.

We have another approved sweet enhancer which is called S6973 which is enhancer of sucrose and this is a sweet enhancer we're going to focus on in more detail today. We have a second generation sucrose enhancer called S9632, which is being evaluated as we speak and we expect to have GRAS approval later this year.

We are also working on enhancers of high fructose corn syrup, that being very important, because high fructose corn syrup is the sweetener that is used in the U.S. primarily for carbonated beverages.

We have a natural sweetener program which is in the screening process. We have two Bitter Blockers that have been GRAS approved and we expect the first commercial launch of our retail product to occur later this year containing a Senomyx Bitter Blocker.

In the Cooling Flavors program, we have selected S5031 for development and we're beginning safety studies on that particular agent. And in the Salt Enhancer program, is at an earlier stage where we're trying to identify the definitive salt receptors; that's located on the tongue that's involved in salt taste perception.

So let's focus a little bit on the Sweet Taste program today. So here the idea is to reduce the amount of added sugar and other sweeteners in products, but yet maintain the desired sweet taste that consumers like. So the idea here is if you reduce the amount of sugar in a product and you decrease the calories, and improved a nutritional profile. It also results a potential cost savings by lowering the amount of sugar that's needed to go into a product as well.

The collaborators on the Sweet Taste program or Firmenich, which is a Swiss-based flavor company, we'll talk a little bit more about them in a moment and also PepsiCo. So we'll focus today on our GRAS approved sucrose enhancer called S6973. And you may have noticed, you have some samples in front of you. So later on in the presentation, we'll do a little taste test to actually show how S6973 actually works as a sweet taste enhancer.

So again focusing on this particular enhancer, the collaborator is Firmenich. This is as I mentioned a leading global flavor and fragrance company based in Geneva. And we'll talk a little bit more about their activities here.

But specifically regarding 6973, what we've found that you can reduce the amount of added sucrose in a product by up to 50% and yet maintain the sweet taste. It's not sweet on the tongue, since at works at the upper level of the receptor to enhance that receptor. And there's no off taste.

And we do have GRAS approval in most food categories and then selected beverage categories as well. And we are currently pursuing additional geographical approvals around the world as we speak.

The commercialization of S6973 was initiated by Firmenich in the second half of 2011 and currently they're marketing the product to food and beverage customers in North and Latin America, South East Asia, Africa, and Australia. So there's a lot that goes on when a company like Firmenich goes out to customers to introduce a novel flavor ingredient such as S6973.

First of all, they have to work with the food and beverage companies to develop product formulation solutions. That has been done in many cases. They've had called on top and mid-tier clients, that work is ongoing right now.

Firmenich is targeting product categories, such as dairy products, powdered ready-to-drink beverages specifically baked cereals biscuits and powdered and ready-to-drink coffee and tea products.

It's also important to build commercial scale. Firmenich has build up commercial skill to the metrics ton quantities. That has been completed. Many companies are completing evaluations in some of their product lines. And we saw the first launch of the product containing 6973 in the later part of 2011 and many of those activities preparing for launch are ongoing right now. And in fact, Firmenich in total have 50-some projects going on at different stages evaluation products with various food and beverage companies.

So many of you may know, since you follow the food and beverage industry, when companies tend to introduce something new, they start with the new ingredient maybe one or two products in a limited number of countries then expand based upon success. So there is a number of ways that expansion could occur.

Once they've had success in any product line, they could do horizon expansion with additional forms, flavors, package sizes and offerings that sort of things. Once we have additional geographical regulatory approval, they can expand in number of countries where they have products containing a new flavor ingredient.

Once they have success, they can then go from one product category to many more. And then also in the food and beverage industry, there is a phenomenon called fast followers that when the markets leaders tend to have success with a new ingredient, many of the smaller companies will then attempt to catch up, if you will. So we think that there is lot of growth opportunity for 6973. And this is an illustration of how new product launches could occur.

On the left hand side we'll start with six hypothetical companies, each of the products represented by different colors. So we started in 2011 where we had FEMA GRAS approval for 6973 and we saw the initial product launch occurring. So as we move into 2012, we'll get what's called JECFA approval, which gives regulatory approval in many smaller countries around the world, and we would expect to see additional product launches occurring during this year.

Then as we move into 2013, we could expect initial approval of 6973 in the European Union and see first product launches in those countries as well. And then as we move to 2014 and beyond, we would expect these companies to get a lot more experience with 6973 and have multiple product launches in multiple countries.

So in terms of the business overview and how we expect to turn this into a commercial business, I can describe to you a little bit about the commercial model that we've used at Senomyx. So when we put in place a collaboration, what we do is we grant co-exclusive rights to a new flavor ingredient to a company coming at a specific program for a specific product category and specific geographies. So for example, S6973, we've granted Firmenich, our partner, rights to that sweet enhancer, plus other enhancers coming out the Sweet Taste Program in all approved product categories and it's a low life collaboration.

So what we get back from our partners such as Firmenich is R&D funding to carry out the program, hopefully upfront license fees and then master payments as we go along and be successful. And importantly, we receive a royalty on their sales of 6973 to their customers.

So the collaborators such as Firmenich in this case is responsible for all manufacturing itself and marketing, and then we have a royalty model that based upon retail sales or in the case of 6973 ingredient supply sales. So how that works if you like again at this particular answer, it's based upon the ingredient or the flavor system sales and what has happened is that we licensed it right to 6973 to Firmenich; they in turn call on their customers which are food and beverage companies, and they sell 6973 as an ingredient. So for every sale that they make, they pay us a royalty on those ingredient sales to their customers.

And I might note that in the case of 6973, it's competing in a very large sucrose market, which is estimated to be around $100 billion on a worldwide basis. There are some other numbers here on the slide regarding other sweet taste enhancers and savory flavor ingredients, that sort of thing, but we won't go into too much detail today on those because of time.

So one question we always get is how do you possibly model this, what does it look like in terms of royalty potential. This is one of the most challenging things that we face, because introducing a new flavor ingredient such as 6973 has not been done before in the market. But we put forth, as an example, of how you might think about this.

So if we look at 6973, it's going to compete in the $100 billion sucrose market on a worldwide basis. But if you look at the U.S. and Canada, we estimate that there is about $12 billion in sales of sucrose in these geographies. We have to assume a penetration rate. So for this example, we've assumed 10%. Further we note that you can reduce the amount of sucrose in a product by up to 50%. So if you just simply do the math, multiply those factors together, you would see that potential ingredient sales for 6973 in these assumptions could be $600 million.

And then we plug in a royalty rate that would come back to Senomyx again, we haven't specified what our royalty rates are. In this example, we are using 5% as a royalty rate example. If you do the math, that would mean a $30 million annual royalty payment coming to Senomyx. This is an example of how you might think about it, but it's a good example when you think about one enhancer from one product in one geography and what it could mean.

So in terms of financial overview of Senomyx, we're at the point of transitioning from a development stage company to that commercial stage, which is very important obviously. We've had very significant historical and ongoing investment in R&D, as you might guess, and also in terms of intellectual property to protect everything that we're doing. Importantly, the future profitability is going to be driven by the royalty and commercial revenue.

We have a very strong balance sheet. At the end of March, we had over $51 million in cash. Plus we have up to $70 million in potential R&D and milestone payments from our existing collaborations. This would include $24 million in committed R&D cash payments, another $24 million in potential milestone payments and another $22 million in potential payments associated with extensions of our ongoing collaborations. This is in addition to the commercial royalty revenue payments that we would expect any time a product is sold containing one of our flavor ingredients. And certainly we're always looking for new collaborations. So we have a very efficient capital structure; there is no doubt. Single class of common stock with just 40 million shares outstanding and no preferred stock or warrants.

So in terms of our guidance for 2012, we would expect total revenues in the range of $30 million to $34 million, total expenses in the range of $39 million to $42 million with about $5 million in non-cash stock-based expense that translates into a net loss of $7 million to $10 million, basic and diluted in that loss of $0.18 to $0.25 per share. But we would expect again in 2012 with cash in excess of $40 billion. So we feel very good about the financial status of the company.

In terms of potential value drivers, obviously 6973 we've talked about today. We would expect the uptake of that particular sweet enhancer to continue along with S2383, the enhancer of sucralose or Splenda. As I mentioned, new savory flavor product launches by our partners Nestle and Ajinomoto on a worldwide basis. I mentioned that the first retail product is expected to be launched later this year, continuing a bitter blocker which is called S6821 that launches, as we mentioned, we expect to occur in a Southeast Asian country.

We would expect GRAS approval for the second-generation sucralose enhancer called S9632. And the reason why we're developing a second-generation enhancer of sucralose is we'd expect that to be used in a wider range of beverages compared to S6973. Again, we've mentioned that we're looking for enhancer of high-fructose corn syrup. We look forward to our development activities on the new cooling agent S5031 and then advancing the Salt Taste Program to identify the definitive preceptor and then what we call a taste proof-of-concept.

Last, but certainly not least, the high-potency sweetener program. This is a natural program effort we're researching our library of natural components to find a natural high-potency sweetener. And then of course, we're looking for new collaborations as we go along.

So we think there are a number of potential value drivers in our future. We have a very diversified portfolio of new flavor ingredients. And as I've mentioned, we are at the point of that crossover firm, a discovery and development company moving into commercialization. So hopefully we gave you a good overview of Senomyx today and helped you understand a little bit more of what we do in terms of science to discover novel flavor ingredients and how we hope to commercialize those into commercial products.

So that concludes the formal remarks that we have today. So I think we're going to move into the next segment of the presentation which is a taste test of a sucrose enhancer called S6973.

Question-and-Answer Session

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