Senomyx Inc. Q4 2007 Earnings Call Transcript

Feb.17.08 | About: Senomyx, Inc. (SNMX)

Senomyx Inc. (NASDAQ:SNMX)

Q4 2007 Earnings Call

February 7, 2008 11:00 am ET

Executives

Gwen Rosenberg- VP of Investor Relations

Kent Snyder – President and CEO

John Poyhonen – Senior Vice President Chief Financial and Business Officer

Mark Zoller – Executive Vice President-Discovery and Development and Chief

Analysts

Ken Goldman – Bear Stearns

Pamela Bassett – Cantor Fitzgerald

Operator

We will now begin the Senomyx Fourth Quarter 2007 Conference Call.

(Operator instructions)

I would now like to turn the call over to Gwen Rosenberg Senomyx Vice President of Invested Relations in Corporate Communication.

Gwen Rosenberg

Welcome to the Senomyx Fourth Quarter and Yearend 2007 Earnings and Corporate Update Conference Call. Participating in this call from Senomyx will be Kent Snyder, President and CEO; John Poyhonen, Senior Vice President and Chief Financial and Business Officer; Mark Zoller, Executive Vice President-Discovery and Development and Chief Scientific Officer; Sharon Wicker, Senior Vice President-Commercial Development and Chief Strategy Officer; and Tony Rogers, Vice President-Finance and Treasury.

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 result may differ materially from the projections described in the press release and this conference call.

Factors that might cause such differences include but are not limited to those discussed in our quarterly and annual report filed with the SEC. Copies of these documents are available upon request from investor relations at Senomyx or maybe accessed via our website at www.senomyx.com. I would now like to turn the discussion over to Kent Snyder, President and CEO of Senomyx.

Kent Snyder

Thank you, Gwen. Good morning to everyone on the call and thank you for joining the Senomyx management team for our conference call and Webcast. During this call we will provide you with the general business and financial update for the 2007 Fourth Quarter and full year; this will be followed by a question and answer session.

I am very pleased to report that Senomyx made significant progress in all of our Discovering Development Programs during 2007 and we have had unprecedented strength and achievement in several areas. As a reminder, Senomyx’s noble approach for discovery of new flavor ingredients starts with the identification of the receptor that is responsible for a particular taste sensation. We then incorporate the receptor into a high-throughput screening assay that allows us to examine the hundreds and thousands of samples in our libraries in order to determine which samples interact with the receptor.

These samples are then evaluated in taste tests and optimized through various new flavor enhancers or beta blockers that meet the needs of our current and potential future partners. We have successfully used the receptors responsible for the savory, sweet, bitter and cool taste sensations in screening assays to discover potential new ingredients. Until now, the primary receptor responsible for human salt taste perception had not been identified by Senomyx or in the scientific literature. We are therefore especially excited about a significant new accomplishment in our Salt Enhancer Program. The identification of the protein we have designated as SNMX-29, which we believe is the primary human salt taste receptor.

In order to achieve this key discovery, the Senomyx salt team led by Dr. Albert Zlotnik, Vice President-Biology undertook an extremely comprehensive effort approximately one year ago. First, the team Senomyx’s unique knowledge of taste and taste receptors to establish extensive detailed criterion to determine which protein found in taste buds functions as a receptor of their response to sodium chloride or salt. This criterion includes specific parameters regarding the structure, function and location of the protein. For example the ability to conduct or respond to sodium and localization of the protein and distinct taste bud cells where the chief criteria to be fulfilled by the receptor or salt taste perception.

Next, the team identified approximately 15,000 proteins found in human taste buds. These proteins were evaluated against the established criteria giving state-of-the-art techniques; some of which were developed recently by Senomyx scientists.

The result of this extensive analysis which we have identified in one protein, SNMX-29, which met all of the criteria for the primary receptor responsible for salt taste perception; we believe the identification of SNMX-29 is a significant achievement for both Senomyx and the science of taste. We have begun development of an assay that incorporates SNMX-29. This assay will be used to screen our compound library to identify potential enhancers of salt taste, and to provide further verification that SNMX-29 is the human salt taste receptor. We expect to initiate screening activities during the first quarter of 2008.

As we have discussed previously, the goal of our Salt Enhancement Program is to identify flavor ingredients that allow a significant reduction of sodium in foods and beverages, yet maintain the salty taste desirable to consumers. The reduction of sodium consumption continues to be our high priority for Food Company and the medical community due to the association of high salt intake with cardiovascular disease. We therefore believe that an effective salt taste enhancer would be a valuable asset for Senomyx, partners and potential new collaborators.

To continue with our scientific achievements, I will not turn to our Sweet Enhancer Program. As noted previously, the primary goal for this program is to identify flavor ingredients that allow a significant reduction of sweeteners including beverage products while maintaining the desired sweet taste. We had two significant accomplishments rendering 2007. The first of which was the discovery of S2383, which provides a large degree of enhancement of a leading high intensity sweetener, sucralose. The use of S2383 has demonstrated that we are able to reduce sucralose by up to 75% in simple product prototypes while maintaining the desired sweet taste without any off-tastes.

Our development activities are proceeding well and are on schedule to support regulatory filings for S2383. Recent progress includes successful completion of initial safety studies, ongoing product application work with a variety of product prototypes and production scale up. Based upon continued success with theses activities, we believe that S2383 can receive a Generally Recognized As Safe or GRAS determination in 2008, which will make it eligible for commercialization at that time.

S2383 is a specific enhancer for sucralose which is used in a wide variety of beverages and food such as confectionaries, baked goods, desserts and dairy products as well as OTC health care products and dietary supplements. It is generally acknowledged that sucralose is associated with lingering and other concentration dependent undesirable effects, and we believe that by enabling its reduction by up to 75%, S2383 may allow Senomyx’s partners and potential new collaborators to improve the taste characteristics for the product and to reduce their cost of good.

We therefore believe there is significant commercial potential for our sucralose enhancer. In addition, our work on S2383 provides us with experience for the development of enhancer of other sweeteners. This leaves to our second significant accomplishment in the sweet enhancer program during 2007 and early 2008; the identification of enhancer of the natural sugar sucrose, which is the sugar most familiar to consumers. On our last earnings call we discussed S5742, a sucrose enhancer that allowed an approximate 40% reduction of sucrose and taste test with simple product prototype. I am pleased to announce today the discovery of S0739, a derivative of S5742 that provides the same reduction of sucrose using approximately one-fourth the amount of material. Like its predecessor in addition to maintaining the taste of sucrose, S0739 had desirable characteristics such as no intrinsic sweetness and no off-tastes.

We are currently optimizing and evaluating S0739 and other derivatives of S5742 that have the same variable taste and physical attributes and taste test with more complex product prototype. We believe that we are making excellent progress and look forward to a near term selection of a sucrose enhancer for the initiation of development activity. We are excited about the potential for a Senomyx sucrose enhancer to meaningfully reduce calories and beverages and food such as confectioneries, baked goods, desserts, cereal, ice cream and yogurt. We are also continuing to screen and evaluate derivative of both the sucralose and sucrose enhancers that may function as enhancers of fructose and other natural or artificial sweeteners.

Fructose is the key sweet ingredient of high fructose corn syrup which is used in a wide variety of food and beverage products marketed by Senomyx’s collaborators and other companies. Identifying a fructose enhancer is a primary focus of our ongoing activity. Additional scientific advances were made during the year in our Bitter Blocker Program; the primary goals of this program are to reduce or block bitter taste and to improve the overall taste characteristics of food, beverages and ingredients. We achieved the breakthrough earlier this year with the discovery of S5105, which provided a statistically significant reduction in the bitterness of several variations of a collaborator’s products and other product prototypes in proof of concept taste test.

More recently, Senomyx identified additional compounds that reduced bitterness in our further validation of the company’s bitter blocking technology. We are now optimizing these bitter blockers to increase their potency.

Senomyx is also working with Solae to develop new blockers that better modulate and control bitterness in certain soy-based products. Solae is a joint venture of DuPont and Bunge Limited and the leading supplier of soy protein for food-based products. Senomyx scientists have characterized bitter components hydrolyzed soy samples and used the components to identify the receptors associated with the bitter taste.

Training activities based on these bitter taste receptors have been developed and screening activities for bitter blockers has been initiated. In other scientific news, we continue to make important headway with our High Potency Sweetener Program; our goals for this program are to identify noble, low or non-choleric natural high potency sweeteners and to improve upon the taste and physical properties of currently marketed high potency sweeteners. We have now completed primary screening of our library of more than 250,000 natural samples isolated from plants and other natural sources. These samples typically contain mixtures of up to ten compounds per sample, providing an effective library of more than 1.5 million individual natural products.

The next step to isolate the active samples for further analysis and taste test, another major advancement in the scientific area is the recent initiation of a Cool Flavor Program to identify novel cooling agents that do not have the limitations of the currently available agents. This program was started in conjunction with Senomyx new collaboration with Firmenich the world’s largest privately owned fragrance and flavor company.

Senomyx has developed a proprietary high-throughput screening assay based on TRPM8, the receptor associate with cooling and menthol taste sensation. Our scientists identified several samples from our library that provided a cooling taste and appear significantly more potent than menthol WS-3 and other commonly used cooling agents.

These results validated the assay and served as proof of concept regarding our ability to discover new ingredients that have a cooling taste effect. Cooling agents are used in confectioneries and foods and beverages as well as OTC and oral health care products such as toothpaste and breath strips. There is a need for new alternatives since many of the current agents have deficiencies that restrict the utilities such as weak to cooling characteristic, bitter off-taste, burning and tingling sensations, unwanted odor, limited solubility and non-proprietary status. We therefore believe that our Cool Flavor Program is a valuable new opportunity for Senomyx. We have already begun screening for compounds that meet Firmenich’s criteria for new cooling agents.

Lastly, in regards to our scientific accomplishments, Senomyx strengthened our position as a leader in the science of human taste. With the issuance of several new patents covering the human sweet and Umami or savory taste receptors, the use of these receptors and screening assays designed to identify new flavor ingredients and other aspects of the company’s technology. As of December 31, 2007, Senomyx is the owner or exclusive licensee of 113 issue patents and 371 pending patent applications in the US, Europe and elsewhere; an increase of 41% in a number of issued patents since the fourth quarter of 2006.

Moving from the scientific front, a hallmark of 2007 was the commercialization of food products containing Senomyx savory flavor ingredients by Nestle, the world’s largest food company. As we have discussed previously the primary applications of our savory flavor ingredients are to reduce or replace monosodium glutamate or MSG and to enhance the savory taste of food by combining our savory flavor with other ingredients to create unique new flavor.

Nestle expanded its commercialization activity during the second half of the year to include the market launch of six products containing Senomyx savory ingredients in four countries in the Pacific Rim and Latin America including Brazil.

These products are all in the bouillon and culinary aid food category and are being marketed under the Maggie label. Senomyx received and recognized as royalty payments one-quarter after the sales have occurred and our first royalty payments for the third quarter of 2007 are therefore included in the commercial revenues recorded today.

As we discussed on our last earnings call, we had conservative expectations regarding initial royalty revenues because they are based on a small number of new products that do not have a sales history. We anticipate that royalty revenue will increase over time as Nestle expand use of our savor enhancers into both new and reformulated established products in additional countries.

As we stated previously we expect that Nestle would initiate product launches in the Pacific Rim, Central-West Africa and Latin America followed by other regions where our savory flavor ingredients have received regulatory approval. These regions were chosen because they include countries where Nestle has rights to these savory flavor ingredients. There they large use of MSG and we have received regulatory approvals for the savory ingredients. In regards to regulatory approval, during 2007 Senomyx received a positive assessment by the joint FAO/WHO expert committee on food additives also known as JECFA. The JECFA determination is expected to expedite regulatory approval in a number of countries particularly those that do not have independent regulatory approval system.

In addition, we anticipate regulatory approval of Senomyx savory flavor ingredients in the European Union by the end of 2008. Based on this timing, we expect European product introduction by Nestle in 2009. It should be noted that approximately two-thirds of the sales of existing products for which Nestle cold dry savory flavor ingredients are in the European Union. We appreciate Nestle’s continuing commercialization efforts and look forward to providing you with further updates in our next earnings report.

Our second collaborator in the savory enhancement program Ajinomoto is continuing with product development work related to inclusion of Senomyx savory ingredients in the number of its products. This work is proceeding according to Ajinomoto standard internal guidelines for product developments, evaluation and consumer testing. Ajinomoto has informed us that initial launches of products containing our savory flavor ingredients are planned for late 2008.

Other corporate highlights for 2007 include important business development activities. In April we entered into a new collaboration with Solae which provide Senomyx the opportunities to participate in the rapidly growing soy market which include energy bars, breakfast cereal, beverages and processed meat. We also expanded our agreement with Ajinomoto twice during the year to include additional product categories in numerous new territories in Africa, the Caribbean, Europe, Latin America, the Middle East and Oceana.

In addition Senomyx collaboration with Cadbury Schweppes for the discovery and commercialization of new flavor ingredients in the gum confectionery category was extended for an additional year in July.

As I mentioned earlier in my remarks, Senomyx and Firmenich announced a new collaborative agreement in January of this year. During the three-year collaborative period, we will use our proprietary screening technologies to discover and develop novel compounds that maybe used by Firmenich on an exclusive basis worldwide as ingredients that impart a cool taste within the flavor system. We believe Firmenich offers key strengths in the area of product development proprietary formulation systems and manufacturing.

In addition, their sales, marketing and distribution capabilities may facilitate market acceptance for the use of new cooling flavor ingredients in both food and non-food consumer markets.

Looking forward, Senomyx have set several important corporate goals that we expect to achieve in 2008. These goals include continuing significant progress in all of our discovering development program such as regulatory approval for S2383 or Super Less enhancer, near term selection of a sucrose enhancer for development, identification of compounds that exerts a salt taste enhancement effect, further progress in optimizing biter blocking compounds, and progress in identifying high protein sweeteners, and novel cooling agents.

We also expect expanded commercialization of food products containing our savory flavor ingredients and additional new business development accomplishments.

This concludes my updates regarding Senomyx discovery development programs and business activity. I will now ask John Poyhonen to provide a financial overview of Senomyx.

John Poyhonen

I would like to begin by reviewing our Fourth Quarter in Yearend 2007 Financial Results. Revenues for the fourth quarter were $6.4 million compared to $3.4 million for the same period in 2006, an increase of 87%. Revenues were $18.2 million for the full year 2007 compared to $12.2 million for 2006, an increase of 49% primarily due to the expansion of existing collaboration and the establishment of new collaborations during 2007. Included in the fourth quarter revenues is $23,000.00 in commercial revenues which include amounts associated with our collaborators, commercialization of products containing Senomyx’s flavor ingredients in the third quarter.

As Kent noted, commercial revenues are generally recognized one-quarter in arrears. Commercial revenues are in alignment with management’s expectation as initial product launches during the third quarter were based on a small number of new products for only a portion of the quarter. Research and development expenses including non-cash stock based compensation expense were $8.4 million in the fourth quarter compared to $6.4 million for the same period in 2006, an increase of 31% primarily due to increased compound acquisition, scientific supply and personal related expenses. R&D expenses for the year ended December 31, 2007 were $29.9 million compared to $25.4 million for the year ended December 31, 2006, an increase of 18% primarily due to increase personal related expenses and scientific supplies expenses.

General and administrative expenses including non-cash stock based compensation expense worth $3.4 million for the fourth quarter compared to $3.2 million for the same period in 2006, an increase of 5%. G&A expenses for the year ended December 31, 2007 were $13.6 million compared to $13.7 million for the year ended December 31, 2007 a decrease of 1%. Net loss for the fourth quarter 2007 were $4.6 million or $0.15 per share compared to a net loss for the same period in 2006 of $5.3 million or $0.17 per share. The net loss for the year ended December 31, 2007 were $21.8 million or $0.72 per share, compared to a net loss for the year ended December 31, 2006 of $23.1 million or $0.77 per share.

Turning to 2008, we anticipate continued year-over-year revenue growth in 2008. This growth is expected to be driven primarily by new collaboration initiated in 2007 and select new business development activity. We also anticipate an increase in expenses in 2008 primarily driven by activities associated with our six discoveries in development programs and cost associated with developing product candidates for potential commercialization. During 2008, we will continue to manage our operation and cash balances closely more specifically for the year 2008, we now expect total revenues of $20 million to $24 million. Revenue will continue to be driven primarily by development revenue based upon existing and new collaboration during 2008.

They key factors for commercial revenue growth are the number of launches with reformulated established products and the timing for these launches. Based upon our partner’s current plans we expect that commercial revenue will represent modest percentage of our 2008 total revenues guidance; and which continues to grow in subsequent years.

As we have indicated in the past, we will not provide specific guidance on the commercial revenue components of total revenues including royalties until we have greater insight into the anticipated results, which will be driven by the actual launches of reformulated established products. However, we do expect to be in a position to provide commercial revenue guidance at some point in the future although the specific timing is still unknown.

We expect total expenses of $50 million to $53 million of which $7 million to $8 million with non-cash stock based compensation expense. Excluding stock based compensation expense we expect R&D expenses to represent more than 75% of overall expenses. We anticipate expense growth to be driven by R&D investments in outsourcing primarily associated with activities required for regulatory submission. Also contributing to 2008’s expense growth will be increased cost for research and development personnel and support of our discovering development programs. Overall, we expect our head count to grow by approximately 10% in 2008.

Returning to our financial guidance we expect a net loss of $23 million to $26 million resulting in a basic and diluted net loss of $0.75 to $0.85 per share. And finally net cash used in operating activities to average between $1 million and $1.5 million per month which is the same guidance that we provided for 2007. The range we are estimating for the net cash to use in operating activities is designed to provide us with flexibility and the timing of business development activity.

I will now turn the call over to the operator to open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions)

Our first question comes from Ken Goldman from Bear Stearns, please proceed.

Ken Goldman - Bear Stearns

Question is on SNMX-29, just wondering if you could give us some level of your confidence in this particular path and we have down this sodium before with ENEC and its variations; I am just wondering, I mean, you seem optimistic here I think that is a great thing, I am just trying to sort to fill out why it might be a little different this time than last time?

Mark Zoller

Our belief that SNMX-29 is a receptor for salt taste is based on an extensive study over the past year, and what we first did was take our understanding of the known taste receptors, so that is for sweet bitter Umami for example, and using this knowledge, we have developed a very key set of criteria that we felt that a salt taste receptor had to fulfill. We then analyzed all the proteins in taste buds and then evaluated what those proteins were, where they were, and notched them up to these criteria. And SNMX-29 meets all these criteria and whereas the previous protein ENEC does not meet these criteria, so that is why we are very confident.

I also want at this time just mention two other members of Albert's team Ryan, Morian and Peter has been heading their teams because again it was a very heroic effort and I think it is a further example of our proprietary technology.

Ken Goldman - BS turns

Okay, and then just one more question, I am just trying to get a feel for how sales have been for Nestle’s products and on the one hand I am getting the sense that you are still feeling very confident, you are sort of guiding the street to the idea that well revenues that came in on the fourth quarter were light because it was new and it did not start until perhaps in the middle of the third quarter, but at the other hand you are sort of telling is that May 2008 will be a little lighter than some observers have expected so can you give us an idea of how Nestle is feeling, how you are feeling and where to go from here.

John Poyhonen

I think consistently we have informed investors that the initial work with Nestle was going to involve new product introduction or line extensions and certainly the comments that we have made around that is that we were expecting those to be modest in sales. We have also consistently indicated that we believe that the significant opportunity really results when we start seeing reformulated established products in the market place; and certainly Nestle has plans on that for 2008.

One of the challenges that we have right now is based on their plans to predicting the number of those reformulated products and the timing of that, so that is the big challenge on the commercial revenue guidance, but I would have to say overall, that we were very pleased with the initial sales, the projections met our expectations since it was only during that timeframe for new products and many of those for a small portion of the quarter.

Operator

Our next question comes from Pamela Bassett from Cantor Fitzgerald please proceed.

Pamela Bassett - Cantor Fitzgerald

Could you please review again what the plan is for moving default programs forward this year and what you think will be accomplished?

Mark Zoller

So we are in the process of taking our initial activity in so what we said is that we have SNMX-29, we have demonstrated that it responds to sodium and so we are turning that assay system into what is called the high-throughput assay system; so that is the activity that is going on now. As Kent mentioned that we expect to initiate screening activities in the first quarter so that would start screening our corporate library to look for salt taste enhancers. Now we cannot get the specific timing but what we have identified is that for each of our other receptors once we have developed that high-throughput screening assay and we have been successful in developing compound to provide taste effect to sweet savory bitter and cool; so we are very confident that once we start screening we believe that we will be able to find a compound that will provide the taste effect, and so we will give you further indications in subsequent earnings call about our progress.

Pamela Bassett - Cantor Fitzgerald

Will there be any scientific publications around this discovery?

Mark Zoller

You know, I think what we are trying to do is first of all maintain our proprietary nature because we have considered this as one of the key proprietary intellectual properties of the company. So while there may be some scientific publications we have not given a timing for when that would be.

Pamela Bassett - Cantor Fitzgerald

One more question about the sweet enhancer program, that sounds like it is moving along pretty rapidly, remind me, did you say that maybe we may look for commercialization this year next year?

John Poyhonen

Pamela what we have said here, I think you are referring to S2383, the sucralose enhancer expect to receive GRAS determination this year and upon GRAS determination it is eligible for commercialization. The actual commercial launching product is really dependent upon collaborators activity; and so the pace of those activities would determine whether a launch will occur this year or not. So that is as much as we can really say at this point in time and we certainly expect to provide updates as we move through the year.

Pamela Bassett - Cantor Fitzgerald

Did I hear correctly that you are in the process of production scale up for S2383?

John Poyhonen

We are but those quantities are primarily utilized and the taste evaluation and also product prototype testing and those types of activities.

Pamela Bassett - Cantor Fitzgerald

If there are activities with your partners like working with formulations and product prototypes right now?

Joy Poyhonen

We are, that is the word that is ongoing right now. Just to clarify, we are not in the process of doing any commercial manufacturing at this time.

Operator

(Operator Instructions)

At this time there are no further questions so I would turn the call back to Mr. Snyder to conclude.

Kent Snyder

I would like to thank all of your for participating in the Senomyx call today. If you have any additional question please feel free to contact us directly or through our website and we look forward to speaking with you at the end of the next quarter. So thank you very much.

Operator

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

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