Senomyx's CEO Discusses Q2 2012 Results - Earnings Call Transcript

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 |  About: Senomyx, Inc. (SNMX)
by: SA Transcripts

Senomyx, Inc. (NASDAQ:SNMX)

Q2 2012 Earnings Call

August 7, 2012, 11:00 am ET

Executives

Gwen Rosenberg - VP, IR & Corporate Communications

Kent Snyder - Chairman & CEO

John Poyhonen - President & COO

Tony Rogers - SVP & CFO

Sharon Wicker - SVP & Chief Commercial Development Officer

Analysts

Mark Williams - Janney Capital Markets

Scott Henry - Roth Capital

Dalton Chandler - Needham & Company

Operator

Good morning. We will now begin the Senomyx second 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. Please proceed.

Gwen Rosenberg

Good morning and welcome to the Senomyx second quarter 2012 earnings and corporate update conference call. Participating on 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 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 maybe 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 and 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 second quarter of this year and a general update on our business activities since our May conference call. This will be followed by a question-and-answer session.

I will start with our announcement today of a significant recent accomplishment for Senomyx, the discovery of S52617 which for reasons have complicity or referred to as S617 a new sweet taste modifier intended to be applicable for the reduction of both High Fructose Corn Syrup known as HFCS and sucrose in foods and beverages. Taste tests have demonstrated that S617 allows a very meaningful reduction of HFCS and sucrose and product prototypes while maintaining the desire if we taste.

This was achieved with very low concentration of the modifier which could provide important cost-in-use benefits to food and beverage companies that incorporate S617 in the products. In light of these valuable attributes have agreed to work with our partner PepsiCo to advance this new flavor ingredient into the preliminary development phase which include the initial safety studies and other activities necessary to support regulatory filings in the US and elsewhere. We will also continue to study other attributes to pass 617 as part of our ongoing evaluations of its commercial potential.

S617 is Senomyx’s first flavor ingredient which we have moved into the development that exhibits the ability to reduce the amount of HFCS a sweetener used primarily in beverages. We believe that S617 will be applicable for many product categories including the extremely important carbonated soft drink category. The utility of S617 with both HFCS and sucrose is significant since it could allow manufacturers that use these sweeteners to focus their internal efforts on a single sweet taste modifier thereby potentially increasing efficiency and cost effectiveness.

S617 is therefore a welcome addition to Senomyx’s family of sweet taste modifiers which includes four flavor ingredients’ at different stages of the development or the commercialization processes. We thought it would be useful to clarify for each of the sweet modifiers, a status, target product categories, incremental potential uses and why it is complementary to the other.

Starting with S2383, this remodifier is used to reduce the high intensity sweetness sucralose up to 75% in all food and beverage product categories. Commercialization of S2383 began in 2011 and is ongoing, with products that contain S2383 being marketed in North America and Latin America.

Next, S6973 our sweet modifier allowing up to a 50% reduction of sucrose, is for use in virtually all food product categories as well as certain beverages, such as ready-to-drink and powdered forms of tea’s coffee and milk products. The first commercial launch of products containing S6973 occurred in late 2011 and John will discuss current commercialization later in the call.

S9632 is our second sucrose modifier that provides for up to a 50% reduction of sugar. We expect it will be useful for essentially all products for which S6973 can be used plus the additional beverage product categories of powdered and concentrated form of food flavored beverages and of certain alcoholic beverages. We are moving towards the conclusion of development activities for S9632. During the second quarter, safety studies with S9632 were completed successfully and our goal is to receive Generally Recognized As Safe or GRAS regulatory approval in the US by the end of this year.

As we announced in our press release earlier today, Senomyx has reacquired from PepsiCo the rights for S9632 related to its use in non-alcoholic beverages. The reacquisition prides us with a new opportunity to maximize the commercial potential of S9632 which John will discuss in more detail later in the call. We appreciate that PepsiCo has consented to the amendment to our collaborative agreement. Other than provisions regarding S9632, no changes have been made to the agreement.

Finally, S617 is our newest sweet modifier. Taste tests have shown that S167 enables the reduction of up to 35% of the high fructose corn syrup and up to 50% of the sucrose and product prototypes. While work is still ongoing, based on what we know at this point from our evaluations, we expect that S617 will be applicable for products where S9632 can be used and in addition, we also believe it will open opportunities in the important carbonated soft drink market as well as other product categories where HFCS is used as a sweetener.

We look forward to providing more detail about the commercial potential for S617 as evaluations with product prototypes progress. As I mentioned, we recently initiated the preliminary development Phase with S617 and we’ll provide guidance on the potential timeline for regulatory approval on future conference calls.

We’re excited about having four different sweet modifiers. Each one has unique characteristics that may be especially applicable for specific product types providing maximum flexibility to food and beverage companies. We believe that each of these ingredients could be a valuable asset for Senomyx and having multiple offerings will expand total market for our sweet program offering.

Turning to updates regarding our other flavor programs. As we announced last quarter a Senomyx partner is planning its first market launch of a retail product incorporating our S6821 bitter blocker during this year. The initial launch will occur in a Southeast Asian country and our collaborator is considering expanding the use of S6821 into other products and geographies.

S6821 has demonstrated efficacy in a number of bitter tasting ingredients such as soy and whey protein, menthol, caffeine, cocoa and stevia which are used in food beverage products. We also had notable recent advances with our cooling taste programs. Earlier in the year, Senomyx initiated activities in the quarter future regulatory filings for S5031 a new cooling agent that was selected for development by Firmenich, our partner for this program.

S5031 has 10 times greater potency in taste tests and other advantageous properties such as a longer, cooling duration and a lack of aroma compared to commonly used agents. I am pleased to report that the first phase of safety study or safety testing with S5031 has been completed successfully and final safety studies are underway.

Based on this progress, we are now anticipating GRAS approval for S5031 by mid-2013. Our Salt Taste Program continues to be an important research focus for Senomyx longer term pipeline with a goal to identified flavor ingredients that allow a significant reduction of sodium and food and beverages yet maintain the salty taste desirable to consumers.

Senomyx has assembled a proprietary comprehensive database of proteins found in taste buds and progress is being made exploring role of a number of these proteins that maybe involved in salt taste perceptions.

Analytical systems that assess the effects of salt are being used to identify specific proteins that could be viable candidates for the receptors or co-factors responsible for salt taste. As discussed previously, we have identified a novel blocker of salt taste and efforts are underway to evaluate this blocker as a tool to help discover receptor involved with salt taste perception.

I will conclude my comments by noting that Senomyx had an important regulatory achievement with the recent receipt of positive determination from the joint FAO WHO expert committee on food additives known as JECFA for all four of the company's flavor modifiers under review. The S6973 sucrose modifier, S2383 sucrose modifier and the S6821 and S7958 bitter blocker.

The JECFA determination allows immediately commercialization in some countries and is expected to expedite regulatory approvals in additional countries particularly those that do not have independent regulatory approval systems for new ingredients.

Countries in Southeast Asia, the Middle East and North Africa are among those that rely on JECFA. Perhaps the most important aspect of being granted approval by JECFA is that it is used as a corroboration of a safety of new ingredients by some large countries that require approval from two major regulatory bodies. Each of the four JECFA approved flavor modifier had previously received GRAS status in the US which allows for commercialization in a significant number of countries and facilitates approval in much of the rest of the world.

To put these approvals in perspective we estimate that the JECFA jurisdiction in conjunction with the GRAS status effectively covers more than half of the global package food and beverage market, either by allowing commercialization directly or through facilitation about their regulatory approvals.

I will now turn the discussion over to John Poyhonen who will provide an update regarding current commercialization and new commercial opportunities, I will return with a few closing comments at the end of the call. John?

John Poyhonen

Thank you, Ken. I am going to focus my comments on the commercialization of flavor ingredients resulting from our Sweet Taste Program starting with S6973 Senomyx’s first sweet taste modifier of sucrose that enables up to 50% reduction of sugar.

Firmenich has exclusive worldwide rights to commercialize S6973 for the use in virtually all foods in classified beverage categories. They have established dedicated sales and technical resources to support their commercialization efforts which were ongoing with top-tier and mid-tier clients in the Americas, Southeast Asia, Africa and Australia.

Recent market launches of retail products that incorporate S6973 have occurred in the United States, Latin America, Asia and South Africa; these products stand a variety of categories including ready-to-drink and powder beverages, dairy products and baked goods. We are encouraged by the strong interest that Firmenich continues to see form major food and beverage companies for S6973.

Although the pace of commercialization is a bit slower than we anticipated earlier in the year, the uptake pattern that we described on the earlier call is taking place. For example, some companies that started using S6973 in one product in a limited number of countries are now beginning to expand their usage to additional countries on product categories.

Concurrently, new customers have placed orders for product acceptance testing and other premarketing activities. As we have described on previous calls, Firmenich is involved with numerous active projects that are in different stages in the evaluation process. Some of these projects have advanced through pre-commercialization activities for product launches, and additional new projects have entered the pipeline.

These project continue to move forward and new launches of products that utilize S6973 are expected during the year and beyond. This brings me to the new opportunity that Senomyx has with our reacquisition from PepsiCo. second sucrose modifier S9632. Like S6973 the new sucrose modifier is expected to allow food and beverage companies to remove up to 50% of the sugar and products while retaining the sweet taste the consumers' desire.

The improved nutritional profile coupled with potential cost savings are important market drivers for both of these flavor ingredients. Based on the amendment to our agreement with PepsiCo. Senomyx now has exclusive worldwide rights to S9632 and the non-alcoholic beverage category and exclusive rights in the powdered beverage category.

Firmenich will maintain their exclusive rights for S9632 in food categories and alcoholic beverage along with exclusive rights in the powered beverage category. The reacquisition allows Senomyx to commercialize S9632 by a one or more third parties and potentially expand the total usage of S9632 and increase our future commercial revenue.

We’re also considering business arrangements whereby we could have greater ability to influence S9632 commercialization. Our goal is to maximize the financial return from the commercial of S9632 and we will keep you informed as our businesses activities progress.

To understand Senomyx’s opportunity with S9632, it's helpful to keep in mind Kent's comments about the specific product categories within non-alcoholic beverage targeted for S9632 use.

The key product categories included ready to drink and powdered forms of coffee and tea, along with ready-to-drink and powder forms of dairy beverage products.

Importantly, we believe that S9632 creates a significant incremental opportunity compared to S6973 since it will also be useful for powdered and concentrated forms of fruit flavored beverages, which are marketed widely in Asia and Latin America.

Based on euro monitored data, the non-alcoholic beverage product categories targeted for S9632 have a global retail market value exceeding $95 billion, and utilize more than 3.8 million metric tons of sucrose.

While we do not know the ultimate use of S9632 and the target products, even a modest penetration rate would create meaningful commercial revenue for S9632.

Lastly, regarding the potential markets for S9632, as Kent mentioned, it is also intended to be used in a variety of food products. In addition, unlike S6973, S9632 is expected to be suitable for use in some alcoholic beverages, which opens a potential new market for premix alcohol beverages and liquors. This completes my comments on the Sweet Program commercialization activities and the opportunity presented by Senomyx’s reacquisition of S9632. Tony Rogers, Senomyx’s CFO will now provide a financial overview of the company. Tony?

Tony Rogers

Thank you, John. Senomyx ended the second quarter of 2012 with $47.9 million in cash, cash equivalents and investments available for sale. Revenues were $6.9 million for the three months ended June 30, 2012 compared to $7 million for the same quarter of 2011. Revenues were $15.1 million for the six months ended June 30, 2012 compared to $15.7 million for the comparable six months last year.

The decrease in total revenue was primarily due to lower upfront license fee revenue recognized in 2012 compared to 2011. Specifically under the Senomyx Sweet Taste collaboration with Firmenich in the second quarter of 2012, the company recognized $1.4 million in development revenue compared to $1.8 million in the same period in 2011.

And for the six months ended June 30, 2012 the company recognized $3.5 million in development revenue compared to $5 million for the same period in 2011. There was no impact on cash flow as the related payments were received prior to 2011. The decrease in upfront license fee revenue is partially offset by the earning of a $500,000 development milestone related to the cooling taste program during the three months ended March 31, 2012.

Research and development expenses including non-cash stock based expense were $7.2 million for the three months ended June 30, 2012 compared to $7.4 million for the three months ended June 30, 2011. General and administrative expenses including non-cash stock based expense were $2.8 million for the three months ended June 30, 2012 and 2011.

Research and development expenses including non-cash stock-based expense were $14.3 million for the six months ended June 30, 2012 compared to $14.7 million for the same period in 2011. General and administrative expenses including non-cash stock-based expense were $5.8 million for the six months ended June 30, 2012 compared to $5.5 million for this timeframe last year.

The net loss for the three months ended June 30, 2012 and 2011 was $0.08 per share. The net loss for the six months ended June 30, 2012 was $0.12 per share compared to $0.11 per share for the six months ended June 30, 2011.

Overall financial results for the first half of 2012 were in line with management expectations. As discussed earlier at this early stage in the commercialization of our Sweet Taste modifiers, it is difficult to forecast the uptick timing by food and beverage companies. We continue to receive positive qualitative feedback and we remain confident that 6973 and other products from our Sweet Taste Program will be commercially successful.

Commercial revenue was $1.8 million in the first half of the year. Based on these results and projections for the second half of the year, we expect approximately $4 million in commercial revenue for the full year 2012. In addition to the $47.9 million in cash and highly liquid investments at June 30, 2012 the company has committed funding and potential sources of cash going forward including the following; ongoing royalty payments from collaborators; $19.3 million in funding commitments from current collaborators; $25 million in potential milestone payments under current collaborations; and $21.7 million related to extension options under current collaboration.

With respect to financial guidance for the full-year 2012 Senomyx expects total revenues of $30 million to $33 million, total expenses of $39 million to $42 million, of which approximately $5 million is non-cash stock-based expense. A net loss of $8 million to $10 million, basic and diluted net loss of $0.20-$0.25 per share and a yearend cash, cash equivalents and investment balance of 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

Your purse question comes from the line of Mark Williams with Janney Capital Markets.

Mark Williams - Janney Capital Markets

It looks like S617 will be about a year behind 9632 regarding development and GRAS approval potentially. So could you just talk about why you think Pepsi chose to wait another year and how would you characterize the level of motivation with regard to both product system from your perspective?

Kent Synder

I think first of all, we certainly cannot speak for Pepsi. You know we think that S617 has some very interesting attributes including the dual activity if you will on the ability to reduce both high fructose corn syrup and sucrose and products and so there is certainly some efficiencies in focusing on one product in development.

So again, we can’t speak for the partner, but this is how we would view the situation. In terms of timing, it’s a little bit too early to project when approval could come for 617. As we said in the past, normally our experience has shown that when we select an ingredient for development, it takes anywhere from 12 to 18 months in terms of developmental activities. We don’t think 617 would fall out outside of that, but yet it's a little bit too early to start talking about timelines.

Tony Rogers

Something to add on that, Kent too would be, we believe, another key advantage of 617 as we believe that it would be useful in carbonated soft drinks and that’s a key differentiator from S9632.

Mark Williams - Janney Capital Markets

Great. And you noted some, just maybe slower uptick than you expected, but you know, continued confidence with regard to the feedback you are receiving on your product launches. Can you just talk about maybe one or two factors that have contributed to the slower than expected uptake and just give some color on some of the qualitative feedback you’ve been receiving?

John Poyhonen

You know, I think one of the key aspects and we've said from this very beginning is we’re very encouraged by the fact that Firmenich clients are looking at very large established brands to utilize S6973 and because of that, they’re always going to take a bit more time to make sure it's absolutely right when they launch a product in the market place.

During past calls, we've indicated that what we’re really looking for was expansion opportunities from horizontal expansion within a launch product category and that's something that we’re beginning to see. We’re looking for additional geographic distribution and we believe the recent JECFA approval helps expand the market opportunity. And we are now beginning to see major companies launching in additional countries.

We are looking for expansion into the additional product categories either within a strategic business unit or into new ones and we are seeing evaluations take place from that perspective and finally we are looking for fast followers based on market leaders launching in market places and that's occurring as well.

So I guess qualitatively we are very encouraged by the results, although we do believe it's lagging a bit behind where we had originally thought just based on the fact that they are major brands and these companies are going to be cautious with brands that have taken dozens of years to build.

Operator

Your next question comes from the line of Scott Henry with Roth Capital.

Scott Henry - Roth Capital

I had a couple of questions on the numbers in the trends. Starting in the development revenues category, Firmenich at $1.4 million in Q2 was a little lower than expected. What I am wondering is, is that $1.4 million per quarter or is that the rate in the third quarter and fourth quarter and when I look at your guidance of $26 million to $29 million, obviously you are banking on that sort of development revenues, you are banking on an uptick in development revenues in the second half of 2012. And I wanted to know where that's coming from, whether it would be Firmenich upticking again or milestones or another category?

Tony Rogers

What we've guided to on your second question there is the balance on development revenue will be a combination of milestone payments as well as cost reimbursements, so that’s what’s going to drive that.

And regarding the first question, I think what I described there was the specific on Firmenich with the upfront license payments that were paid prior to 2011 and the revenue recognition on those is recalibrated each time they extend the collaboration and that recalibration extends the time over which we recognize as revenue and therefore reduces that. Importantly, there is no impact of that point out on that cash flow as all of that money was received prior to 2011.

Scott Henry - Roth Capital

So I guess again, so with the Firmenich’s $1.4 million a quarter is that go forward number or will cost reimbursement work its way into your Firmenich development revenues?

Tony Rogers

I would say that’s approximately a go forward number and then additional on top of that built into our plan of milestones and cost reimbursements.

Scott Henry - Roth Capital

Okay, so where do the cost reimbursement show up; I know you break it out in the 10Q by categories; is that in the category or….?

Tony Rogers

That’s in development revenue; everything is lumped into the development revenue.

Scott Henry - Roth Capital

Okay, alright I will take a look at that when the Q comes out as well. Second question your commercial revenues obviously we are always trying to get an idea of the trajectory; I think 2010 was $2.5 million, 2011 was $3.2 million and now 2012 looks like it’s going to be about $4 million. How should we think about 2013; I mean are we finally going to jump up more than $1 million in 2013; should we start to see the hockey stick effect, should we start to see revenues jump beyond from four to five to perhaps six, seven, eight; I just want to get your sense of how we should be thinking about the commercial revenue ramp at the end of 2012 and going forward?

Kent Snyder

John you want to comment on that?

John Poyhonen

Sure Scott, this is John, so I think that that’s always the challenge to project what commercial revenue will look like. I think that the way that we look at it is that if you look at the market opportunity for sucrose which is over a $100 billion ingredient and you compare that to something like MSG which is $5 billion opportunity or sucralose which is $400 million opportunity, we think there is tremendous potential on a go forward basis.

And of course a key function of that is just the ramp of acceptance in the marketplace and penetration, so how many different products in geographies that S6973 to get into. And we haven’t provided any guidance into 2013, but certainly we’re optimistic for significant growth into the future just based on the size in the market and more will come on that as move into the end of the year and next year looking at providing guidance for 2013.

Scott Henry - Roth Capital

I guess, asking another question related on a micro perspective; the approximately $780,000 commercial revenues in 2Q, do you certainly expect that to be a low point at this point for commercial revenues; were you ever expected to get to that low level again?

Kent Snyder

Well, we haven’t given guidance beyond this year, but if you just at where we are guiding to now at $4 million that would indicate that we expect growth in the second half of the year Scott, so that’s probably an assumption that would be a fair way to say.

Operator

Your next question comes from the line of Dalton Chandler with Needham & Company. Please proceed.

Dalton Chandler - Needham & Company

I know you mentioned a couple of times that you can use it for high fructose corn syrup and sucrose and that's makes the development more efficient. But I am assuming there must be some differences in the way, it's blended in with those two different ingredients. Could you just talk about the process?

Kent Snyder

In terms of the manufacturing process or the actual formulation?

Dalton Chandler - Needham & Company

The formulation, yeah?

Kent Snyder

I think it's probably little bit too early to comment on specifics in terms of formulation activity. You know, a lot of that work, you know, needs to be done as we are in the development phase. I am not sure that we’ve been commenting more on that unless Sharon if you have any other detail.

Sharon Wicker

Sure, Dalton. I think Kent is right. We are in fairly early stages. We're doing a lot of product applications as part of the development but I think the main thing to give you some insights is that between sucrose and high fructose corn syrup the enhancement level is a little bit different and that was mentioned in the comment whereby if you can get a slightly greater reduction in sucrose, than you can in high fructose corn syrup instead of very low concentration of the use of the ingredients.

Kent Snyder

Yes, I think that’s an important key Dalton. If you look at it, this is flavor modifier that is going to be used at lower levels than what we’ve seen in the past and we’re hoping there would be cost and use benefits for our partners on that particular flavor modifier.

Dalton Chandler - Needham & Company

Okay, thanks for that and then what was the inducement for Pepsi to give you back their rights to S9632? Is that a trade-off for S617?

John Poyhonen

Dalton, this is John. There were really two key components involved in this and it relates only to S9632. The first is that they no longer are obligated to pay minimum annual royalties for a short-term associated with that particular flavor modifier. In addition, they would not be required to pay a potential future milestone associated with S9632 but all other rights and the agreement remain the same.

Dalton Chandler - Needham & Company

Okay, and I guess just a general question, I think Pepsi was the last new collaboration until you signed. That was about two years ago. Are you out looking for additional collaborations and how do you think your plate is pretty full?

Kent Snyder

I mean we’re always open to new collaborations. You know, we’re constantly looking at what's the benefit of finding a new collaborator, depending on which program they’re interested in and some of your [stage] programs, (inaudible) in order to build some value, but I think the short answer is yes, we’re always looking for new collaborations. It didn’t make sense financially to the company on the long-term basis.

Operator

At this time, there are no further questions. So I'll turn the call back to Mr. Snyder to conclude.

Kent Snyder

We would like to thank you for participating in the call today. This is a very important time for the company and we’re confident that Senomyx is in an excellent position to increase shareholder value. Our discovery and development efforts continue to provide novel flavor ingredients including our most recent discovery of S617, a modifier for high fructose corn syrup and sucrose and in addition the new S9632 sucrose modifier has numerous possible applications.

We are excited that our reacquisition of rights to market 9632 for non-alcoholic beverages potentially allows us to utilize the business arrangements whereby we could have a greater ability to influence commercialization and expand the usage of S9632. This could provide a significant new commercial opportunity for the company.

In addition new international regulatory approvals for four of our flavor ingredients validate their safety and expand their potential markets. We have also been strengthening our intellectual property portfolio with newly issued patents in the US and elsewhere. We are looking forward to further leveraging the success of Senomyx’s discovery and development programs and updating you about many value drivers which include continuing commercialization of Senomyx’ Sweet Taste modifiers and savory flavor ingredients by our partner, the initial market launch of the first product containing our S6821 bitter blocker, business development activities and targeted yearend GRAS approval for our new sucrose modifier S9632, progress towards our targeted mid-2013 GRAS approval for our new cooling agent S5031, development activities intended to lead to a regulatory approval of our new modifier of high fructose corn syrup and sucrose 617, and achievements with our other research and development activities.

This completes our update call, we appreciate your time and interest in Senomyx and 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. Have a great day.

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