Senomyx's (SNMX) CEO John Poyhonen on Q3 2017 Results - Earnings Call Transcript

Senomyx Inc. (NASDAQ:SNMX) Q3 2017 Earnings Conference Call November 2, 2017 5:00 PM ET

Executives

John Poyhonen – President and Chief Executive Officer

Sharon Wicker – Senior Vice President, Chief Commercial Development Officer

Dave Humphrey – Vice President of Finance

Analysts

Scott Henry – Roth Capital

Mike Malouf – Craig-Hallum Capital

Chris Krueger – Lake Street Capital

Operator

Good afternoon. We will now begin the Senomyx 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 the company.

Unidentified Company Representative

Good afternoon, and welcome to the Senomyx Third Quarter 2017 Earnings and Corporate Update Conference Call. Participating in this call from Senomyx will be John Poyhonen, President and Chief Executive Officer; Sharon Wicker, Senior Vice President, Chief Commercial Development Officer; and Dave Humphrey, Vice President of Finance.

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 today’s press release and this call. Factors that may cause such a difference include, but are not limited to, those discussed in our quarterly and annual reports filed with the SEC. Copies of these documents are available upon request from Investor Relations at Senomyx or may be accessed on our website at www.senomyx.com.

I will now turn the discussion over to John Poyhonen, President and CEO of Senomyx.

John Poyhonen

Welcome, everyone, and thank you for joining the Senomyx management team for our conference call and webcast.

After the market closed, we issued a press release announcing our results for the third quarter ended September 30, 2017. A copy of which is available in the Investor Relations section of our website. As you may have seen, we completed another strong quarter, highlighted by significant direct sales growth, and receipt of regulatory authorization for the commercialization of Sweetmyx FS22 in the U.S. and certain other markets. On top of this, we exceeded our quarterly financial guidance, made significant progress on the monetization of certain flavor assets through our strategic adviser as well as advanced our discussions towards establishing new collaborative research funding for our Natural Sweet Taste Program.

To provide more context, in July, we engaged an adviser to pursue strategic options related to certain flavor ingredient assets. We’re encouraged by the third-party interest on the assets from our Cool Taste Program, and are confident in our ability to monetize these non-core assets. As we’ve talked about on prior calls, a top priority for us has been securing non-dilutive funding to support the development of siratose, future natural product discoveries and the growth of our direct sales program. We believe this initiative combined with new collaboration funding and direct sales revenue growth will be critical factors in supporting our funding needs.

In the first quarter, we announced a new natural high-intensity sweetener under the common or usual name of siratose. This novel sweetener is the minor component of luo han guo also known as monk fruit. The discovery of siratose, which exists in less than 1% of the monk fruit plant was facilitated by our proprietary taste science technologies, allowing us to identify the sweet-tasting components in hundreds of plants and other natural sources that cannot be identified through traditional human taste-testing methods alone.

Based on our comprehensive screening, along with our physical property and sensory evaluations, we believe that siratose offers benefits over all currently available natural high-intensity sweeteners. Siratose has demonstrated greater potency and excellent taste-quality profile and improved physical properties over all other natural high-intensity sweeteners that we have evaluated.

We remained on track with our development timeline with additional progress to support the development of a commercially-viable, fermentation scale-up route for siratose. The next projected milestone will be to establish a proof-of-concept for the fermentation strain development, and to be able to produce small quantities of siratose by the first half of 2018.

Assuming we’re able to achieve this goal, the following step would then be to optimize the strain-development process and submit our Generally Recognized As Safe, or GRAS, notification to the FDA by the end of 2019. It is important to keep in mind, however, that the feasibility and timeline of these development activities is inherently uncertain.

On the development front, our next-generation sweet taste booster, Sweetmyx FS22, was determined Generally Recognized As Safe by the expert panel of the Flavor and Extract Manufacturers Association of the United States, or FEMA, during the third quarter. The GRAS determination enables us to pursue commercialization in the U.S. and a number of other countries.

Sweetmyx FS22 allows for a significant reduction of both sucrose and high-fructose corn syrup, while still maintaining great taste. In addition, it has improved physical properties over our existing sweet taste boosters, making it easier to use in end-consumer products. Third parties are currently evaluating this novel flavor for potential use in non-alcoholic beverages and other product categories.

I will now turn the call over to Sharon Wicker, who will discuss the direct sales progress and business development activities, then Dave Humphrey will review our financial results and outlook. Afterwards, we’ll open up the call to questions. Sharon?

Sharon Wicker

Thank you, John. Senomyx’ portfolio of Complimyx flavor ingredient products continued to show strong growth in the third quarter, as we achieved the second-highest direct sales revenue since the inception of the program during this most recent quarter. Additionally, on a cumulative basis through the first three quarters of 2017, direct sales revenues are nearly double that for the same period versus the prior year. We continue to build our business with the world-class flavor house customers, and their forecast for future use of our ingredients remained promising.

During the third quarter, our win count increased to 20 wins across 14 different flavor house customers. As a reminder, a win means that a flavor company has ordered a sufficient amount of volume of one of our Sweetmyx, Bittermyx or Savorymyx ingredients to support use in a commercial product that is being market by one of their consumer product goods or CPG clients. Wins are being tracked by both flavor company and our five Complimyx portfolio products. This means that in total each flavor house customer has the potential to achieve up to five wins.

We remain encouraged by the sales performance of our existing flavor house customers based on the growing number of repeat orders. These reorders are a result of wins with the initial customer as well as expanded sales of the flavor ingredient to new CPG clients. Additionally, the sales team CPG pull-call efforts have been effective in generating interest in our Complimyx product offerings by food and beverage manufacturers. This activity is directly contributing to the sales increases we are seeing from our flavor house customers.

Moving to business development. In March, we made important disclosures related to the plant source, the expected manufacturing process and anticipated development timeline for siratose. These disclosures have facilitated our pursuit of new collaborative relationships for our Natural Sweet Taste Program. Collaborators will benefit from immediate access to siratose as well as to future natural product discoveries that come out of this research program. Potential partners continue to express significant interest in our Natural Sweet Program, viewing it as an initiative that can support their calorie-reduction goals, while also maintaining great taste of their product offering.

During the third quarter, our business development efforts have focused on advancing negotiations with the most promising collaboration candidates. We remain confident in our ability to begin adding funding partners to our syndicate during 2017. This was a very productive quarter for Senomyx’ direct sales program, and we continue to make important progress towards bringing on new research funding for our Natural Sweet Program. I look forward to reporting additional progress during our next earnings call.

I’ll now turn the discussion to Dave Humphrey, who will provide an overview of our financial results and outlook. Dave?

Dave Humphrey

Thanks, Sharon. Revenues for the third quarter were approximately $350,000 higher than our guidance. And net income was approximately $1 million higher than our guidance. These favorable results were primarily due to higher royalties related to our Sweet Taste Program, along with higher direct sales as well as managing personnel and other expenses to the low end of our internal targets.

Commercial revenues increased 22% to $3.1 million in the third quarter of 2017 from Q3 of last year. For the first nine months of the year, commercial revenues increased 24% or $1.7 million to $8.6 million. Higher royalties from our sweet taste boosting ingredients and higher direct sales of our flavor ingredients were the main drivers for the increases in commercial revenues.

Development revenues decreased to $1.9 million in the third quarter of 2017, and decreased to $5.8 million for the first nine months of 2017 compared to the corresponding periods of 2016. The decreases for both periods were primarily attributable to reduced research funding under our Sweet Taste Program collaborations.

Turning to our expenses. Research, development and patent expenses decreased 22% or $1.2 million in the third quarter of 2017. For the first nine months of 2017, research, development and patent expenses decreased to 21% or $3.4 million compared to the same period in 2016. The decrease is primarily due to lower personnel-related expenses.

Our selling, general and administrative expenses decreased in the third quarter of 2017 by approximately $154,000, and for the first nine months of 2017, SG&A expenses increased by approximately $111,000 compared to the corresponding period in 2016. Non-cash stock-based compensation expenses comprised approximately 10% of R&D and SG&A expenses in the third quarter and 11% for the first nine months of the year.

The net loss for the third quarter of 2017 totaled $2.2 million or $0.05 per share. And for the nine months ended September 30, 2017, our net loss totaled $8.4 million or $0.18 per share.

Turning to our financial outlook for the fourth quarter ending December 31. Not including potential results from business development activities, we expect total revenues of at least $4.8 million. Of this amount, we expect commercial revenues to be at least $2.8 million. We also anticipate that our net loss will not exceed $2.7 million or $0.06 per share.

Regarding our balance sheet, we ended the third quarter with no debt and $7.7 million in cash, which was down $3.5 million from the prior quarter and $4.6 million for the nine months ended September 30, 2017. As previously noted, our cash flows may vary significantly from quarter-to-quarter depending on the timing of payments received from collaborators and the timing of payments made to vendors.

Significant non-recurring or infrequent payments made during the third quarter included annual insurance renewals, royalty payments under technology license agreements and fees related to the proxy contest in our annual meeting. The current cash balance is sufficient to fund our operations for at least the next 12 months.

During the third quarter, we did not sell any shares of our common stock under our equity agreement with Lincoln Park Capital. In addition to our current cash balance, we have $12.3 million in committed development funding payments over the next two years. This total does not include royalty payments and cash from direct sales as well as certain cost reimbursements we will also receive.

Furthermore, we remain focused on establishing new collaborative research funding and monetizing certain flavor assets to support our Natural Sweet Taste Program discovery and development initiatives. Going forward, we will continue to thoughtfully manage our balance sheet to ensure that we remain well positioned to effectively pursue our key initiatives, including our Natural Sweet Taste Program discovery and development activities and growing our direct sales business. We look forward to reporting on our progress soon.

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

Question-and-Answer Session

Operator

[Operator Instructions] Mr. Poyhonen, our first question comes from Scott Henry with Roth Capital. Please proceed.

Scott Henry

Thank you, and good afternoon. Just a couple questions. First, on commercial revenue guidance for Q4. It looks like it’s down ticked a little bit from Q3. I was hoping if you could give some color on that? I don’t know, seasonally, when I looked up past couple years, Q4 hasn’t been a strong quarter. Just any color on – we’ve been seeing a nice uptrend, why it’s not continuing in Q4?

John Poyhonen

Scott, this is John. So first of all, I think everyone is aware that seven quarters ago we went through a quarterly financial guidance approach. And every one of those quarters we’ve met or exceeded our financial guidance. We tend to be conservative in the numbers that we put out there to make sure we can continue that trend. That being said, I would indicate that you’re right. In the past, we have seen a bit of a dip in the fourth quarter, and that’s generally reflective of our direct sales based on inventory requirements of our flavor houses. Since most of them are on a calendar year – fiscal year basis, they’re looking to draw down their inventory late in the year. And that’s why you may see a bit of a drop in the fourth quarter. But as we saw during this past year, there was a major increase during the first quarter. So hopefully that answers your question.

Scott Henry

That’s helpful. And then as far as being able to complete a collaboration in 2017, is that reasonable? I would gather at this point, you’d have to be reasonably far along, given the holidays coming up. Just how – I mean, do you consider that an aspirational goal? Or is that a goal that you would typically like to meet or exceed?

John Poyhonen

Another good question. We remain confident in our ability to add new collaborative research funding during 2017. And we certainly understand that the remaining time is very limited in 2017. But we’re confident based on the stages of negotiations, and importantly, the third-party feedback that we’re receiving. So I would say that from the beginning of the year, we indicated that was a corporate goal and we stand firm on achieving that during 2017.

Scott Henry

Okay, great. And then the final question, I thought I heard you say on siratose, possibly you could submit the GRAS by end of 2019. If you could just remind me, what is the turnaround after you submit that application, typically, before you would be able to sell product?

John Poyhonen

So the way that it works historically with a GRAS notification process to the FDA is it’s a six-month review period. So we would expect six months following that, we would be in a position to actually commercialize the product. Our goal would be to be in a position where we’re actually producing product prior to the review since we’ve already discussed the approval with the FDA. We have a high-confidence level. And we’d like to have sufficient commercial inventory and stock prior to getting the FDA GRAS approval.

Scott Henry

Okay, great. Thank you for taking the questions.

Operator

Your next question comes from the line of Mike Malouf at Craig-Hallum Capital. Please proceed.

Mike Malouf

Great. Thanks for taking my questions. If I could explore FS22, can you go through, how – now that you’ve gotten the GRAS approval, where we go from here as far as getting it into the market? And how long you think that will take?

John Poyhonen

Yes, great question, Mike. Why don’t I ask Sharon Wicker to do that, since it will be part of our direct sales portfolio.

Sharon Wicker

Right. So Mike, the achievement of FEMA GRAS was very important for this ingredient as it has been for all of our past flavor ingredients. It’s a critical milestone. So importantly, what this now allows for the companies that we have been most active talking to and have been completing evaluations, it allows them to now take those evaluations to the next step, whereby they can do ingestion with the material, and move on to doing work in additional product applications that are of interest to them. So that’s a really important step. And then really understanding the opportunity and wanting to be more aggressive and putting resources behind this type of work. So that’s important. From there we would expect in time for them to go to consumers, to do whatever validation work that they need to do, which would then put them in a position to be ready to actually commercialize in these different products. So as we look to the next year and launching FS22, it is certainly our goal to start to achieve some sales from customers as the year progresses.

Mike Malouf

Okay, great. And then when you take a look at S617, which is, sort of, very similar to FS22, and the fact that Pepsi, who spent millions of dollars to develop the S617 decided not to go through and monetize it when they had the ability to do so. After, I guess, pretty extensive consumer testing. What gives you the confidence or any indication that FS22 could actually become a significant product for you?

John Poyhonen

Yes, maybe I’ll start off with that Mike, it’s another good question. I would say, first of all, with respect to the PepsiCo test market, the results with Sweetmyx S617 were actually very, very strong and positive. It was a change in their corporate strategy that resulted in their decision not to go forward with it. We’re very optimistic about FS22 because it has the same properties as far as allowing for a significant reduction of both sucrose and high-fructose corn syrup. The biggest advantage of FS22 is, really, its improved physical properties. So it has much better photostability or stability within the sunlight. And importantly, it has greatly improved solubility, which makes it much easier to incorporate into products. So based on the feedback that we’re receiving from third parties, they’re seeing FS22 as a pretty significant advantage over what S617 is. But ultimately, they’ll need to get into consumer testing and make sure that it fares out in the marketplace.

Mike Malouf

Okay, great. And I’m wondering as we look into 2018, is there a chance that we can see direct sales finally get broken out from the commercial sales?

Dave Humphrey

Yes, Mike. This is Dave. I’ll answer that. I understand that’s certainly something that you’re interested in and investors are interested in and something that we are considering. The big challenge in that decision is what it does from a competitive standpoint. I think if – with that information out there, some of the large customers might use that as leverage in pricing negotiations with us. And for competitive concerns, we haven’t done that today. But we are certainly considering that and may look to do that in 2018.

Mike Malouf

Okay, great. Thanks for taking the questions.

Operator

And our next question comes from the line of Chris Krueger with Lake Street Capital. Please proceed.

Chris Krueger

Hi, good afternoon.

John Poyhonen

Hi, Chris.

Chris Krueger

Hi. First question is on siratose. And I apologize if it seems like, kind of, a dumb question. But you said less than 1% of monk fruit has the ingredient or whatever that you can use. Now let me understand how this works through. Do you actually need a large source of monk fruit? Or do you simply need to start the fermentation process and go from there? Please – kindly explain how that works?

John Poyhonen

Sure. Maybe first just a point of clarification. So siratose is present in well less than 1% of monk fruit. So it’s only available in extremely small quantities. There’s limited monk fruit that’s available throughout the world, mostly grown in China. And based on the limited supply, there’s going to be significant challenges of making something commercially viable when you’re dealing with those types of low quantities or concentrations within the product. So what we intend to do is utilize a fermentation process, for one it makes a supply much more readily available.

We do not have to start with monk fruit, although we are looking at extracted process as well. But we think from a cost-and-use standpoint that eventually we’re going to end up with a fermentative-type approach, which is great from a cost-and-use as well as a sustainability perspective, because you don’t need all the land and water and everything else required to actually grow the plants. So hopefully that answered your question, Chris.

Chris Krueger

Yes, it does. And then my other question is on direct sales. I know over the last few years, your commercial revenues have gone from, I think, $7 million to about $9 million to little more than $11 million this year. Is there any potential new business in your pipeline that you’ve been presenting that could, kind of, break it out, where instead of gradually getting it on, let’s say, $13 million next year could pop and be a $20 million business run rate a year from now or something like that?

John Poyhonen

So with respect to that question, we’re only providing guidance on a quarterly basis right now. Certainly, we’re aware of some large opportunities with the flavor companies across our portfolio of direct sales products. But I think we’re at this point it’s really premature to predict when that true inflection point will hit.

Chris Krueger

All right. Fair enough. Thank you.

Operator

And at this time, there are no further questions. So I’d like to turn the call back to Mr. Poyhonen to conclude.

John Poyhonen

I would like to thank you all for participating in our call today. It was certainly a busy quarter for us in which we grew direct sales to record levels, advanced our business development discussions for our Natural Sweet Taste Program and also received regulatory authorization for the commercialization of Sweetmyx FS22. We appreciate your continued interest and support, and look forward to updating you on our next earnings call.

Operator

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