Senomyx's (SNMX) CEO John Poyhonen on Q4 2017 Results - Earnings Call Transcript

Senomyx, Inc. (NASDAQ:SNMX) Q4 2017 Earnings Conference Call March 8, 2018 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

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 participants are in a listen-only mode. After the presentation, we will open the conference up for questions and answers from the company's publishing cells at analyst. [Operator Instructions]

I would now like to turn the call over to the company.

Unidentified Company Representative

Good afternoon, and welcome to the Senomyx Fourth 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 fourth quarter and fiscal year ended December 31, 2017. A copy of which is available in the Investor Relations section of our website. As you may have seen, 2017 was both a productive and meaningful year for Senomyx, highlighted by encouraging direct sales growth, successful monetization of certain cool flavor assets and continued progress along our R&D road map.

More specifically, in the fourth quarter we exceeded our financial guidance, collected an upfront payment of $10 million for expanding Firmenich's licenses to our cool taste ingredients and also made continued progress in the siratose strain development process.

Another item to note, during the past year as most of you are aware, we've been aggressively pursuing new non-exclusive collaborative relationships for our sweet taste program. At this time, we've not been able to add new collaborators to provide research funding for our natural sweet taste program on terms that are acceptable to us.

We anticipate that further progress on the siratose strain development process will be pivotal in establishing these new collaborations. To be more clear, developing a strain capable of producing siratose will help us validate our projections on cost in use and commercial timing. We believe that when we're able to demonstrate this progress we will be in a much better position to execute the right deals on our natural sweet taste program.

Looking back at our business development goals, our confidence to deliver new research funding for our natural sweet program was based on advanced negotiations, but circumstances outside of our control resulted in changes to key financial terms and we decided to pass on the collaboration at this time. We remain on track with our development timeline for siratose.

During the fourth quarter, Senomyx scientists made significant progress on the siratose strain development. Based on this progress, our goal continues to be achieving a proof of concept for the fermentation strain development and to be able to produce small quantities of siratose by mid-2018. Assuming, that we're able to achieve this goal, the next step will 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's important to keep in mind however, that the feasibility and timeline of these development activities is inherently uncertain. Moving forward, Senomyx will continue our siratose development efforts, while pursuing new collaborative research funding on satisfactory terms.

Moving to other matters, today we announced the company's engagement of an advisor to pursue a range of strategic alternatives to further enhance the shareholder value. Our Board of Directors would routinely consider a broad range of strategic opportunities with the ultimate goal of maximizing value of our shareholders.

We plan to carefully consider all possible outcomes related to the strategic review process and as we demonstrated in the fourth quarter, through the successful monetization of certain cool taste ingredient, engaging an advisor enables us to consider all possible options to support the growth of our business in order to maximize value for our shareholders.

With respect to our R&D road map, our top priority has been and will continue to be siratose development and the discovery of new natural sweet taste solutions. However, more recently we've made significant progress in a few other areas of R&D, beginning first with our bitter block program for Active Pharmaceutical Ingredients also known as APIs.

Our scientists have identified the function of 22 bitter taste receptors, meaning they've found the specific receptors that are responsible for sending signals for bitter taste found in many, food, beverage, over the counter and API products. Using this knowledge, we've developed a comprehensive bitter receptor profile that allows us to screen APIs to identify the specific bitter receptor associated with bitter taste of the respective API.

Thus far, we've identified bitter receptors for 10 commonly used APIs and importantly we've promising bitter block that leads for the majority of these APIs. In addition, we've established a business model whereby pharmaceutical companies can submit their APIs for bitter profile screening and can subsequently evaluate the efficacy of using BB68 or Senomyx bitter blocker development candidate for blocking the bitterness of such APIs.

In the first quarter, we established our first bitter blocking screening funded research project with a leading global pharmaceutical company and look to add additional projects in the future. Also of note, based on significant third party interest in our novel cool ingredients, we will restart our cool taste screening activities with previously unscreened library samples.

We plan on screening about 170,000 samples with a goal of discovering and developing new cooling ingredients with benefits of our existing cooling ingredients. I look forward to updating you on our progress in the future.

I'll 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's Complimyx flavor ingredient continued to show strong performance in the fourth quarter. During fiscal year 2017, our annual direct sales revenues were $1.8 million, which represents 70% growth versus 2016. We continue to build our business with market leading flavor house customers, and their forecast for future use of our flavor ingredients remained promising.

Since our last earnings call, our win count increased by 3, now bringing us to a total of 23 wins across 17 different flavor house customers. For those newer to our story, a win means that a flavor company has ordered a sufficient amount of volume of one of our ingredients to support use in a commercial product that is being marketed by one of their Consumer Product Goods or CPG clients. Wins are being tracked by those flavor company and our five Complimyx portfolio products. This means that in total, each flavor house customer has a potential to achieve up to 5 wins.

Our sales performance continues to be particularly strong outside of the United States. In fact, over 65% of our 2017 sales were shipped to various Asian and European locations. Based on a 2015 study from MarketsandMarkets, sales of artificial flavor ingredients make up over 85% of total flavor sales globally on a tonnage basis. Despite this, we've still been facing some headwinds regarding use of artificial flavors in certain end product categories and geographies.

Continued use of artificial flavor solution is especially prevalent in the Asia Pacific region, where almost 95% of all flavor sales are from artificial material. Furthermore, of the three new wins since our last earnings call, one of these was a result of our broker in the Asia Pacific territory. This broker has been representing Senomyx for just the past year and is already producing favorable outcomes for us.

As it relates to our business expansion strategy, we've further focused our selling efforts toward relevant food, beverage and pharma or OTC private label offerings along with nutrition or energy, oral care and alcoholic beverage products as artificial flavor ingredients remain widely used in these categories.

Additionally, our CPG poll call efforts have been effective and jittering interest in our sweet mix, savor mix and bitter mix product offerings by CPG manufacturers for the above mentioned categories. This activity is directly contributing to the sales increases we're seeing from our flavor house customers.

Moving to business development, as John previously mentioned, we anticipate that further progress on the siratose strain development process will be very important in our ability to establish new collaborations. We're continuing to pursue discussion with potential partners who have expressed interest in our natural sweet program and siratose in particular, viewing it as an initiative that can support their calorie reduction goals while also maintaining the great taste of their product offerings.

Adding new research funding partners on satisfactory financial terms continues to be a key goal of ours. The fourth quarter was a very productive period Senomyx's direct sales program and we will continue to pursue new research collaborations for our natural sweet program moving forward. I look forward to reporting additional progress during our next earnings call.

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

Dave Humphrey

Thanks, Sharon. Senomyx delivered excellent financial results for the fourth quarter and fiscal year of 2017, driven by $10 million of revenues from the recent amendment of our cool taste program collaboration with Firmenich, we reported net income of $7.2 million in the fourth quarter and exceed all financial guidance for the quarter.

Commercial revenues increased to $12.9 million in the fourth quarter of 2017 from $2.3 million in 2016. For the fiscal year, commercial revenues increased to $21.5 million in 2017 from $9.2 million in 2016. This increase was offset from the $10 million in revenues from the cool taste program I just mentioned as well as higher royalties from our sweet taste boosting ingredients and higher direct sales of our flavor ingredients.

Development revenues increased to $2 million in the fourth quarter of 2017 from $1.9 million in the prior year's fourth quarter. Development revenues decreased from $13.8 million in 2016 to $7.8 million in 2017, primarily due to reduced research funding under our Sweet Taste Program collaborations.

Looking at expenses. Research, development and patent expenses in the fourth quarter of 2017 decreased 18% or $0.8 million from the fourth quarter of 2016. For the full year, research, development and patent expenses decreased to 20% or $4.3 million in 2017 compared to 2016. The decreases were primarily due to lower personnel-related expenses.

Our selling, general and administrative expenses for the fourth quarter of 2017 increased by $0.3 million over the 2016 period and increased by $0.4 million for the full year compared to 2016. The key components of these increase was advisor fees related to the cool collaboration amendment. Non-cash stock-based compensation expenses comprised approximately 11% of R&D and SG&A expenses in both the fourth quarter and fiscal year 2017.

Net income for the fourth quarter of 2017 totaled $7.2 million or $0.15 per share, an improvement from a net loss of $3.7 million or $0.08 per share in the fourth quarter of 2016. For fiscal year 2017, net loss totaled $1.3 million or $0.03 per share, compared to $10.7 million or $0.24 per share in fiscal year 2016.

Turning to our financial outlook, commercial revenues in the first quarter of 2018 are expected to decline due to contractual terms, including the conclusion of the minimum annual royalty's period under the PepsiCo sweet program collaboration and the temporary suspension of royalty payments under the amended Firmenich cool program collaboration.

Considering these factors, for the first quarter ending March 31, we expect total revenues of at least $3 million. Of this amount, we expect commercial revenues to be at least $1.4 million. We also anticipate that our net loss will not exceed $4.2 million or $0.09 per share.

Regarding our balance sheet, at year-end we had $15.9 million in cash, which was an increase of $8.2 million from the prior quarter and an increase of $3.5 million from the prior year-end. In addition to our current cash balance, we have $10.5 million in committed development funding payments over the next two years. This total does not include royalty payments, cash from direct sales and certain cost reimbursements that we will receive.

Regarding royalty payments, although the minimum annual royalty's period under the PepsiCo sweet program collaboration is officially concluding, the corresponding payment for that period occurs after the royalty period ends and is expected to be received in the first half of 2018.

Also during the fourth quarter, we terminated our equity purchase agreement with Lincoln Park Capital that had been established in December 2016. In order to provide additional funding for the company, we remain focused on pursuing a range of strategic opportunities, establishing new collaborations and continuing the growth of direct sales.

In conclusion, we had a productive and successful fiscal year in 2017, highlighted by significant commercial revenue growth as well as the reduction in operating expenses compared to the prior year.

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

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will begin at this time. [Operator Instructions] At this time, this concludes the question-and-answer session. If your question was not taken, you may contact Senomyx Investor Relations team at [e-mail]. Now, I'd like to turn the call back over to Mr. Poyhonen to conclude.

John Poyhonen

Well, that was certainly the Q&A session we've ever had. We understand our research analysts had conflicts during this time slot and were unable to participate in the call today. However, I'd like to thank you for listening to our call. It certainly was a busy quarter for Senomyx in which we accrued direct sales to record levels, collected an upfront payment of $10 million for expanding our Firmenich cool agreement and advanced our siratose strain development process. We appreciate your continued interest and support and look forward to updating you in the future.

Operator

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