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Edited Transcript of SNMX earnings conference call or presentation 27-Apr-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Senomyx Inc Earnings Call

SAN DIEGO May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Senomyx Inc earnings conference call or presentation Thursday, April 27, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Antony E. Rogers

Senomyx, Inc. - CFO and SVP

* John W. Poyhonen

Senomyx, Inc. - CEO, President and Director

* Megan Knight

* Sharon Wicker

Senomyx, Inc. - Chief Commercial Development Officer and SVP

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Conference Call Participants

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* Louie M. Toma

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Serge D. Belanger

Needham & Company, LLC, Research Division - Senior Analyst, Specialty Pharmaceuticals and Biopharmaceuticals

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Presentation

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Operator [1]

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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. (Operator Instructions) I would now like to turn the call over to the company.

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Megan Knight, [2]

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Good afternoon, and welcome to the Senomyx First 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 Tony Rogers, Senior Vice President and Chief Financial Officer.

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 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 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.

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John W. Poyhonen, Senomyx, Inc. - CEO, President and Director [3]

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Good afternoon to everyone, and thank you for joining the Senomyx management team for our conference call and webcast. Senomyx is off to a good start in 2017. We exceeded our financial guidance for the first quarter of 2017 and are well positioned to meet key commercial revenue, business development and R&D goals. More specifically, during the first quarter, we grew direct sales well over twice that of our previous highest quarter. We also advanced our business development discussion with leading companies on potential nonexclusive collaborations on our Natural Sweet Taste Program.

In addition, during the first quarter, we received regulatory authorization to commercialize a new cooling flavor ingredient. In March, we introduced our new natural high-intensity sweetener under the common or usual name of siratose. This novel sweetener is a miniscule component of low-hang growth also known as monk fruit, which is the fruit of the siraitia grosvenorii plant. This fruit is well known for its sweet taste and has been used as a sweetener for centuries. The discovery of siratose, which exists in less than 1% of monk fruit was facilitated by our proprietary taste science technology, allowing us to identify sweet tasting components of plants and other natural sources that cannot be identified through traditional human tasting methods alone. Based on our comprehensive evaluation, we believe that siratose offers benefits over all currently available natural high-intensity sweeteners. In blinded sensory evaluations, siratose has demonstrated greater potency and a better taste profile than rebaudioside-A, the most commonly used sweetener from the Stevia plant, and it is also superior to commercially available monk fruit sweeteners. In addition, siratose has shown improved stability in low pH products, such as carbonated beverages, and increased solubility, making it easier to work with compared to all known Stevia-based sweeteners.

Importantly, based on the preliminary work completed thus far, we anticipate a lower cost in use for siratose compared to commercially available natural high-intensity sweeteners, based on it's potency and our manufacturing cost target.

With respect to key next-steps in time line for siratose, we remain on track. Our scientists have made important discoveries to support the development of a commercially viable fermentation scale up route for siratose. The next projected milestone is establishing a proof of concept for the fermentation strain development to produce siratose. Working with fermentation process experts, our goal is to achieve a proof of concept of fermentation strain development by the first half of 2018. Assuming we are able to achieve this goal, the next step is to optimize the strain development process and submit our GRAS notification to the FDA by the end of 2019. Keeping in mind the feasibility and time line of these development activities is inherently uncertain. We look forward to continuing to report additional progress with this exciting product.

On the development front, our newest cooling flavor ingredient, which we have named Coolmyx CL19 was determined to be generally recognized as safe or GRAS by the Expert Panel of the Flavor and Extract Manufacturers Association of the United States during the first quarter. The GRAS determination allows Senomyx to pursue commercialization in the U.S. and a number of other countries. Coolmyx CL19 provides a clean, long-lasting cooling taste profile and will initially pursue the confectionery and oral health care categories as the primary target markets where cooling ingredients are commonly used. Additionally, we feel that given Coolmyx CL19's unique sensory profile, it will also be appropriate for use in less traditional product categories, such as beverages. Third parties are currently evaluating this cooling flavor, and we are considering a broad range of strategic options for commercialization of this new product.

Also in the pipeline is our next-generation sweet taste booster, Sweetmyx FS22, which we've advanced into the final safety studies. Our goal is to submit our application for GRAS review and receive GRAS status in October 2017. We believe Sweetmyx FS22 is a compelling product targeted for use in the large nonalcoholic beverage category, since it allows for a reduction of both sucrose and high fructose corn syrup. In addition, we believe that it has improved physical properties to Sweetmyx S617 making FS22 easier to work with, and we anticipate it will provide a lower cost in use for customers. In order to accelerate commercialization time lines we are currently working with several third parties to evaluate Sweetmyx FS22 for potential use in their products. We look forward to providing updates on our progress with FS22 later this year.

I will now turn the call over to Sharon Wicker, who will discuss the direct sales progress and business development activities. She will be followed by Tony Rogers who will review our financial status and outlook, and I'll return after the Q&A at the end of the call. Sharon?

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Sharon Wicker, Senomyx, Inc. - Chief Commercial Development Officer and SVP [4]

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Thank you, John. Direct sales of Senomyx' Complimyx flavor ingredient offerings grew to record levels during the first quarter with revenues increasing by over 250% compared to the same quarter a year ago. We continue to earn new business with world-class flavor house customers and their forecasts for future use of our products are promising.

We have also registered another win since our last quarterly earnings call. So our win count now stands at 17 wins across 14 different flavor house customers. A win occurs when a flavor company orders a sufficient amount of volume of 1 of our 5 Complimyx ingredients to support use in a commercial product. This means they'll be formulated into a consumer product goods or a CPG, client's product offering, that will be sold on the market. We are tracking wins by flavor company by product, so each flavor house has the potential to achieve 5 wins. That is one for each of our current portfolio ingredients.

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 the initial customers wins, as well as expanded sales of the flavor ingredient to new consumer products companies.

As discussed on prior earnings call, the sales team's CPG [pull] call efforts have been effective in creating awareness of our Sweetmyx, Bittermyx and Savorymyx flavors by food and beverage manufacturers, which in turn is leading them to contact their preferred flavor house suppliers for additional information and request for samples. We believe an accelerated focus on expanding relationship with target CPGs will create greater urgency for use of our Complimyx ingredients and project brief requests these companies make to their flavor house suppliers.

In the first quarter, we announced that we had filled a newly created position, Senior Director of Sales, to lead our sales organization in the field, and that we also added an experienced flavor ingredient broker with a proven track record to represent Senomyx in Asia and Oceana. We remain enthusiastic about the positive impact we anticipate these additional resources will have on our direct sales efforts going forward.

Moving to business development. In March, we made important disclosures related to the plant source, the expected manufacturing process and anticipated development time line for siratose. These disclosures have facilitated our pursuit of new nonexclusive collaborative relationship for Natural Sweet Taste Program. Collaboratives will benefit from immediate access to siratose as well as access to future natural product discoveries that come out of this research program. Potential partners continue to express significant interest in our Natural Sweet Program as they view it as an initiative that can support their calorie reduction goals while maintaining the great taste of their product offerings. We have built a pipeline of about 20 excellent collaboration candidates, and we remain confident in our ability to begin adding partners to our syndicate during 2017. This was a very productive quarter for Senomyx' direct sales program and our siratose disclosures allowed us to make important progress towards engaging additional collaborators for our Natural Sweet Program. I look forward to reporting additional progress during our next earnings call.

I'll now turn the discussion to Tony Rogers, who will provide an overview of our financial status and outlook. Tony?

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Antony E. Rogers, Senomyx, Inc. - CFO and SVP [5]

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Thank you, Sharon. Senomyx begins 2017 with very good first quarter financial results. Revenues and net results for the quarter were approximately $300,000 better than guidance. This favorable outcome is primarily due to a strong quarter of direct sales. In the first quarter ended March 31, 2017, commercial revenues increased to $2.6 million from $2.1 million in the same period 2016. Higher direct sales of our flavor ingredients to flavor houses and higher royalties from our sweet taste boosting ingredients lead to this 26% improvement.

Excluding a onetime commercial milestones earned in Q1 of 2016, the remaining commercial revenues comprised of royalties and direct sales increased over $1 million or 67% in Q1 of 2017 compared to Q1 of 2016.

Development revenues decreased to $1.8 million for the first quarter 2017. This was primarily attributable to lower R&D funding revenue from our Sweet Taste Program collaboration with Firmenich. The research funding period under this collaboration came to its contractual conclusion in July 2016. Firmenich will continue to make royalty payments going forward, which will be recognized as commercial revenue.

Turning to expenses. Research, development and patent expenses decreased by over $1 million or 19% to $4.4 million in the first quarter of 2017 compared to the same peered in 2016. These decreases are primarily due to lower personnel-related expenses, partially offset by higher outsourced R&D cost.

First quarter selling, general and administrative expenses were consistent with prior year at approximately $3.1 million. Approximately $800,000 or 11% of these first quarter 2017 R&D and SG&A expenses were noncash stock-based expenses. The net loss for Q1 2017 was $3.4 million or $0.07 per share.

Regarding our financial outlook, for the second quarter 2017, the company expects total revenues of at least $4.6 million, of which commercial revenues anticipated to be comprised entirely royalties and direct sales will be at least $2.7 million. And a net loss that will not exceed $3.3 million or $0.07 per share. Regarding expenses, for the full year 2017, we continue to anticipate research and development and SG&A expenses to be less than $30 million, of which we estimate around $3.5 million will be noncash stock-based expenses.

Also, as I've previously noted, under the terms of our facility lease as renegotiated in 2015, about $1.2 million included in our 2017 expense guidance will not have a corresponding cash outflow as we will benefit from a period of free rent in the second half of 2017.

Turning to the company's balance sheet. Senomyx ended the first quarter with no debt and $10.1 million in cash. During the quarter, the company reduced its accounts payable by $1.4 million to end the quarter at $4.1 million. Our accounts receivable balance increased to $5.5 million as of the end of the first quarter. During the second quarter, we expect to collect $5 million of this amount, which we anticipate will drive positive cash flow from operations for the quarter. In addition to the $5.5 million in accounts receivable, the company currently has $15.8 million in committed development funding payments going forward based on existing contractual commitments.

The company will also receive meaningful royalty payments in cash from direct sales as well as certain cost reimbursements. Furthermore, as John and Sharon described on this call, we are also keenly focused on establishing new collaborative agreements who will provide funding in support of our National Sweet Taste Program discovery and development initiatives.

Going forward, we will continue to thoughtfully manage our balance sheet to ensure we are well positioned to effectively pursue our key initiatives, including our Natural Sweet Taste Program discovery and development activities and continuing to grow our direct sales business.

In conclusion, we began the year with a very good first quarter, exceeding our guidance for commercial revenues and highlighted by our outstanding direct sales growth. We look forward to reporting on our progress on our next earnings call.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Mr. Poyhonen your first question comes from Serge Belanger from Needham & Company.

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Serge D. Belanger, Needham & Company, LLC, Research Division - Senior Analyst, Specialty Pharmaceuticals and Biopharmaceuticals [2]

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Just a couple of questions from me. First one, John, just wanted to ask, I guess, a couple of questions about your -- the partnership strategy that you are currently thinking of. In the press release, you mentioned you built the pipeline of 20 potential collaboration candidates. Are these potential partners for the broad Natural Sweet Taste Program? Or are they specifically interested in siratose? And I guess to follow-up on that, how many of these 20 potential partners do you think could eventually become partners? Is there a certain number or a certain limit that makes it feasible or not?

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John W. Poyhonen, Senomyx, Inc. - CEO, President and Director [3]

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Yes. Two good questions, Serge. So I guess -- first of all, we're really excited about the pipeline as you mentioned. We have about 20 excellent collaboration candidates and that's an increase from about 15 during our call in March. So I think the news that we've made as far as disclosures on the plant source, timing as well as the fermentation process has been very well received by potential partner companies. With respect to -- we would view all of these as -- thus far interested not only in siratose, and they see that as the major advantage because it could be a quick win for their products, but also in what will happen in the discovery pipeline too. So we haven't had anyone that we're talking to right now that indicated that it's only siratose that they are interested, but because it's so far along in the process, it will remove lot of risk and it makes it that much more attractive for the potential partners. As far as the timing, I'm not going to comment on timing or the number of partners right now. I don't want to set unnecessary pressure on our negotiations and put someone in a leverage position. But I would say that we certainly feel that in '17 and into the future, we have the ability to add a number of partners, especially those that are focused on siratose as their primary sweetener of interest and then it may deviate a bit based on new discoveries as we go forward. So hopefully that answers your question.

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Serge D. Belanger, Needham & Company, LLC, Research Division - Senior Analyst, Specialty Pharmaceuticals and Biopharmaceuticals [4]

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Sure. Okay. And then on Coolmyx CL19, is this the first Coolmyx product that's been approved as part of your portfolio and will be part of the direct sales offering? And I guess, just describe the potential market opportunity for a cooling agent.

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John W. Poyhonen, Senomyx, Inc. - CEO, President and Director [5]

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Sure. So this is the second product from our cooling franchise that's been approved. S2227 has -- was approved 1 year ago or actually was commercialized for the first time 1 year ago with Firmenich under the brand name FreezeStorm. With Coolmyx 19, we have a number of third parties that have been evaluating it and -- or very pleased that feedback has been excellent. CL19 provides a clean long-lasting cooling taste profile. And we think really that the duration of the cooling effect makes it especially interesting that the feedback that we heard from third parties says that this is the longest they've seen from a product that makes it exciting. From a commercialization standpoint, we're really pursuing all options to create the most value for the company for this exciting new product. We have discussions ongoing on license rights on both an exclusive or first mover advantage basis. We're also considering adding it to our direct sales portfolio depending on the outcome of our business development discussions. With respect to the market opportunity, the ingredient market for cooling agents is difficult to track, some of the key products in that market or things like menthol, WS3 and Evercool. But I think it's really important to remember that many times multiple cooling flavor ingredients will be used in the same product to produce different cooling sensations, and we believe the market opportunity is quite sizable if you look at the manufacturers selling value in a market like oral care, which would be things like toothpaste, mouthwash and breath mints. It's about $21 billion annually. And if you look at the confectionery market, including chewing gum and sugar confectionery, it's about $51 billion. So between those 2, we think there could be a significant commercial opportunity for Coolmyx CL19.

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Serge D. Belanger, Needham & Company, LLC, Research Division - Senior Analyst, Specialty Pharmaceuticals and Biopharmaceuticals [6]

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Okay. And then just a couple of questions on -- for sharing on direct sales before I get back in queue. It seems like we're seeing direct sales go through an inflection point here. I think the press release mentions over 250% over 1Q of '16. I guess just talk about the progress and the new win cadence and whether we're seeing that same kind of growth during this early part of the second quarter of '17?

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Sharon Wicker, Senomyx, Inc. - Chief Commercial Development Officer and SVP [7]

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Sure. We are extremely excited about the direct sales performance. It started picking up in the second half of last year and then certainly, as you accurately described, we did report that our sales are up over 250% quarter-on-quarter through the first quarter. So very excited to see that traction starting to take hold. Additionally, we mentioned we did report another win. So those wins are also starting to pick up and advance nicely. In terms of kind of ongoing into the early part of Q2, of course, there is not a lot I can -- specially I can say about that, other than we do see momentum growing. We have a number of customers now that had these wins for a while, and there the pipeline is such that they're getting additional wins that we don't necessarily report or can track easily among the 17 that I've talked about, but it is a promising project pipeline that bodes well for this year and into the future.

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Operator [8]

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And our next question comes from Louie Toma from Craig-Hallum Capital.

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Louie M. Toma, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [9]

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Just wanted to dig in a little bit more on the direct sales side. Just when -- we look at the direct sales over the last couple of years and in the sales cycles that we've talked about, are we hitting the inflection point of that sales cycle where we can expect continued ramp for this segment? Or how should we think about that at this point?

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John W. Poyhonen, Senomyx, Inc. - CEO, President and Director [10]

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Yes, Louie. This is John. So I think it's a very good question. I would say that, obviously, when you see the type of growth that we've had where it's more than 2x greater than our previous largest quarter in history and up 250% over the prior year on a quarter-over-quarter basis, those are exciting numbers. I think it's one data point right now. We're encouraged by the feedback that we're getting from flavor companies. We're off to a good start in the second quarter as well. But I think we want to get a few more data points behind us before we say that we've absolutely hit that inflection point, but we're very encouraged by the results. As Sharon mentioned, the pipeline looks strong. When we got forecasts from some of the flavor companies, they were at literally 2/3 of their pipeline already this year, even though we're only in April. So that tells us there is future growth that's out there, and we look forward to reporting on it on our next call.

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Louie M. Toma, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [11]

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And just -- if we can ask one more on this. So you have 17 wins, and I have guessed in this for what I think the direct sales numbers are. But is it -- is there -- I mean, is the way to look at this is dividing that number by the 17? Or are there 1 or 2 customers that represent a significant portion -- disproportion of that -- of the sales numbers?

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John W. Poyhonen, Senomyx, Inc. - CEO, President and Director [12]

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Yes, maybe we'll have Sharon answer that one.

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Sharon Wicker, Senomyx, Inc. - Chief Commercial Development Officer and SVP [13]

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So we've been realizing these wins over time and reporting them. And certainly, we have some customers within that are more developed in their business than others. So in general, once the wins start and you get traction, you see more of the typical order cycle. But I don't think that it's the right way to think about it at this point in time as to divide it by 17. So having said that, it's -- on the other hand, it's not just one of those that is driving the vast majority of the volume either or so.

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Louie M. Toma, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [14]

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When you look at the total flavor houses that you sell into, what would you say the biggest flavor house represents of your direct sales revenues without giving any names, obviously?

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Sharon Wicker, Senomyx, Inc. - Chief Commercial Development Officer and SVP [15]

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Sure. I think as we've talked before, in general, both our wins and our sales revenues are reflective of the concentrated industry. So the largest flavor houses that we sell to in general makeup a bigger portion of our volume. I think that's the information that -- I think that's what you're asking.

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John W. Poyhonen, Senomyx, Inc. - CEO, President and Director [16]

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Yes. I would say the top 12 list, generally speaking, they are -- Louie, over 90% of our business is coming from that top 12, which isn't surprising, since 82% of the flavor business comes from them. So intuitively, it makes sense.

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Louie M. Toma, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [17]

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Got it. And just a question on the margins for this business. Are margins for the direct sales business pretty stable or do they fluctuate from quarter-to-quarter?

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Antony E. Rogers, Senomyx, Inc. - CFO and SVP [18]

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Louie, this is Tony. I would characterize as they're fairly stable, declining a bit as we work through some of our earlier higher cost inventory, process improvement costs, those kinds of things were burden to inventory early on. So they are improving, but they're -- I think they're fairly stable from quarter-to-quarter.

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Operator [19]

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(Operator Instructions) And at this time, there are no further questions, so I'll turn the call back to Mr. Poyhonen to conclude.

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John W. Poyhonen, Senomyx, Inc. - CEO, President and Director [20]

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I'd like to thank all of you for participating in our call today during the first quarter of 2017. We grew direct sales to record levels. We advanced our business development discussions on siratose, and we received regulatory authorization to commercializing new cooling flavor. We appreciate your interest in Senomyx and are looking forward to updating you on our next earnings call.

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Operator [21]

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