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Edited Transcript of SNMX earnings conference call or presentation 2-Mar-17 10:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Senomyx Inc Earnings Call

SAN DIEGO Mar 3, 2017 (Thomson StreetEvents) -- Edited Transcript of Senomyx Inc earnings conference call or presentation Thursday, March 2, 2017 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Poyhonen

Senomyx Inc. - President, CEO

* Sharon Wicker

Senomyx Inc. - SVP, Chief Commercial Development Officer

* Tony Rogers

Senomyx Inc. - SVP, CFO

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Conference Call Participants

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* Serge Belanger

Needham & Company - Analyst

* Louie Toma

Craig-Hallum Capital - Analyst

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Presentation

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Operator [1]

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Good afternoon and welcome to the Senomyx Conference Call.

(Operator Instructions)

I would now like to turn the conference over to the Company.

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Unidentified Company Representative [2]

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Good afternoon and welcome to the Senomyx fourth quarter and fiscal year 2016 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 Poyhonen, Senomyx Inc. - President, CEO [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 and is poised for continued commercial growth in R&D success.

During 2016, we grew our commercial revenues, advanced our lead natural high intensity sweetener into the development phase and we also secured additional funding by extending our key collaborative agreement with PepsiCo while transitioning it to a nonexclusive license arrangement giving us the ability to expand our market potential.

Over the past several quarters, we have indicated that our top R&D priority was to develop a natural high intensity zero calorie sweetener that is superior to existing natural sweetener options. To that end we have screened over 3 million natural samples since 2010 and identified nearly 300 sweeteners from 35 distinct families of sweeteners found in nature.

After conducting a comprehensive analysis of taste and physical properties, we have advanced our natural sweetener into the development phase. This natural sweetener is a miniscule component of Luo Han Guo, which is the fruit of the Siraitia grosvenorii plant.

Senomyx is introducing our new natural zero calorie sweetener under the common or usual name of siratose. This is not a brand name but the name you will see on the ingredient list within the nutrition facts information area on a packaged food or beverage product.

Examples of common or usual names include aspartame, and for natural sweeteners, Rebaudioside A or steviol glycosides, which are used for the sweet derivative of the Stevia plant. We are particularly enthusiastic that siratose is from Luo Han Guo fruit, also known as monk fruit. 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 conditional human taste testing methods alone.

Next, I'll focus on the benefits of siratose over existing natural sweeteners and blinded sensory evaluations, siratose has demonstrated greater potency and a better case profile than Rebaudioside A, the most commonly used sweetener from the Stevia plant. In addition, siratose has shown improved stability on low pH products -- such as carbonated beverages -- and increased solubility making it easier to work with compared to all known steviol glycoside sweeteners.

Importantly, siratose has also demonstrated potency in overall taste quality superior to commercially available monk fruit sweeteners, and superior to over 50 other minor sweetener components found in both monk fruit and monk fruit plant that we have evaluated.

In the United States, high intensity sweeteners are regulated under provisions of the Food Drug and Cosmetic Act. Under this Act, high intensity sweeteners may be regulated as approved food additives or as generally recognized as safe or GRAS substances. Based on discussions with regulatory experts, we will pursue a GRAS notification for siratose with the US Food and Drug Administration, or FDA.

Since 2009, five extracts of Luo Han Guo have achieved regulatory authorization through the FDA utilizing this approach. Additionally, this widely accepted strategy has been utilized with over 40 steviol glycoside sweeteners. In parallel we are continuing our efforts to develop a commercially viable fermentation scale up route for siratose. The next projected milestone is establishing a proof of concept of the fermentation strain development to produce siratose.

Working with fermentation process experts, our goal is to achieve a proof of concept of the strain development by the first half of 2018. Assuming that we were 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 timeline of these development activities is inherently uncertain.

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.

Finally, during the past year we have developed a comprehensive intellectual property strategy, initiated preliminary safety studies and gained confidence in our ability to partner to develop a cost-effective fermentation scale-up process with siratose. We look forward to sharing additional progress on this exciting product in the future.

Moving to business development, establishing additional non-exclusive collaborative relationships for our natural Sweet Taste Program remains a top priority for the Company. Potential partners continue to express significant interest in our Sweet Taste Program to support their goal of reducing calories while maintaining great taste. Several potential partners have already tasted siratose and the feedback has been very positive. We have built a pipeline of excellent collaboration candidates and we remain confident in our ability to begin adding collaborators to our syndicate during 2017.

Shifting back to R&D we are continuing our efforts with the salt taste program to determine the specific protein, or group of proteins, responsible for human salty taste perception. We have prioritized our work and are conducting screening with two proteins of interest. Our goal is to use taste tests to validate a protein that is specific for salt taste. Our current efforts are focused on prioritizing our assay screening tests to improve the potency and solubility for further sensory evaluations.

During the fourth quarter, we announced that PepsiCo has extended their research funding of a salt taste program through the end of 2017. In addition, we continue to pursue new products to expand the nonalcoholic beverage market opportunity and plan to selectively self-fund the synthetic sweet taste booster research efforts.

We've advanced our next generation sweet taste booster Sweetmyx FS22 into the final development stage, based on the clean results from our initial safety studies.

Our goal is to submit our application for GRAS review and receive GRAS status in October of 2017. We believe Sweetmyx FS22 is a compelling product for its potential use in the large nonalcoholic beverage category, since it allows for the reduction of both sucrose and high fructose corn syrup.

In addition, we believe it has improved physical properties to Sweetmyx F617, making it easier to work with. And we anticipate it will provide a lower cost-in-use for customers. We look forward to providing updates as we advance towards potential regulatory approval.

Shifting to commercialization I'll now turn the call over to Sharon Wicker who will discuss the direct sales progress and 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. - SVP, Chief Commercial Development Officer [4]

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Thank you, John. Senomyx direct sales program showed very good progress since our last quarterly earnings update. We continue to earn business from new flavor house customers, many of whom have a global presence. Our win count has grown to 16 wins across 13 different customers. As a reminder, a win occurs when a flavor company orders a sufficient amount of volume of one of our five Complimyx ingredients to support use in a commercial product.

This means it will be formulated into a consumer product goods or CPG -- client's food or beverage offering that will be sold on the market. We are tracking wins by flavor company, by product, so each flavor house customer has the potential to achieve five wins -- that is, one for each of our current portfolio ingredients.

We also 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 CPG clients.

We closed the second half of 2016 on a strong note from a sales revenue standpoint and have seen that momentum carry into the first quarter of 2017. In fact, through February of this year, direct sales revenues are already 75% greater than our previous highest quarter since inception of the program. We believe the sales growth demonstrates the value and differentiation our product portfolio offers our customers in the development of their flavor solutions.

As we move into 2017, our direct sales metric reporting will be focused on wins, as this metric has the greatest impact on our revenue growth opportunity for this year and beyond. Since our last call, we have taken additional steps to build our sales resources to further expand our reach and presence in the marketplace. Specifically we recently filled a newly created Senior Director of Sales position to help in evolving our selling strategy as well as to lead our sales team.

In addition to our ongoing work cultivating and supporting our important flavor house customer relationships, we will also look to increase our interactions with target consumer product companies who market products that can benefit from use of our Complimyx ingredients.

Our focus is on food and beverage categories looking to deliver improved health benefits such as reduced calorie beverages, dairy and nondairy offerings, reduced sugar baked goods, weight management and other nutritional products. Additionally, we are targeting product and market segments where use of artificial flavors is more acceptable. This includes categories like oral care and OTC offerings, and market segments such as private label and select food service outlets.

As discussed on prior earnings calls, the sales teams CPG poll 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 requests for samples.

We believe that an accelerated focus on expanding relationships with target CPGs will create greater urgency for using our Complimyx ingredients and project brief requests these companies make to their flavor house suppliers. We have also engaged an experienced flavor ingredient broker with an excellent track record in selling value-added ingredients to represent Senomyx in Asia and Oceana.

This is a very large and growing region for processed food and beverage products which represents a big opportunity for our flavor offerings. For the year ended 2014, Asia Pacific's market share of total food and beverage flavor sales on a tonnage basis was 29% second only to North America at 32%.

Based on a study from MarketsandMarkets, Asia Pacific is projected to have the highest flavor sales growth rate of any region through 2020. Additionally, 93% of Asia Pacific's total flavor sales volume is derived from artificial material sources versus 87% on a total global basis. Further, receipt of China regulatory approval in late summer 2016 for the remaining two ingredients in our direct sales product portfolio -- Sweetmyx SR96 and Bittermyx BB68 -- allows our broker to fully exploit the largest market in Asia.

We are extremely enthusiastic about the addition of both our new senior sales director and a broker network to cover the Asia and Oceania territories. We are confident that these two additions will have a positive impact on our direct sales efforts moving forward. This was a very productive quarter for Senomyx direct sales program and 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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Tony Rogers, Senomyx Inc. - SVP, CFO [5]

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Thank you, Sharon. Senomyx delivered very good financial results for the fourth quarter and for the full-year 2016. Revenues were in line with the financial guidance we provided and net results for the quarter were approximately $800,000 better than guidance. This favorable outcome is primarily due to lower than anticipated incentive-based compensation expenditures as well as managing expenses to the low-end of our internal targets.

Regarding results for the full-year 2016, commercial revenues increased to $9.2 million for the year ended December 31, 2016 from $7 million in 2015. Two factors led to this 31% improvement. One, higher royalties from our sweet taste boosting and bitter blocking ingredients; and two, higher direct sales of our flavor ingredients to flavor houses. Excluding one-time commercial milestones, the remaining commercial revenues comprised of royalties and direct sales increased $3.7 million or 73% in 2016 compared to 2015.

Development revenues were $13.8 million for the year ended December 31, 2016 and $17.8 million in 2015,. The decrease 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 expense decreased to $21 million in the year ended December 31, 2016, from $24.1 million in 2015. We also had lower selling, general and administrative expenses which decreased to $11.8 million in 2016 from $12.8 million in 2015. These decreases are primarily due to lower personnel related expenses. Approximately $4.4 million or 14% of these 2016 R&D and SG&A expenses were non-cash stock-based expenses.

Driven by higher commercial revenues and lower expenses, the net loss for the year ended December 31, 2016 improved to $10.7 million compared to $12.6 million for 2015. Regarding our financial outlook, at this point, we will continue to provide only quarterly guidance for revenues and net results due to the limited control we have over commercial revenue timing and variability around ongoing business development activities.

For the first quarter 2017, the company expects total revenues of at least $4.2 million of which commercial revenues anticipated to be comprised entirely of royalties and direct sales will be at least $2.4 million and a net loss that will not exceed $3.7 million or $0.08 per share. In terms of expenses for the full year 2017, we anticipate research and development and SG&A expenses to be less than $30 million.

In general, we expect to see a decrease in most of our expense categories. We anticipate these decreases will be partially offset by higher outsourcing expenses related to siratose development activities.

Included in our 2017 expense guidance are non-cash, stock-based expenses, which we estimate to be around $3.5 million in 2017. I'll also point out that 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 2017.

Regarding the Company's cash position, Senomyx ended 2016 with no debt and $12.4 million in cash. The company currently has $17.5 million in committed development funding payments going forward based on existing contractual commitments. During 2017, we will also receive meaningful commercial payments as well as cost reimbursements. In addition, we expect additional development funding from our Sweet Taste Program syndicate.

Furthermore, in December 2016, we established a purchase agreement with an investor, whereby the investor has made a commitment to purchase up to $14 million in Senomyx common stock. The pricing is determined by a pre-agreed-upon calculation that is tied to Senomyx's stock prices around the time of any sale of stock to the investor. Senomyx makes all decisions regarding if and when to sell stock to the investor.

During February of 2017, we utilized the purchase agreement for the first time and raised $568,000 through sales of stock to this investor. Any future utilization of the purchase agreement is dependent upon multiple factors, including balancing the benefits of maintaining a strong balance sheet during periods of negotiation and funding select development activities, while considering the dilutive impact of any stock issuances.

If Senomyx utilizes the purchase agreement in future periods, this activity will be reported on our quarterly filings with the SEC. Generally speaking, our cash requirements continue to be inextricably linked to the timing and magnitude of our commercial revenue growth, as well as our partnering initiatives.

In conclusion, we had a very good fiscal year in 2016, highlighted by a significant improvement in both commercial revenues and net results compared to 2015. Moving forward, the company is well positioned to continue to grow commercial revenues as well as establish new collaborations that provide additional development funding.

As described during this call, we are particularly enthusiastic about the momentum we are seeing with our direct sales initiative. Furthermore, we have taken measures to reduce our level of spending and we have established a committed source of funding. I look forward to reporting on our progress on our next earnings call.

I will now turn the call back 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) Serge Belanger with Needham & Company.

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Serge Belanger, Needham & Company - Analyst [2]

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Hi, good afternoon. A couple of questions from me. First on your natural sweetener product candidates. You mentioned it was from the monk fruit group and the five extracts from this plant are now approved. Just wanted to know how widely used these extracts are and whether they use the same fermentation process that you are currently evaluating?

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

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Yes, hi, Serge. This is John. That's a great question. So, first of all, siratose is a novel naturally occurring sweetener found in monk fruit at extremely low concentrations. It's never been described before in the literature and it's different than all of the monk fruit sweeteners that we've evaluated, and on the market.

So if you look at the five that are on the market right now, they're all extracts that come from the monk fruit, the primary sweetener of all commercially available is the Mogroside-5, which is the sweetener -- and that's very different from siratose.

We're very confident that siratose is the best monk fruit sweetener, because we've conducted a comprehensive analysis. So what we've done is we started with looking at the commercially available Luo Han Guo, or monk fruit extracts. And siratose demonstrated superior potency in overall taste, quality for all available monk fruit sweeteners. But we didn't stop there.

We wanted to make sure that there wasn't going to be another monk fruit sweetener that looked like it was going to be more encouraging. So what we did is that we then looked at over 50 other minor sweetener components for monk fruit and also the monk fruit plant and once again, siratose was the best, not only from a potency standpoint, but from a taste quality perspective.

If you take a look at the currently available monk fruit extracts and Luo Han Guo extracts, the feedback that we've gotten from the market is they're not widely used. They tend to be used more as a tabletop sweetener. They're not very potent and apparently some people complain that they do have off taste as a result of the extraction process.

The other thing that people need to keep in mind is because they are extracted that there is a significant cost to them and we believe that our fermentation process will create a significant cost and use benefit as well as the potency we have. So, a bit of a long answer, but I think it's very important that everyone realizes that siratose is very different from any monk fruit that currently exists.

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Serge Belanger, Needham & Company - Analyst [4]

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Okay. And in that press release you mentioned that several partners had already tasted siratose, just wanted to know what kind of development work is underway, and how much development work can be done while you're doing the GRAS work in the scale up process?

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

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Yes, good question. So if we take a look at our business development strategy, as we've talked about, we're very focused on building a syndicate of non-exclusive, collaborative relationships for the Natural Sweet program. We have about 15 excellent collaboration candidates, and of that, six have actually tasted siratose.

It was tasted in a blinded taste test in a simple solution, and the feedback was outstanding. All six companies really found it to be superior versus the other product that they tested which was Rebaudioside-A in a blinded taste test. So that looks very strong.

As far as the actual work -- in order for a company to actually start product development activities, they would have to sign a collaborative agreement with us in order to get access to it. But what we're doing right now is just making it available in simple solutions for taste tests for interested third parties.

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Serge Belanger, Needham & Company - Analyst [6]

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Okay. Moving on to FS22, it sounds like it has some improved properties relative to S617. I guess just your quick thoughts on where you think the potential of this sweet enhancer can be, relative to S617?

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John Poyhonen, Senomyx Inc. - President, CEO [7]

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Yes. Like most companies, I think what we're always looking to do as we move through the process and evolve is look for something that has incremental benefits over prior products. We believe that's the case with FS22. From a physical property standpoint, it has both better light stability -- also known as photo stability -- as well as being much more soluble. And both of those aspects make it much easier to work with.

That being said, I think that it also provides the type of reduction that we see in sweeteners with sucrose up to 50% reduction and in high fructose corn syrup, up to 30% or 35% reduction. So we're seeing the same sort of performance, but we think between, not only the improved physical properties, but also what we anticipate will be a lower manufacturing cost, that there could be cost and use benefits compared to Sweetmyx S617.

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Serge Belanger, Needham & Company - Analyst [8]

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Okay. Just one last one for me. Related to the purchase agreement from late December, just wanted to know if there are any monthly limits or quarterly limits.

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Tony Rogers, Senomyx Inc. - SVP, CFO [9]

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No. There are no limitations on the use. There are some limitations on the frequency -- for instance, a regular purchase can only be every other day. But really there are no other limitations.

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Operator [10]

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Mike Malouf with Craig-Hallum Capital.

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Louie Toma, Craig-Hallum Capital - Analyst [11]

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Hi, I'm sorry. This is Louie Toma for Mike.

(Multiple Speakers)

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Louie Toma, Craig-Hallum Capital - Analyst [12]

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So, just a couple of questions. If you file for GRAS by the end of 2019, what is the earliest that you would expect to begin commercialization?

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John Poyhonen, Senomyx Inc. - President, CEO [13]

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The fermentation process will be going on and really the strain development and optimizing that will be going on in parallel. If you look at, historically the way it works, the FDA usually rules within six months of a GRAS notification. And if they agree with the GRAS status, they will issue a no questions letter.

So from a regulatory standpoint, it would be six months following our actual submission date, assuming that the FDA agrees. And we would hope to be in a position where we'd be ready to commercialize immediately after that date.

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Louie Toma, Craig-Hallum Capital - Analyst [14]

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Got it. What are your thoughts on the cost to finish the development of this to get this to commercialization? I know you're looking for collaboration partners, but if you decide that, what would be the cost to get you where you need to be?

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John Poyhonen, Senomyx Inc. - President, CEO [15]

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Well under the FDA process and going after GRAS, if you take a look over the past several years, there have been five Luo Han Guo extracts that have gone through the GRAS, the FDA GRAS notification process. And based on the work that we've done internally already, we've demonstrated that siratose is bio-equivalent to the components of the Luo Han Guo extract.

Therefore, all the safety studies that were conducted with Luo Han Guo concentrate can be surrogates for safety and the safety of siratose. So that's a very strong piece of information and very important because that means there shouldn't be a significant additional cost associated with doing additional safety studies on this.

The second piece is on the scale up and really that's the fermentation process. We're doing work internally on the strain development, but we're also working with outside consultants and hope to have an actual partner associated with the program too, during 2017.

So that would be the only major cost outside of our internal cost. And those costs are still being evaluated as we negotiate with different third parties.

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Tony Rogers, Senomyx Inc. - SVP, CFO [16]

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And Louie, I would add that those costs that we anticipate for 2017 are baked into that guidance of expenses of less than 30 million for the year.

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Louie Toma, Craig-Hallum Capital - Analyst [17]

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Got it, okay. And when you look at this as a natural, how do you compare the cost, relative to what you have, your synthetics. So when you look at your other costs -- I'm assuming the cost to develop a natural would be higher, right? So the cost -- the gross margins? I mean when you think about it, when you sell this to potential customers, is this going to be -- how would you compare the cost relative to your, say, 617?

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John Poyhonen, Senomyx Inc. - President, CEO [18]

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It's really too early to make that determination. Until we get a final strain development for the fermentation. Historically though, I think most companies have found that if you have a viable, optimized fermentation process that the cost of goods can be significantly less than a synthetic process.

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Louie Toma, Craig-Hallum Capital - Analyst [19]

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I was under the impression from earlier conversations that the costs associated with the natural would be higher just because of the way you secure your products for use?

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

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I think there are two different paths. One would be extraction from a plant source, and that tends to be very expensive and would probably be more than a synthetic-type approach, whereas a validated and optimized fermentation process, you would expect the cost of goods to be significantly less.

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Louie Toma, Craig-Hallum Capital - Analyst [21]

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Got it, okay. And last question, Tony, what is your expected cash burn for 2017?

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Tony Rogers, Senomyx Inc. - SVP, CFO [22]

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We haven't guided to what our expected cash burn is. I'll just point out, if you examine the guidance we've provided today, which is less than 30 million of cash -- or, pardon me -- of expense for the year, and you take out the 3.5 million of non-cash stock-based expense, and you look at our revenue guidance of 4.2 million and then consider the potential for new collaborative funding, commercial revenue - continued commercial revenue growth -- and these metrics I think you can arrive at a pretty good ballpark using those metrics we've disclosed today.

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Operator [23]

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Thank you. And at this time, there are no further questions. And I'll turn the call back to Mr. Poyhonen to conclude.

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John Poyhonen, Senomyx Inc. - President, CEO [24]

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I'd like to thank all of you for participating in the call today.

During 2016, Senomyx delivered a three year extension on our PepsiCo Natural Sweet collaboration, continued commercial revenue growth and made important progress on our natural, novel zero calorie sweetener by advancing siratose into the development phase.

We appreciate your interest in Senomyx and look forward to updating you on our next earnings call.

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Operator [25]

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Ladies and gentlemen, this concludes our conference call for today. All parties may disconnect. Everyone, have a great day.