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>>> Senomyx's (SNMX) CEO John Poyhonen on Q3 2016 Results - Earnings Call Transcript



Oct. 27, 2016

SeekingAlpha


http://seekingalpha.com/article/4016122-senomyxs-snmx-ceo-john-poyhonen-q3-2016-results-earnings-call-transcript?page=2




PepsiCo extension was a critical component to pivoting our business development strategy, to focus on granting non-exclusive licenses rather than exclusive licenses. This approach is fundamental in allowing us to expand the addressable market opportunity. We are actively pursuing other collaborative relationships for our natural sweet taste program and with the right to collaborate with nearly any third party on the research development and commercialization of our natural sweet taste program. Our goal is to build a syndicate of collaborators but share the goal of reducing calories, without sacrificing taste. While the timeline for establishing new collaborative relationships it is inherently uncertain. We have built a strong pipeline of interested third parties and we are confident in our ability to deliver our new business development opportunities in the future.

Moving to our Natural Sweet Program, we have two key areas of focus. One is screening new natural liver samples, to identify natural ingredients with sweeping or sweet taste boosting attributes. The other area of focus, as an activities related to our lead natural high intensity, zero calorie sweetener previously discovered. Our R&D teams' priority is advancing the sweet natural sweetener into the development phase. This Novel sweetener from a plant source has demonstrator greater potency and it better taste profiled in our body side aid. The key sweeteners in Stevia in sensory evaluations.

We have initiated preliminary safety studies and are continuing our efforts to determine the commercial feasibility, of potential fermentation, scale operates. A significant number of potential partners have tasted or lead natural sweetener and the feedback has been very positive. Well, the discovery and development timeline is currently uncertain we are enthusiastic about the potential of these product candidates. In addition, we continue to pursue new products to expand the non-alcoholic beverage market opportunity, and plant the cell -- the synthetic sweet taste booster activities of our sweet taste program. We've advance our next generation sweet taste booster Sweetmyx FS22 into the final development stage activities, based on clean results from our initial safety studies.

Our goal is to submit our application for U.S. regulatory review and receive approval in the second half of 2017. We believe Sweetmyx FS22 has compelling potential, particularly with non-alcoholic beverages and we look forward to providing updates as we advance towards potential regulatory approval.

Shifting to commercialization Senomyx has had a very good first nine months of 2016. Highlighted by strong commercial revenue growth, driven by increases from our royalty base collaborations and our direct sales to flavor houses. Our flavor ingredients Sweetmyx S617 was first commercialized by PepsiCo and made available to consumers during the fourth quarter of 2015. The reformulated concentrates containing Sweetmyx have been used in Manzanita Sol nationally and Mug Root Beer in two test markets; Denver and Philadelphia.

On October 25, PepsiCo informed us, that while they will continue selling the reformulated version of Manzanita Sol containing Sweetmyx S617 throughout the United States, they unfortunately will not be proceeding with the national launch and the reformulated version of Mug Root Beer containing Sweetmyx S617. Well, we're happy to hear the news regarding Manzanita Sol, we were surprised and disappointed by PepsiCo's decision regarding Mug Root Beer. We have fully expected the reformulated version of Mug would be launched nationally in the United States during 2016. Based in large part on the test market results.

Our prior understanding, was that PepsiCo's national launch decision criteria was primarily based on market performance and consumer response. And given this, we routinely monitored the Mug Root Beer test market performance through Nielsen scanner data which reflects; retail sales of the product in both test markets. Based on our review of the data comparing trends before and after launch. The reformulated lower calorie version of Mug Root Beer performed well in both test markets.

Turning to direct sales, Sharon Wicker out of the office working on a potential new commercial opportunity. So, I will provide the update this quarter. Our win counts is increased to 13 wins across 10 different customers. As a reminder a win occurs when a flavor house company order sufficient amount of volume of one of our five flavor ingredients to support use in a commercial product. This means, it will be formulated into a consumer product goods or CPGB clients food or beverage offering, that will be sold on the market. We're 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're also very encouraged by the sales growth from our existing flavor house customers, including the growing number of repeat orders. These re-orders are driven by our customers' initial wins, as well as their expanded sales, of the flavor ingredient to additional CPG Clients for use in more food and beverage products. We believe these results demonstrate the value and differentiation of our Complimyx flavors, offer to our customers in the development of their flavor solutions.

Our sales team also continues to show good progress on their promotional activities, with both flavor house customers and CBG Clients. We now have met with over 100 flavor companies on a global basis. 48 of these customers have presented sample flavor solutions, including our Sweetmyx, Savorymyx and Bittermyx ingredients, to at least one but in most cases multiple of their CPG Clients for possible use, in their end food or beverage product. This metric is very important in illustrating the growing pipeline of opportunities for our Complimyx product line. Specifically as it relates to the potential achievement of new wins for our flavor house customers.

As further encouraging news, flavor house feedback indicates a number of CPGs are conducting pilot runs, with their products using new flavor solutions containing our Complimyx flavors and we expect these trials, to drive new business over the next several months. We now have completed introductory presentations with 122 CPG's including taste test of out flavor ingredients. With a broad range of food and beverage manufacturers, and food service providers. This effort has been effective in creating awareness of our product offerings by this 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 this ongoing interaction with CBG companies, is contributing to the growing number of flavor houses that are using Complimyx ingredients, within the flavor solutions they're developing in response to their clients project briefs. This has been another productive quarter for Senomyx and we look forward to reporting additional progress in future earning calls.

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

Tony Rogers

Thank you, John. Senomyx delivered very good financial results for the third quarter and for the year-to-date. Net results were approximately $600,000 better than guidance, this favorable outcome resulted in part from higher than anticipated direct sales, also contributing to the favorable outcome; was managing expenses to the low end of our internal targets.

Regarding results through three quarters. Total revenues through September 30, 2016, or $18.8 million compared to $18.6 million for the same period in 2015. Commercial revenues increased to $6.9 million for the nine months ended September30, 2016 from $5.2 million for the same period in 2015, this 32% improvement primarily resulted from two factors; higher royalties from our sweet taste boosting and bitter blocking ingredients, as well as higher direct sales of our flavor ingredients to flavor houses.

So the first nine months of 2016 direct sales have nearly doubled, compared to the same period in 2015. The year-over-year increase in total commercial revenues is even more pronounced when one-time commercial milestones are removed from the comparison at these milestones were $1.3 million higher in 2015 compared to 2016.

Taking a look specifically at third quarter commercial revenue results, these revenues decreased by approximately $400.000, however, it should be noted that while there were no commercial milestones in third quarter 2016, there was a one-time commercial milestone of $1.5 million in the third quarter of 2015, excluding this milestone commercial revenues increased 74% in the third quarter of 2016 compared to the same period in 2015.

Development revenues were $11.9 million for the nine months ended September 30, 2016 and $13.4 million in the same period in 2015, the $1.5 million 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 revenues.

Turning to expenses, research development and patent expenses decreased to $60.2 million in the nine months ended September 30, 2016 from $18.3 million in the same period of 2015. We also had lower selling general administrative expenses which decreased $8.9 million to three quarters of 2016, from $9.6 million in the same period 2015, approximately $3.4 million or 14% of these 2016 R&D and SG&A expenses were non-cash stock base expenses. On the strength of this entire revenues and lower expenses, the net loss for the nine months ended September 30, 2016 improved a $7 million compared to $9.7 million for the nine months ended September 30, 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 a commercial revenue timing and variability around ongoing business development activities, for the fourth quarter 2016 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 $2.3 million and net loss will not exceed $4.5 million or $0.10 per share.

In terms of expenses for the full year 2016, we now expect research and development and SG&A expenses to be less than $34 million. With respect to extend collaboration with PepsiCo, we currently anticipate recording R&D funding development revenues of $1.5 million per quarter over the three year term of the agreement. In addition, under this collaboration we expect to record cost reimbursement development revenue and we're eligible turn milestones, although the timing and amounts of these revenue sources is less certain.

Regarding the company's cash position, Senomyx ended in the third quarter with no debt and $15.7 million in cash. In addition the company currently has $19.1 million in committed development funding payment of which we expect to receive $2.6 million in the fourth quarter from PepsiCo for the Sweet Taste Program, R&D funding covering the period August 15, to December 31, 2016. During the fourth quarter we will also receive commercial payment and cost reimbursement, our cash requirements continue to be inextricably linked to the timing and magnitude of our commercial revenue growth, as well as a partnering initiative John described earlier during this call.

In conclusion, we had a very good third quarter, furthermore our year-to-date results have shown significant improvement in both a commercial revenues and net results compared to 2015. I 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.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Mr. Poyhonen, our first question comes from Mike Malouf of Craig-Hallum Capital. Your line is now open.

Mike Malouf

Great, thanks guys, and really sorry to hear about Mug, obviously that is pretty shocking. Am wondering if you can tell us a little bit more about the decision, particularly if you have any insight into what Pepsi would like to do with 617 going forward, obviously spent a quite a bit of time and money, both testing it and funding you to develop it, and am just wondered if there's any idea of what you going to do with this product now that they basically control it.

John Poyhonen

Sure Mike, this is John. Let me start by saying that we were very pleased that PepsiCo will continue selling the reduced calorie formulation of Manzanita Sol containing Sweetmyx S617 throughout the U.S. Obviously we were very disappointed by their decision not to proceed with the national launch of the reduced calorie formulation of Mug, however we are encouraged by the positive tough market performance of the new formulation. So the way we looked at it was then -- we utilize the Nielsen data to evaluate sales buying trends, we established a baseline for the 52-week period preceding the launch of the new formulation of Mug Root Beer, and then compared that baseline to the volume trends after launch. More specifically, in Philadelphia there was a 9.5 percentage point improvement over the 52-week pre-launch trends, the improvement in Denver was even greater within 11.1 percentage point gain.

And notably the Mug test market volume results outperform the overall carbonated soft drinks trends in both markets, so we felt like that performance of S617 in Mug Root Beer, was quite good. We can't say exactly why the decision was made, we can't speak for PepsiCo, but we recognize there are many factors that they considering decisions related to their brands, a factor referenced by PepsiCo was their new PWP20 out pledge, which states at least two-thirds of their beverages will contain 100 calories or less per 12 ounce serving of year 2025. The reformulated version of Mug Root Beer does not meet the standard, and we believe this play a role in their decision. In addition, we were told that it was not related to the tough market sales performance results, but unfortunately, we do not have any additional insights to share at this time and will continue to seek additional clarity as we go forward.

I think your second question was that with respect to what are the plans for Sweetmyx S617 in the future, we know that their current plan is to continue to sell Manzanita Sol in the U.S. with respect to future plans will be meeting with PepsiCo this quarter to better understand the role that Sweetmyx S617 may have in the future, but at this time out we don't have any new information on anything other than Manzanita Sol and Mug.

Mike Malouf

And are they happen to pay any further money to keep control of that? Alternatively, did them -- any more milestones or minimums that they have to pay.

John Poyhonen

Well, all of our collaborative agreements contained some sort of minimum financial commitment to continue to maintain results, and this would be no deferent. With respect to our ongoing use, they continue to have their rights and continue to pay us royalties based on the number of uni-cases [ph] Sweetmyx S617 used in.

Mike Malouf

Okay. And then how do you think this is decision will affect if any effect on your direct sales, I mean obviously that is a second pillar growth for you or was a second pillar growth for you and as you look at Pepsi's decision, do you think that will have any effect on that direct sales?

John Poyhonen

Well, its early days on that Mike, so it's hard to know for sure, I think from our perspective because of the strong performance of the product in the marketplace and the improvements that was seen involve tough markets, we think that bodes very well for direct sales. As Tony mentioned, we're seeing real traction in the marketplace right now from our direct sales perspective were -- we've nearly doubled the results year-over-year and we're also continuing to see they are artificial flavors grow from a royalty perspective. So if we look at it, we're still very bullish on the potential for artificial flavors, if you really look at it from a market research standpoint, we have data from markets and markets, that indicates over 85% of the volume used in 2015 was artificial flavors, so we continue to believe there's a very important role for artificial since we go forward.

Mike Malouf

Okay. And then one more question, FS22, can you compare that to 617 and then who would be the target market for that?

John Poyhonen

Right, so FS 22 has similar properties to 617 from a sweetener reduction standpoint, both products have the ability to reduce hyper corn syrup by up to 35% and 50% of sucrose, in addition we believe that FS22 offers some incremental benefits, including improved stability and solubility making it easier to use, we anticipate lower cost in use compared to S617 which could create extra incentive to use it. And finally, I -- and I don't think this can be underestimated, since this will be part of our direct sales approach, the product use will not be disclosed which may be desirable with some companies.

Mike Malouf

So you can literally sell this directly to Coca Cola to use in their products with no problem?

John Poyhonen

Well, we would not get into any specifics on companies that we might be targeting, but we would have freedom to operate to sell this to either flavor houses or consumer product companies.

Mike Malouf

Okay, great. Thank you for taking my questions.

John Poyhonen

Thanks, Mike.

Operator

And our next question comes from a line of Serge Belanger with Needham & Company. Your line is open.

Serge Belanger

Hi, good afternoon, first a couple questions on Pepsi decision on Mug, I guess their decision was based on the -- you mentioned that their target to have their two-thirds of their portfolio with less than 100 calories by 2025, you think of that also push to having natural sweeteners and natural sweet enhancers?

John Poyhonen

So, I think that's a good question Serge, and the reality is we're not sure why that decision was ultimately made, they certainly reference that the fact that the PWP 2.0 pledge was a consideration, with respect to any other areas it's really hard for us to stay in and we can't speak on behalf of PepsiCo, obviously based on their new extension of our sweet taste program, we know that they are interested in and naturals and will continue to work with us, both from a natural sweetener, as well as that unnatural taste modifier perspective. So that will be really all the comments I have on that.

Serge Belanger

Okay. And can talk about some of Nielsen data metrics? Can you talk about some of this the same metrics around Manzanita Sol? And was there anything else that Pepsi was using in their evaluation work of the test market launches?

John Poyhonen

Well, with Manzanita Sol; the original rollout was a national rollout, and you know we haven't looked at individual markets without particular product. Based on the Nielsen data it's been over a 3% volume increase year-over-year based data that we've received from the Nielsen.

Serge Belanger

Okay. A question I guess on the recent Pepsi collaboration renewal; now that you'll be funding the synthetic Sweetener program, should we expect the R&D to remain pretty stable; what we've seen in the last few quarters?

John Poyhonen

I think I will ask Tony to address that, Serge.

Serge Belanger

Okay.

Tony Rogers

Yes, I don't see any driver of a meaningful increase our stand rate going forward. I think Serge, we may see in the coming quarters a fluctuating increases on outside services activities related to our Naturals program. But I expect a significant portion of that will be offset with cost reimbursement. So the short answer is no I don't see it an us a big change in the coming few quarters with respect to the synthetic program are or R&D spend overall.

Serge Belanger

Okay. And one more question on the financials. Based on the 4Q guidance you gave us, can you just talk about what is the cash spend that comes out from these numbers?

Tony Rogers

I'm not sure I understand the question.

Serge Belanger

The cash flow burn from…

Tony Rogers

Well, I think one thing out points out the third quarter cash burn was I think higher than usual our higher certainly than our loss. And it was driven by an increase in accounts receivable and so will receive some of the cash associated with Q3 revenues if you will in Q4, so I think Q3 cash burn a little higher so we'll see mostly the cash associate with the revenue guidance plus some other cash associated with Q3 revenue.

Serge Belanger

Okay. Thank you.

Operator

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

John Poyhonen

I'd like to thank all of you for participating in our call today Senomyx delivered strong results in the third quarter with a three year extension of our PepsiCo sweet collaboration, continued commercial revenue growth and important progress on our R&D goals. We appreciate your interest in Senomyx 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.

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