Stock Pitch Nikolai Doytchinov, Jonathan Im, Trey Coppinger, Yang Wu, Cheng Ma
Table of Contents I. Investment Thesis II. The Flavor Industry and the Sweetener Market I. Flavor Houses II. Shifting Consumer Preferences III. Stevia-Based Alternatives III. Senomyx s Solution IV. Company Overview V. Valuation 2
I. Investment Thesis
Senomyx (NASDAQ: SNMX) Senomyx s exclusive licensing deal with PepsiCo on a sugar enhancer combines with a unique method of identifying other flavor molecules to create a compelling investment opportunity. Recommendation: Buy Current Price: $9.05 Price Target: $17.02 CATALYSTS Imminent introduction of Pepsi product using flavorless sweetener enhancer S617 Consumer dissatisfaction with both sugar and alternative sweeteners Pristine balance sheet ($30M cash, $0 debt) RISKS Consumer preferences for full-sugar soft drinks Skepticism about artificial additives Uncertainty about success of other experiments 4
II. The Flavor Industry and the Sweetener Market
Flavor Houses
Flavor Houses Market Size - $24 billion Top 10 flavor houses constitute ~80% of the market
Shifting Consumer Preference CHANGE IN SUGAR CONSUMPTION Downward trend in sugar consumption American Journal of Clinical Nutrition Driven by: Obesity and health impacts Health conscious consumerism Green companies and brands Artificial sweeteners and health concerns Source: Consumption of added sugars is decreasing in the United States Jean A Welsh, Andrea J Sharma, Lisa Grellinger, and Miriam B Vos Am J Clin Nutr 2011 ajcn.018366; First published online July 13, 2011. doi:10.3945/ajcn.111.018366
Shifting Consumer Preference Artificial Sweeteners
Shifting Consumer Preference - WSJ
Stevia sweetener derivatives
Stevia based alternatives Made from the leaves of the plant species Stevia rebaudiana 300 times sweeter than sugar Licorice or bitter aftertaste Pepsi CEO Indra Nooyi Stevia, unfortunately, does not work well in colas.
III. Senomyx s Solution
Senomyx Compound S617 S617 PROPERTIES COMMERCIAL CONTRACTS S617 is a sucrose modifier Allows for 50-75% reduction in sucrose usage with no flavor profile change Lower calories Lower cost Beverages Alcoholic and non-alcoholic Extremely low concentrations required Firmenich has negotiated first-mover rights Second largest flavor house in the world Exclusive until March 2018 PepsiCo PepsiCo has exclusive rights to use S617 worldwide in all non-alcoholic beverages. 10 PPM 14
Senomyx Flavor Development Process Assay Development New Potential Ingredients Optimization and candidate selection Regulatory Approval Pre-marketing preparation Sales 15
Senomyx Flavor Development Process Strong IP holdings on new flavorings, Optimization enhancers and methods for finding them Assay Development New Potential 406 patents Ingredients thus far awarded and candidate selection Proprietary assay technologies: SavoryScreenHT SweetScreenHT SaltScreenHT and SaltScreen EP BitterScreenHT Automated and fast allowing for screening of millions of different compounds Guided by research into underlying mechanisms of taste perception 16
Senomyx Additional Flavor Programs S2383 Sweetmyx (S9632) SWEET TASTE PROGRAM Sucralose modifier Similar to S617, also licensed by Firmenich and Pepsi SAVORY TASTE PROGRAM Savorymyx (S807) New savory flavors S336 S643 S6973 S2227 Sucrose modifier COOLING TASTE PROGRAM Higher potency, longer duration, improved aroma (under-development) S6821 S7958 BITTER BLOCKER PROGRAM Reduce perception of bitter ingredients, e.g. caffeine, Rebaudioside A (stevia) SALT TASTE PROGRAM Currently researching salt receptor protein 17
Senomyx FEMA GRAS REGULATORY AND SAFETY CONSIDERATIONS Flavor and Extract Manufacturers Association SNMX flavors have received Generally Recognized as Safe designation Passed review by a panel of experts Recognized as flavoring agents Potential for similar backlash experienced by artificial sweetener products Mitigated by low required concentrations Can be called artificial flavors in labelling
Senomyx FEMA GRAS PANEL OF EXPERTS FEMA Expert Panel (left to right): Dr. Steve Hecht, University of Minnesota (2010), Dr. Ivonne Rietjens, Wageningen University (2006), Dr. Sam Cohen, University of Nebraska Medical Center (2002), Dr. Larry Marnett, Vanderbilt University (2000) (Chair), Dr. Nigel Gooderham, Imperial College London (2009), Dr. Shoji Fukushima, Japan Bioassay Research Center (2010), Dr. Robert Smith, Imperial College London (1981)
IV. Company Overview
Management Team John Poyhonen (President, CEO) Worked with the company since the beginning Extensive experience in pharmaceutical companies, including directing Heron Therapeutics Donald Karanewsky, PhD (SVP, CSO) Extensive experience directing research teams and managing biotech institutions Inventor on 90 issued US patents and authored over 70 publications Tony Roger (SVP, CFO) Worked with the company since the beginning Extensive experience in finance positions at biotech companies David Linemeyer, PhD (VP Biology) 20+ years of experience in directing biology research programs Inventor on numerous patents and authored 50 scientific publications Kenneth Simone (VP Supply Chain) 13 years of experience in the food and flavor industry Previously VP Supply Chain at Firmenich, world s #2 flavor house Catherine Tachdijan, PhD (VP Chemistry) 20+ years of experience in directing research teams in the development of novel molecules Led to 35 issued patents and scientific publications for Senomyx Source: Company Website 21
Catalysts GRAS approval of S617; launch of Pepsi product that uses S617 Growing sucrose market (10% penetration = $2bn profit) Global Expansion into EU and Middle Eastern countries Healthy balance sheet: starting 2014 with no debt and $33m in liquid investments Development of natural sweeteners, salt enhancer, and natural salt replacements Source: SEC Filings 22
Risks and Mitigations Stock price will be affected by Pepsi-related news Extremely small chance that the Pepsi deal will fail Profit from Pepsi deal is small compared to potential profit from direct business Requirement of artificial flavor labeling on the ingredients list might turn consumers away Studies have shown the most important issue consumers care about in food and drink is taste Majority of consumers that are eating sugary products already know the products are not good for their health Adding SNMX products to products that already have artificial flavors on the label would result in zero labeling changes Products can be marketed as naturally sweetened even though artificial flavoring will be included in ingredients list on the back of the packaging Markets in countries with different labeling laws than the US and the food services industry will not be affected 23
V. Valuation
Valuation (R&D payments + S617 only) ($ in millions, except per share data) FCF Calculation 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Development revenue 24.7 25.6 26.7 27.7 28.8 30.0 31.2 32.4 33.7 35.1 36.5 38.0 Commericial revenue 4.6 8.0 20.0 30.8 47.6 73.4 113.2 140.5 174.3 216.3 268.4 333.0 Total Revenue 29.3 33.6 46.7 58.6 76.4 103.4 144.4 172.9 208.0 251.4 304.9 371.0 COGS of Commercial Revenue 0.3 0.2 0.6 0.9 1.4 2.2 3.4 4.2 5.2 6.5 8.1 10.0 R&D Expense 28.6 30.6 32.8 35.1 37.5 40.1 42.9 44.7 46.4 48.3 50.2 52.2 SG&A 12.3 13.4 14.6 15.9 17.3 18.9 20.6 22.5 24.5 26.7 29.1 31.7 Total Operating Expenses 41.2 44.2 48.0 51.9 56.3 61.2 66.9 71.3 76.1 81.5 87.4 93.9 Operating Income -11.9-10.6-1.3 6.7 20.2 42.2 77.5 101.6 131.9 169.9 217.5 277.0 FCF -11.9-10.6-1.3 4.4 13.1 27.4 50.3 66.0 85.7 110.4 141.4 180.1 PV of FCF -11.9-9.3-1.0 2.9 7.8 14.2 22.9 26.4 30.1 34.0 38.1 42.6 Share Price Calculation PV of FCF 2014-2024 225.39 Terminal Value 1854.72 PV of TV 483.52 Shares Outstanding 41.64 Total Equity Value 708.91 Value Per Share 17.02 2014-2019 Revenue Growth Projection Global CSD Sales 370000 US CSD Sales 77000 PEP CSD as Percent of US 28% Percent Penetration of PEP 15.00% Royalty Rate 3.50% Potential PEP Revenues 113.19 Key Assumptions 2014-2019 Revenue Growth 54.24% 2019-2024 Revenue Growth 24.09% Perpetual Growth Rate 3.00% WACC 13.0% 25