Stock Pitch

Nikolai Doytchinov, Jonathan Im, Trey Coppinger, Yang Wu, Cheng Ma

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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

I. Investment Thesis

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Senomyx (NASDAQ: SNMX)

Recommendation: Buy Current Price: $9.05 Price Target: $17.02

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.

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)

CATALYSTS

RISKS

Consumer preferences for full-sugar soft drinks

Skepticism about artificial additives

Uncertainty about success of other experiments

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

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

CHANGE IN SUGAR CONSUMPTION

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 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

10 PPM

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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.

S617 PROPERTIES COMMERCIAL CONTRACTS

Senomyx – Flavor Development Process

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Assay Development New Potential

Ingredients

Optimization and candidate

selection

Regulatory Approval

Pre-marketing preparation

Sales

Senomyx – Flavor Development Process

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Strong IP holdings on new flavorings, enhancers and methods for finding them

406 patents thus far awarded

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

Assay Development New Potential

Ingredients

Optimization and candidate

selection

Senomyx – Additional Flavor Programs

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SWEET TASTE PROGRAM

S2383 Sucralose modifier

Sweetmyx (S9632)

Similar to S617, also licensed by Firmenich and Pepsi

S6973 Sucrose modifier

SAVORY TASTE PROGRAM

Savorymyx (S807)

New savory flavors S336

S643

BITTER BLOCKER PROGRAM

S6821 Reduce perception of bitter ingredients, e.g. caffeine, Rebaudioside A (stevia) S7958 COOLING TASTE PROGRAM

S2227 Higher potency, longer

duration, improved aroma (under-development)

SALT TASTE PROGRAM

Currently researching salt receptor protein

Senomyx – FEMA GRAS

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

REGULATORY AND SAFETY CONSIDERATIONS

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

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Management Team

Source: Company Website

John Poyhonen (President, CEO) Worked with the company since the

beginning Extensive experience in

pharmaceutical companies, including directing Heron Therapeutics

Tony Roger (SVP, CFO) Worked with the company since the

beginning Extensive experience in finance

positions at biotech companies

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

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

David Linemeyer, PhD (VP Biology) 20+ years of experience in directing

biology research programs Inventor on numerous patents and

authored 50 scientific publications

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

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Catalysts

Source: SEC Filings

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

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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

V. Valuation

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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

Key Assumptions

2014-2019 Revenue Growth 54.24%

2019-2024 Revenue Growth 24.09%

Perpetual Growth Rate 3.00%

WACC 13.0%

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