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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

** **

**FORM 10-K**

 

| **x** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934** |
|-------|------------------------------------------------------------------------------------------------------|

 

**For thefiscal year ended December 31, 2008**

 

**or**

 

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For thetransition period from               to                **

** **

**Commission File Number 000-50791**

** **

**SENOMYX, INC.**

(Exact name of registrant asspecified in its charter)

 

| **Delaware**                                                     | ** ** | **33-0843840**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation  or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **4767  Nexus Centre Drive**                                     | ** ** |                                  |
| **San  Diego, California**                                       | ** ** | **92121**                             |
| (Address of principal  executive offices)                        |       | (Zip Code)                            |

 

**(858)646-8300**

Registrant’stelephone number, including area code

 

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title of Each Class**                  | ** ** | **Name of Exchange on Which Registered** |
|------------------------------------------|------------|------------------------------------------|
| Common  Stock, par value $.001 per share |       | The NASDAQ Stock Market  LLC             |

 

Securitiesregistered pursuant to Section 12(g) of the Act:

**None**

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.  Yes o   No x

 

Indicate by check if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of theAct.  Yes o   No x

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer, “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.  (Checkone):   Large accelerated filer o  Non-accelerated filer o  Accelerated filer x  Smaller reporting company o

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Act). Yes  o  No  x

 

As of June 30, 2008, the aggregate market value of the votingstock held by non—affiliates of the registrant, computed by reference to thelast sale price of such stock as of such date on the NASDAQ Stock Market LLC,was approximately $119,215,000. Excludes an aggregate of 6,406,318 shares ofcommon stock held by officers and directors and by each person known by theregistrant to own 5% or more of the outstanding common stock as of June 30,2008. Exclusion of shares held by any of these persons should not be construedto indicate that such person possesses the power, direct or indirect, to director cause the direction of the management or policies of the registrant, or thatsuch person is controlled by or under common control with the registrant.

 

As of January 31, 2009, there were 30,670,123 shares of theregistrant’s common stock outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Portions of the registrant’s definitive Proxy Statement for the 2009Annual Meeting of Stockholders, to be filed with the Securities and ExchangeCommission pursuant to Regulation 14A not later than 120 days after the end ofthe fiscal year covered by this Form 10-K, are incorporated by referencein Part III, Items 10-14 of this Form 10-K.

 

 

 

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**SENOMYX,INC.**

 

**AnnualReport on Form 10-K**

**For theFiscal Year Ended December 31, 2008**

 

**TABLE OF CONTENTS**

 
| ** **    | ** **                                                                                                          | **Page** |
|---------------|---------------------------------------------------------------------------------------------------------------------|----------|
| PART I   |                                                                                                                |     |
| Item 1.       | Business                                                                                                            | 3        |
| Item 1A.      | Risk Factors                                                                                                        | 26       |
| Item 1B.      | Unresolved  Staff Comments                                                                                          | 41       |
| Item 2.       | Properties                                                                                                          | 41       |
| Item 3.       | Legal Proceedings                                                                                                   | 41       |
| Item 4.       | Submission  of Matters to a Vote of Security Holders                                                                | 41       |
| PART II  |                                                                                                                |     |
| Item 5.       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 42       |
| Item 6.       | Selected Financial  Data                                                                                            | 44       |
| Item 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 45       |
| Item 7A. | Quantitative and Qualitative Disclosures  About Market Risk                                                         | 58       |
| Item 8.       | Financial  Statements and Supplementary Data                                                                        | 59       |
| Item 9.       | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure                               | 85       |
| Item 9A.      | Controls and Procedures                                                                                             | 85       |
| Item 9B.      | Other Information                                                                                                   | 86       |
| PART III |                                                                                                                |     |
| Item 10.      | Directors, Executive  Officers and Corporate Governance                                                             | 87       |
| Item 11.      | Executive Compensation                                                                                              | 87       |
| Item 12.      | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                     | 87       |
| Item 13.      | Certain Relationships and Related  Transactions, and Director Independence                                          | 87       |
| Item 14. | Principal Accountant Fees and Services                                                                              | 87       |
| PART IV  |                                                                                                                |     |
| Item 15.      | Exhibits and Financial Statement  Schedules                                                                         | 88       |
|          |                                                                                                                |     |
| Signatures    |                                                                                                                | 92       |

 

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**SPECIALNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

*This annual report on Form 10-K contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. All statements included or incorporated by reference in this annualreport on Form 10-K other than statements of historical fact, areforward-looking statements. You can identify these and other forward-lookingstatements by the use of words such as “may,” “will,” “could,” “anticipate,” “expect,”“intend,” “believe,” “continue” or the negative of such terms, or othercomparable terminology. Forward-looking statements also include the assumptionsunderlying or relating to such statements.*

 

*Our actual results could differ materially from thoseanticipated in these forward-looking statements as a result of various factors,including those set forth below under the caption “Risk Factors” in Part IItem 1A and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in Part II Item 7 of this annual report on Form 10-Kand elsewhere in this annual report on Form 10-K.  Readers are cautioned not to place unduereliance on forward-looking statements. The forward-looking statements speak only as of the date on which theyare made and we undertake no obligation to update such statements to reflectevents that occur or circumstances that exist after the date on which they aremade except as required by law.*

 

**PART I**

 

**Item1.    *Business***

 

**Overview**

 

We are a leading company focused on using proprietary tastereceptor-based assays and screening technologies to discover and develop novelflavors, flavor enhancers and bitter blockers, which we refer to as flavoringredients, for the packaged food, beverage and ingredient supply industries.We believe our flavor ingredients will enable packaged food, beverage andingredient supply companies to improve the nutritional profile of theirproducts while maintaining or enhancing taste and, in certain cases, generatingcost of goods savings.**We license ourflavor ingredients to our collaborators on an exclusive or co-exclusive basis,which we believe will provide these companies with a competitive advantage. Wehave product discovery and development collaborations with seven of the world’sleading packaged food, beverage and ingredient companies: Ajinomoto Co., Inc.,or Ajinomoto, Cadbury, Campbell Soup Company, or Campbell, The Coca-ColaCompany, or Coca-Cola, Firmenich SA, or Firmenich, Nestlé SA, or Nestlé, andSolae LLC, or Solae. We currently anticipate that we will derive all of our revenuesfrom existing and future collaborations. Depending upon the collaboration, ourcollaboration agreements provide for upfront fees, research and developmentfunding, reimbursement of certain regulatory costs, milestone payments basedupon our achievement of research or development goals and, in the event ofcommercialization, commercialization milestones, minimum periodic royalties androyalties on sales of consumer products incorporating our flavor ingredients.Senomyx’s current programs focus on the development of savory, sweet and saltflavor enhancers, high potency sweeteners, bitter blockers and cooling agents.

 

Flavor ingredients are substances that impart or modulate tastes oraromas in foods and beverages. Individuals experience the sensation of tastewhen flavor ingredients in food and beverage products interact with tastereceptors in the mouth. A taste receptor functions either by physically bindingto a flavor ingredient in a process analogous to the way a key fits into a lockor by acting as a channel to allow ions to flow directly into a taste cell. Asa result of these interactions, signals are sent to the brain where a specifictaste sensation is registered. There are currently five recognized primarysenses of taste: umami, which is the savory taste of glutamate, sweet, salt,bitter and sour. In addition, there are secondary taste sensations, such ascool, hot and fat.

 

We are currently pursuing the discovery and development of flavoringredients through six programs focused on savory, sweet, salt, bitter andcooling taste areas.  The goals of oursavory program are to enhance the taste of naturally occurring glutamate andenable the reduction or elimination of added monosodium glutamate, or MSG. The goalsof our sweet enhancer program are to enhance the taste of 

 

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natural and artificial sweeteners and enable asignificant reduction in added sweeteners. The goals of our salt program are toenhance the taste of salt and enable a significant reduction in added salt. Thegoals of our bitter taste modulation program are to reduce or block bittertaste and to improve the overall taste characteristics of packaged foods,beverages, over the counter, or OTC, health care products and pharmaceuticalproducts. The goals of our high potency sweetener program are to allow for thereduction of calories in packaged foods and beverages and to enable ourcollaborators to use product labeling referencing “natural flavors.”  The goal of our cool flavor program is todiscover novel cooling compounds for a variety of applications.

 

Our internet address is www.senomyx.com. We post links on our websiteto the following filings as soon as reasonably practicable after they areelectronically filed with or furnished to the Securities and ExchangeCommission, or SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and any amendment to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as amended. All such filings are available through ourwebsite free of charge. Our filings may also be read and copied at the SEC’sPublic Reference Room at 100 F Street, NE Washington, DC 20549.Information on the operation of the Public Reference Room may be obtainedby calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internetwebsite that contains reports, proxy and information statements, and otherinformation regarding issuers that file electronically with the SEC. Theaddress of that site is www.sec.gov.

 

**Industry Background**

 

***Packaged Food and Beverage Industry***

 

Packaged food and beverage products include carbonated andnon-carbonated beverages, frozen foods, snack foods, ice cream, pasta, cannedsoup, pet food and numerous other products. According to recent data fromEuromonitor International, an independent research organization, worldwidesales of packaged food and beverage products in 2007, excluding pet food, wereapproximately $1.6 trillion, of which $300 billion was generated in the UnitedStates. These figures represent growth rates of approximately 6% and 3%,respectively, over 2002 amounts.  Basedon these estimates, of the worldwide total, sales of packaged foods wereapproximately $1.2 trillion and sales of non-alcoholic beverages wereapproximately $415 billion. Additionally, according to recent data from Euromonitor, the worldwidesales of pet food products in 2007 were approximately $32 billion.  Based on recent data from Euromonitor,Information Resources, Inc., a provider of enterprise market informationsolutions and services, and reports from our collaborators, we estimate thatour collaborators’ combined worldwide sales in 2007 of their products that fallwithin their exclusive or co-exclusive product fields were approximately $64billion. Our collaboration agreements for retail and food service sales providethat we will receive royalties of up to 4% on our collaborators’ sales ofproducts containing our flavor ingredients. Our collaboration agreements foringredient supply sales provide that we will receive royalties of up to 5% onour collaborators’ sales of our flavor ingredients or flavor systems thatincorporate our flavor ingredients.  Aflavor system can be a combination or variety of flavors and ingredients, suchas strawberry flavor and sweeteners. However, we do not anticipate that our collaborators will incorporateour flavor ingredients into all of their products within their exclusive orco-exclusive product fields.

 

Each of our flavor ingredients addresses large, potentially overlappingmarkets. The following table sets forth the four primary taste areas on whichwe are focused and, for each taste area, provides examples of productcategories that could incorporate ingredients in those taste areas, estimatedworldwide sales and our estimates of the worldwide sales for food and beverageproducts of our existing collaborators in their exclusive or co-exclusive productfields.

 

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| **Taste Areas** | ** ** | **Example Product Categories**                                                                                                                                                | ** ** | **2007 Estimated  Worldwide Sales(1)** | ** **  | **2007 Estimated  Revenues Of  Existing  Collaborators  In Exclusive  Product Fields(2)** | ** ** |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|-------------|---------------------------------------------------------------------------------------------------------------|------------|
|                 |       |                                                                                                                                                                                    |       |                                             |        |                                                                                                          |       |
| Savory               |       | Ready meals,  sauces, spreads, frozen foods, beverages, meal replacements, soups, pastas,  dried foods, snack foods, processed meats, processed cheeses and cracker  products           |       | $                                                | 443 billion |                                                                                                          | $          | 21.6 billion |   |
|                 |       |                                                                                                                                                                                    |       |                                             |        |                                                                                                          |       |
| Sweet                |       | Confectionaries,  cereal, ice cream, beverages, yogurt, dessert, spreads and bakery products                                                                                            |       | $                                                | 592 billion |                                                                                                          | $          | 23.6 billion |   |
|                 |       |                                                                                                                                                                                    |       |                                             |        |                                                                                                          |       |
| Salt                 |       | Product  categories are the same as those set forth for savory taste area plus canned  foods and bakery products                                                                        |       | $                                                | 456 billion |                                                                                                          | $          | 9.3 billion |   |
|                 |       |                                                                                                                                                                                    |       |                                             |        |                                                                                                          |       |
| Bitter               |       | Products  which contain bitter tastants, including confectionary, beverages, ice cream,  ready meals, canned foods and soups, and products which utilize certain  artificial sweeteners |       | $                                                | 576 billion |                                                                                                          | $          | 9.2 billion |   |

 

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(1)          According to recent Euromonitor data for packaged food and beverages,excluding pharmaceutical and OTC health care applications.

 

(2)          Based on recent data from Euromonitor, Information Resources and reportsfrom our collaborators.

 

According to Hill ConsultingGroup’s “Cooling Agents” report, annual sales of current cooling compounds arein the range of $400 million, and we estimate the opportunity for flavorsystems incorporating improved cooling agents may be three to four times thatsize.

 

***Flavor and Ingredient Supply Industry***

 

Flavors and ingredient supplies are used in a variety of packaged food,beverage and ingredient products throughout the world. Flavors and ingredientsupplies can originate from either naturally occurring or chemicallysynthesized compounds. Flavors include compounds that impart a taste such asstrawberry, vanilla or cool while ingredient supplies include food additivessuch as MSG and hydrolyzed soy protein. Flavor ingredients may be sold as part of a flavor system or incombination with another ingredient to packaged food and beverage companies, orto companies that make pharmaceutical or OTC healthcare products. A flavorsystem can be a combination or variety of flavors and ingredients, such asstrawberry flavor and sweeteners.  Flavorsystems can also come in several forms such as powder or liquid, and may bespecially processed to increase the functionality of the flavor.

 

While some packaged food, beverage and ingredient companies have theirown internal research and development programs, most have traditionally reliedon purchases of flavor ingredients from third parties. Historically, flavoringredients have been sold on a commodity basis by independent manufacturerswho make their products broadly available to packaged food, beverage andingredient companies on a non-exclusive basis. This has limited the ability ofpackaged food, beverage and ingredient companies to use flavor ingredients todifferentiate their brands from competitors.

 

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Traditionally, flavor and ingredient supply companies have discoverednew flavor ingredients primarily using inefficient, non-automated andlabor-intensive trial and error processes involving a limited number of trainedtaste testers. Using this approach, taste testers must physically taste eachpotential flavor ingredient to assess the taste characteristics of thecompound. Taste testers can assess only a limited number of potential flavoringredients at one time due to the sensory fatigue that results from repeatedtasting. As a result, only a small fraction of the available universe ofingredients can be tested economically.

 

Flavors and ingredientsupplies are regulated in the United States under provisions of the Food, Drugand Cosmetic Act, or FD&C Act, administered by the Food and DrugAdministration, or FDA.  Flavor ingredientssold in countries and regions outside the United States are also subject toregulations imposed by national governments or regional regulatory authorities,as is the case in the European Union. For further discussion of the regulatory regime for flavor andingredient supplies, please see the “Regulatory” section below.

 

***High Potency Sweetener Industry***

 

High potency sweeteners havemany functions in the food and beverage industry and are used in a wide varietyof consumer product categories.  Highpotency sweeteners are commonly found in soft drinks, juices, confectionaries,low calorie foods and chewing gum.

 

As is the case with flavor and ingredient supply companies, highpotency sweetener companies have typically discovered new high potencysweeteners primarily using inefficient, non-automated and labor-intensive trialand error processes involving a limited number of trained taste testers. Inother instances, as with the discovery of aspartame, high potency sweetenershave been discovered by accident.

 

High potency sweeteners aresold on a commodity basis by sweetener manufacturers and other thirdparties.  These sweeteners are broadlyavailable to packaged food and beverage companies on a non-exclusive basis.  This has limited the ability of packaged foodand beverage companies to use high potency sweeteners to differentiate theirbrands from competitors.  Another problemoften faced by users of high potency sweeteners are the negative aspects oftheir taste profiles such as lingering, delayed onset and bitterness.  These limitations of current high potencysweeteners require many food and beverage manufacturers to blend high potencysweeteners together in a single product to get the desired taste profile.

 

While most flavoringredients are regulated in the United States as Generally Recognized as Safe,or GRAS, substances under the provisions of the FD&C Act, most high potencysweeteners are currently regulated as food additives that may require FDAapproval prior to use in foods.  (Pleasesee the “Regulatory” section below for a more complete description of theregulatory process.)

 

***Flavor Ingredients as a Source of CompetitiveAdvantage***

 

The packaged food, beverage and ingredient industries are comprised ofa number of large and highly competitive market segments. Small market sharegains in specific large market segments can translate into significantadditional revenue for packaged food, beverage and ingredient companies. Forexample, according to recent Euromonitor data, estimated 2007 worldwide salesof soft drinks were approximately $331 billion. Thus, an increase of a tenth ofa percentage point in overall worldwide market share would result in additionalrevenue of approximately $331 million.

 

As a result of these market opportunities, packaged food, beverage andingredient companies are constantly seeking ways to differentiate theirproducts, demand for which can be greatly affected by very small actual orperceived improvements in flavor or health profiles. Flavor ingredients canpotentially provide an important way to differentiate a particular productthrough enhanced taste, improvements in nutritional profile or labeling, flavoringredient exclusivity and cost of goods savings.

 

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·                     *Taste.* Product taste is a critical competitive factor for packaged food,beverage and ingredient companies. These companies seek to use flavoringredients to improve or maintain taste while improving the nutritionalprofile of packaged food, beverage and ingredient products or reducingingredient costs.

 

·                  *Health Benefits.* Packaged food, beverage and ingredient companies are exploring ways toimprove overall nutritional quality of their products. It is widely acceptedthat poor diet contributes to adverse health conditions such as cardiovasculardisease, diabetes and obesity. To address these concerns, many companies haveintroduced reduced calorie, reduced sodium and reduced fat content products tothe market. Flavor ingredients with specific desired characteristics provide aninnovative way to reduce the levels of ingredients that may contribute to theseconcerns without compromising desirable taste attributes.

 

·                  *Flavor IngredientExclusivity.*  Failure of packaged food, beverage andingredient companies to differentiate their brands from their competition,including private label products, may result in significant loss of marketshare, price pressure and erosion of profit margins. Packaged food, beverageand ingredient companies spend millions of dollars creating brands and brandimages to compete with other products. Many of these competitive productscontain the same or similar flavor ingredients. The limited availability ofproprietary flavor ingredients makes it difficult for manufacturers todifferentiate their products based on flavor ingredients.

 

·                  *Cost of Goods Savings.*  Thepackaged food, beverage and ingredient industries purchase enormous quantitiesof raw materials to produce their products. According to the Food and Agriculture Division of the United Nations andLMC International, an economic and business consultancy providing economicresearch and consultancy services, estimated worldwide sugar production in 2007was over 166 million metric tons, and consumption was over 145 million metrictons.  The market value of processedsugar produced worldwide is therefore in excess of $63 billion on an annualbasis, based on United States spot prices in January 2009.  Similarly, according to Ajinomoto’s FY2008Market and Other Information report, worldwide demand for MSG was over 2million metric tons in 2007 at a cost of $4.2 billion. According to LMCInternational, worldwide demand for high-fructose corn syrup for 2008 wasapproximately 12.9 million metric tons at a cost of approximately $6.9billion.  Flavor ingredients canpotentially facilitate a reduction in the quantity of these ingredients used inpackaged food, beverage and ingredient products, which could result insignificant decreases in costs and associated increases in profit margins.

 

**Our Solution**

 

We use our proprietary taste receptor-based assays and screeningtechnologies to discover and develop novel flavor ingredients. We havedeveloped proprietary taste receptor-based assays that incorporate human tastereceptors. We use these assays in our high-throughput screening systems to rapidlyand efficiently screen our compound libraries and identify large numbers ofnovel potential flavor ingredients. We believe our approach improves thelikelihood that ingredients with the desired characteristics can be discoveredand then optimized into novel flavor ingredients.

 

We believe our approach will result in the discovery and development offlavor ingredients that will address the following key challenges faced by thepackaged food, beverage and ingredient industries:

 

·                  *Maintaining and Improving Taste.*  Weare developing flavor ingredients to enable our current and futurecollaborators to improve or maintain taste while improving the nutritionalprofile of packaged food, beverage and ingredient products or reducingingredient costs.

 

·                  *ReducingSugar, Artificial Sweeteners, Salt and MSG in Packaged Food, Beverage andIngredient Products. *We aredeveloping flavor ingredients to enable our current and future collaborators tosignificantly reduce the levels of sugar, artificial sweeteners, salt and MSGin packaged food, beverage andingredient products while maintaining or improving taste. We believe reducingthe levels of such ingredients will improve the nutritional profile and/ortaste of packaged food, beverage and ingredient products.

 

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·                  *Blocking UndesirableTastes.*  We are discovering flavor ingredients that webelieve will be useful in blocking bitter and other unwanted tastes associatedwith certain packaged food, beverage, OTC health care products andpharmaceutical products.

 

·                  *Overcoming Deficiencies inCertain Flavor Ingredients.*Weare discovering flavor ingredients with lower costs and improved propertiesover existing ingredients, including flavor and physical properties.

 

·                  *Identifying NaturalIngredients.*  We are screening our library of naturalsamples isolated from plants and other natural sources to discover new naturalingredients.

 

·                  *Obtaining Exclusive orCo-Exclusive Use of Proprietary Flavor Ingredients. *We are able to offer our current and future collaborators exclusive orco-exclusive use of our proprietary flavor ingredients in defined packagedfood, beverage and ingredient product categories. We believe this approach willassist our collaborators in differentiating their products from those of theircompetitors.

 

·                  *Reducing Cost ofGoods. *We believe our proprietary flavor ingredientswill enable our current and future collaborators to reduce overall raw materialingredient costs in certain cases, particularly for those products containinghigh levels of natural and artificial sweeteners and MSG.

 

**Our Strategy**

 

Our goal is to become the leader in discovering, developing andcommercializing new and improved flavor ingredients. Key elements of ourstrategy include:

 

·                  *Collaborating With LeadingPackaged Food, Beverage and Ingredient Companies. *We are collaborating with leading packaged food, beverage andingredient companies to develop and commercialize our product candidates. Ourcollaborators are responsible for marketing, selling and distributing theirproducts incorporating our flavor ingredients. In addition, our collaboratorsare responsible for all manufacturing costs of our flavor ingredients.  As a result, we expect to commercialize ourflavor ingredients without incurring significant sales, marketing, manufacturingand distribution costs. We currently have collaborations with Ajinomoto,Cadbury, Campbell, Coca-Cola, Firmenich, Nestlé and Solae.

 

·                  *Developing FlavorIngredients that are Eligible for Flavor and Extract Manufacturers Association,or FEMA, GRAS Determination. *Our primary focus is on the development offlavor ingredients that will qualify for a FEMA GRAS determination.  Five ingredients developed as part of oursavory and sweet programs have received FEMA GRAS determination.  Upon theGRAS determination, our collaborators can begin to test market andcommercialize products incorporating our flavor ingredients. In the event thata particular flavor ingredient is not eligible for FEMA GRAS determination, wemay dedicate our development efforts to alternative ingredients.

 

·                  *Pursuing AdditionalCollaborations and Market Opportunities. *We seek to establishadditional collaborations with leading packaged food, beverage and ingredientcompanies to use flavor ingredients developed through our existing programs forexclusive or co-exclusive use within new packaged food, beverage and ingredientproduct fields. We intend to receive from future collaborators up-front fees,research and development funding, milestone payments, minimum periodicroyalties and royalties on future sales of products incorporating these flavoringredients. In addition, we plan to target fields in which our collaboratorscan incorporate more than one of our flavor ingredients into a particularproduct or flavor system.

 

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·                  *Expanding Our Product Candidate Pipeline. *We will continue to focus on the discovery and development ofadditional flavor ingredients based on additional taste receptors to addressnew taste areas. We believe potential new taste receptors include the fattaste, sour taste and hot taste receptors. We also intend to improve the beneficial characteristics of our currentproduct candidates through the development of next-generation flavoringredients. We will also continue to consider applications of our currentproducts and technologies outside of the packaged food, beverage and ingredientindustries.

 

·                  *Maintaining and Expanding Our TechnologyPosition. *We believe our proprietary tastereceptor-based technologies, including our receptor discovery, assaydevelopment and high-throughput screening technologies and natural andsynthetic compound libraries provide us and our collaborators with significantcompetitive advantages. We intend to continue to develop and acquireproprietary technologies and related intellectual property rights to expand andenhance our ability to discover and develop new proprietary flavor ingredients.

 

**OurDiscovery and Development Process**

 

Thefollowing diagram summarizes our discovery and development process.

 

 

Thekey elements of our Discovery and Development process are:

 

·                  *Proprietary Taste Receptor-Based AssayDevelopment. *The first step in our discovery anddevelopment process is to develop proprietary assays based on human tastereceptors. Our assays are tests that measure interactions between the tastereceptors and potential flavor ingredients. To date we have developed assays totest for compounds that interact with receptors associated with savory, sweet,salt, bitter and cooling tastes.

 

·                  *High-Throughput Screening and Identification of LeadCompounds. *The next step in our discovery anddevelopment process is to use our proprietary taste receptor-based assays toidentify compounds that bind to human taste receptors, known as hits. We useautomated high-throughput screening to rapidly evaluate our libraries of diversesynthetic and natural compounds.  A panelof taste testers then evaluates the taste effect of the most potent hits. Basedon this evaluation, we designate hits that exhibit a positive taste effect asproof-of-concept compounds. We then select the most promising of thoseproof-of-concept compounds, which we call lead compounds, for optimization.

 

·                  *Optimization of Lead Compounds and Selection ofProduct Candidates. *The next step in our discovery anddevelopment process is to chemically enhance, or optimize, our lead compoundsto allow lower amounts of the compound to be used in the finished product orimprove the enhancement effect to meet the taste attribute goals of ourcollaborators. Optimization may also be required to enhance the safety profileor to improve the physical properties of a compound so that it is stable undermanufacturing, storage and food preparation conditions. We refer to optimizedcompounds that provide desirable taste attributes in packaged food, beverageand ingredient product prototypes as product candidates.  When screening natural libraries,optimization involves selecting the appropriate source and developing the mostefficient process to obtain the active compound.

 

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·                  *Safety Studies and Regulatory Approval of ProductCandidates. *The next step inour discovery and development process is to select one or more productcandidates for commercialization. We then evaluate the selected productcandidate for safety, including preliminary in-vitro evaluation and additional in-vivo studies to confirm anacceptable safety profile. Following this evaluation, we submit the safety dataalong with the physical and chemical properties of the product candidate and adescription of manufacturing and conditions of intended use to FEMA forreview.  The FEMA review is conducted byan Expert Panel identified and convened by FEMA.  If the Expert Panel determines the productcandidate to be GRAS, the conclusions of the Expert Panel are provided directlyto the FDA and published in the journal Food Technology.  The FEMA GRAS status allows the ingredientsto be commercialized in the United States and several other countries andregions.  FEMA GRAS status alsofacilitates regulatory determinations in a number of additional countries.

 

Five ingredients developed as part of oursavory and sweet programs have received FEMA GRAS determination.  Theprocess from selection for development until receipt of that determination hasranged from 12 to 16 months.  Costs associated with the FEMA GRAS process,including synthesis of material for regulatory studies, contract safety studiesand preparation of the application, were less than $1 million.  We expect that most of the flavor ingredientswe develop in the future will require a similar amount of time and cost.  However, the length of time may varydepending on the properties of the flavor ingredient.  In the United States, most high potencysweeteners are currently regulated as food additives which require FDA approvalprior to use in foods.  However, noUnited States regulation precludes high potency sweeteners from beingdetermined to be GRAS.  The safety datarequirements for food additives and GRAS substances are the same and dependupon the anticipated human exposure to the substance or consumption, and thelevel of concern for potential toxicity based on the structure of thesubstance.  If a food additive petitionis required, there is a range of potential studies that may be conducted.  These studies have a total estimated cost ofup to $7 million and may take up to four years to complete.  Furthermore, additional studies adding costand time to approval may be required depending on the results of the initialsafety studies.  Outside the UnitedStates, the food additive approval process is generally similar to the FDA foodadditive petition process.

 

·                  *Commercialization. *Following regulatoryapproval in a given country, foods and beverages containing our proprietaryflavor ingredients can be commercialized immediately.  Our collaboratorshave ultimate responsibility for commercialization of Senomyx flavoringredients in their end product offerings.  Prior to commercializationcollaborators complete extensive product formulation work on targeted products. Our collaborators may validate final formulations for these productsthrough in-house sensory evaluation as well as external in-market taste testsby consumers.  Upon confirming consumer acceptance of these products, thecollaborators complete activities such as production of the Senomyx flavoringredients and the development of packaging and sales samples and materials,enabling the actual market launches of the products.

 

**OurDiscovery and Development Programs**

 

Weare currently pursuing the discovery and development of flavor ingredientsthrough six programs focused on savory, sweet, salt, bitter and cooling tasteareas.

 

***Savory Enhancer Program***

 

Thegoals of our savory program are to enhance the taste of naturally occurringglutamate and enable the reduction or elimination of added MSG and a relatedfood additive, inosine monophosphate, or IMP. Using SavoryScreenHT, ourhigh-throughput savory receptor-based assay system, we identified two productcandidates, S336 and S807, that enhance the savory taste of glutamate.  S336 is approximately three times more potentthan S807 in taste tests and exhibits greater water solubility compared toS807, which is more fat soluble. Other characteristics, such as heat stabilityand ease of manufacturing by a simple synthesis process, are similar for thetwo ingredients. Our collaborator evaluated S336 and S807 for savory tasteenhancement in product prototypes, and formally selected both S336 and S807 fordevelopment in May 2004.

 

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Wecompleted the safety assessment studies for S336 and S807 and submittedapplications for GRAS determination to FEMA in December 2004.  In March 2005, the FEMA Expert Paneldetermined that S336 and S807 were GRAS. In addition, two other flavor enhancers, S263 and S976, which arerelated to S336, were also determined by FEMA to be GRAS.  A more detailed description of the FEMA GRASprocess is provided in *Item 1*, *Business — Regulatory Process*.  After we achieved FEMA GRAS status for thefour savory ingredients, our collaborator initiated product development effortsto identify initial applications, optimal concentrations and the development ofnew recipes.

 

During2007, the Chinese Ministry of Health granted official regulatory approval inChina for our savory flavor ingredients. Also in 2007, our savory flavor ingredients received a positive reviewby the Joint FAO/WHO Expert Committee on Food Additives, or JECFA.  The JECFA determination facilitates theacceptance or approval of flavors for use in food in many countries throughoutthe world.

 

*Commercialization by Collaborators*

 

Initialmarket launch by Nestlé of products including our savory enhancers occurred in June 2007. Nestlé’s launch strategy is focused on countries where regulatory approval isin place, and targets products that contain high levels of MSG.  A totalof six new bouillon and culinary aid products, across four countries in thePacific Rim and Latin America, including Brazil, were launched in 2007. Additional new products containing our savory enhancers were launched in2008.  Additionally, Nestlé has beenconducting product development and consumer testing with both new andreformulated established products in larger countries that are high-volumeusers of MSG.  We anticipate that Nestléwill initiate commercialization of established products containing our savoryflavor ingredients in 2009.  A second collaborator for the savory enhancerprogram continues preparation for potential future launches of productscontaining our savory ingredients.

 

Concurrently,we are working to obtain global regulatory approvals in support of new businessdevelopment activities and commercialization strategies for subsequent productlaunches of our savory flavor enhancers in additional countries.

 

***Sweet Enhancer Program***

 

Thegoals of our sweet enhancer program are to enhance the taste of natural andartificial sweeteners and enable a significant reduction in added sweeteners.Senomyx has identified S2383, a novel enhancer of the high-intensity sweetener sucralose,and S6973, a new sucrose, or plain sugar, enhancer.  Taste tests demonstrated that S2383 enabledup to a 75% reduction of sucralose in product prototypes such as beverages,yogurt and baked goods, yet maintained the same sweet intensity without anyoff-tastes.  In November 2008 weannounced receipt of FEMA GRAS status for S2383.  Also in November 2008, we and Firmenichannounced a new collaboration under which Firmenich has exclusive rights tocommercialize S2383 as a standalone ingredient or as part of an ingredientmixture in virtually all countries. Firmenich has initiated pre-commercialization activities for S2383.

 

Thesucrose enhancer S6973 allowed an approximately 50% reduction of sucrose intaste tests with beverage, yogurt, cereal, cookie, condiments, hard candy andother product prototypes.  In addition tothis significant degree of enhancement, S6973 has key beneficial tastecharacteristics that allowed the taste of sucrose to be unaffected in thesetests.  During 2008, we moved S6973 intothe development phase.  We are currentlyconducting safety studies to support regulatory filings for S6973.

 

Additionalwork is ongoing to identify enhancers of fructose and other natural andartificial sweeteners and to identify other enhancers of sucrose with otherdesirable physical properties.  Samplesthat are active in the screening assay are being scaled up and optimized fortaste tests.

 

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***Salt Enhancer Program***

 

**The goal ofthe salt enhancer program is to identify flavor ingredients that allow asignificant reduction of sodium in foods and beverages yet maintain the saltytaste desirable to consumers.  During2008, Senomyx reported a major scientific finding with the discovery ofSNMX-29, the protein the Company believes is the primary receptor responsiblefor human salt taste.  Using newproprietary screening assays based on SNMX-29, Senomyx has identified well over100 enhancers of both sodium chloride (table salt) and potassium chloride thatare active in the assays.  Theseenhancers, which represent 12 diverse sample classes, are being optimized toincrease their solubility, potency, and taste characteristics.  Taste tests to determine their efficacy havebeen initiated.**

 

***Bitter Blocker Program***

 

The goals of our bitterblocker program are to identify compounds that modulate or eliminate the bittertaste and to improve the overall taste characteristics of certain packagedfood, beverage and ingredient products, OTC health care products andpharmaceutical products.  This involvesthe identification of taste receptors that respond to bitter ingredients knownto be present in a variety of food and beverage ingredients, followed by theuse of these receptors to discover bitter taste blockers.  We have identified blockers for 18 of the 22different bitter receptors that we believe are the primary means by whichhumans sense bitter tastes, and we are currently screening to find blockers forthe remaining receptors.  In this way, weare creating a novel “toolbox” of bitter blockers that have the potential to beused to reduce the bitter taste of a wide variety of products.  We are using this toolbox approach in our effortsto reduce the bitterness of products marketed by our two collaborators for thebitter blocker program.

 

In the first collaboration,during 2008 we identified S0812 and other bitter blockers that met the criteriafor reducing the bitterness of several variations of one collaborator’sproduct, as well as additional product prototypes.  We have therefore initiated developmentactivities intended to support regulatory filings for these bitter blockers inthe U.S. and elsewhere.  The developmentphase includes scale-up manufacturing and safety studies.

 

Our second collaboration,which is with Solae, involves the discovery and development of new bitterblockers that modulate and control bitterness in certain soy-basedproducts.  During 2008, we reached criticalmilestones related to our demonstration that it is possible to block thereceptors responsible for the bitter taste associated with hydrolyzed soyprotein.  We recently achieved a tasteproof of concept with promising blockers that reduced soy bitterness in tastetests.

*** ***

***High Potency Sweetener Program***

 

Thegoals of our high potency sweetener program are to discover and develop novelno- or low-calorie natural high potency sweeteners and to improve upon thetaste and physical properties of currently marketed high potencysweeteners.  We have been expanding ournatural products library with numerous additional samples, most recently from avariety of plants.  We have identifiedmultiple natural sample extracts that were active in the sweet receptor screeningassay.  These samples, which typicallycontain mixtures of 10 or more components, are being purified in preparationfor evaluation in taste tests.  We havevalidated our natural screening and purification processes by demonstratingthat our methodologies can be used to identify and isolate a known naturalsweetener from a complex plant extract.

 

***Cooling Flavor Program***

 

Thegoal of our cool flavor program is to identify novel cooling flavors that donot have the limitations of currently available agents.  During 2008, we began screening samples usinga proprietary high-throughput screening assay designed to identify potentialnew cooling agents.  Samples thatdemonstrate activity in the assay are further characterized and prepared fortaste testing.  We recently demonstratedthat one of these samples provided indications of a cooling taste effect.

 

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**ProductDiscovery and Development Collaborations**

 

Wepursue collaborations with leaders in the packaged food, beverage andingredient supply markets. Under each of our current product discovery anddevelopment collaboration agreements, we have agreed to conduct research anddevelop flavor ingredients in one or more specified taste areas, such assavory, sweet, salt, bitter or cool. Each of these collaborations is focused onone or more specific product fields, such as non-alcoholic beverages, wet soupsor frozen foods. We have product discovery and development collaborations withAjinomoto, Cadbury, Campbell, Coca-Cola, Firmenich, Nestlé and Solae.  We also have an additional commercializationand license agreement with Firmenich regarding our S2383 sucralose enhancer.

 

Allof our current collaboration agreements provide for royalty payments based uponfuture product sales in the event the collaborator commercializes a productincorporating our flavor ingredients. Most of our current collaboration agreements provide for research anddevelopment funding, milestone payments upon achievement of pre-definedresearch or development targets and cost reimbursement.  Certain of our current collaborationagreements also provide for upfront fees and minimum periodic royalties.  The research and development funding undereach of these agreements is typically paid according to a fixed paymentschedule, but may vary from period to period upon mutual agreement of theparties. Each of these collaborations provides us with a portion of the fundingwe require to pursue the discovery and development of flavor ingredients forthe applicable program. Under each of these agreements, we are primarilyresponsible for the discovery and development phases and any associatedexpenses, while our collaborator is primarily responsible for selecting theconsumer products that may incorporate our flavor ingredients. Our collaboratoris also responsible for manufacturing, marketing, selling and distributing anyof these consumer products, and any associated expenses. Under most of ouragreements, we are primarily responsible for the regulatory approval phase anda portion of the associated expenses.  Webelieve our collaborations will allow us to benefit from our collaborators’well-established brand recognition, global market presence, established salesand distribution channels and other industry-specific expertise. Each of ourcollaborations is governed by a joint steering committee, consisting of anequal number of representatives of the collaborator and us. The steeringcommittees provide strategic direction and establish performance criteria forthe research, development and commercialization of our flavor ingredients. Alldecisions of the steering committees must be unanimous.

 

Ourproduct discovery and development collaboration agreements provide that we willconduct research and development on flavor ingredients for use within clearlydefined packaged food, beverage and ingredient product fields on an exclusiveor co-exclusive basis for the collaborator during the collaborative periodspecified in each of the agreements.  Ourcurrent product discovery and development collaborators are not prohibited fromentering into research and development collaboration agreements with thirdparties in any product field. Under the terms of each agreement, we will retainrights to flavor ingredients that we discover during the collaboration for usewith the collaborator, or for our use or with other collaborators outside ofthe defined product field. We will also retain rights to any flavor ingredientsthat we discover after the respective collaborative period. In addition to theproduct discovery and development agreements, we have a commercialization andlicense agreement with Firmenich regarding our S2383 sucralose enhancer, whichhas already received GRAS status.  In thecase of certain of our agreements, if the collaborator terminates the agreementor fails after a reasonable time following regulatory approval or GRAS determinationto incorporate one or more of our flavor ingredients into a product, it will nolonger be entitled to use, and we will have the right to license the flavoringredients to other packaged food, beverage and ingredient companies for usein any product field covered in the agreement.

 

Eachof our agreements terminates when we are no longer entitled to royalty paymentsunder the agreement. In addition, each agreement may be terminated earlier bymutual agreement or by either party in the event of a breach by the other partyof its obligations under the agreement. Our initial agreement with Ajinomoto provides for research anddevelopment funding through March 2009 and gives Ajinomoto the right toterminate the agreement without cause provided that it pay additional specifiedresearch funding if it terminates the agreement prior to March 23,2009.  Our most recent agreement withAjinomoto provides for research and development funding through October 2009and gives Ajinomoto the right to terminate the agreement without cause providedthat it pay additional specified research funding if it terminates the 

 

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agreement prior to October 5,2009.  Our agreement with Cadbury, asamended, provides for research and development funding through July 2009and gives Cadbury the right to terminate the agreement earlier without causeupon 90 days’ written notice.  Ouragreement, as amended, with Campbell provides for research and developmentfunding until March 2009 and gives Campbell the right to terminate theagreement earlier without cause, provided that it pay a specified terminationfee if it terminates the agreement prior to March 28, 2009. Our agreementwith Coca-Cola provides for research and development funding until April 2010and gives Coca-Cola the right to conclude the collaborative program earlier forany reason upon payment to us of an early conclusion fee.  Our initial agreement with Firmenich permitsFirmenich to terminate the agreement without cause upon 90 days written noticeon any anniversary of the effective date of the agreement provided that it payadditional specified research funding if it terminates prior to December 14,2010.  Our most recent agreement withFirmenich permits Firmenich to terminate the agreement without cause upon 90days written notice on any anniversary of the effective date of theagreement.  Our initial agreement withNestlé (as amended in April 2005 and April 2008) provides for researchand development funding through April 2010 and gives Nestlé the right toterminate the agreement earlier without cause on July 18, 2009, October 18,2009 and January 18, 2010 upon 30 days’ written notice.  Our most recent agreement with Nestlé regardingthe discovery and commercialization of novel flavor ingredients in the coffeeand coffee whitener fields provides for research and development fundingthrough July 2011 and gives Nestlé the right to terminate the agreementearlier without cause, provided that it pay additional specified researchfunding if it terminates the agreement prior to July 26, 2011.  Ouragreement with Solae provides for research and development funding through April 2010,and gives Solae the right to terminate the agreement without cause upon 90days’ prior notice provided it pay additional specified research funding if itterminates the agreement prior to April 23, 2010.

 

***Ajinomoto***

 

In March 2006, weentered into a collaborative research, development, commercialization and licenseagreement with Ajinomoto for the discovery and commercialization of novelflavor ingredients on an exclusive basis in the soup, sauce and culinary aids,and noodle product categories, and on a co-exclusive basis in the bouillonproduct category within Japan and other Asian markets.  Under the terms of the initial collaboration,Ajinomoto agreed to pay us an upfront license fee and research and developmentfunding for up to three years.  In addition, we are eligible to receivemilestone payments upon achievement of specific product discovery anddevelopment goals and reimbursement for certain patent costs.  In April 2007, we amended the agreementto expand Ajinomoto’s rights into North America.  Under the terms of the April amendment,Ajinomoto agreed to pay us an upfront license fee and we are eligible toreceive an additional milestone payment upon achievement of a specificgoal.  In August 2007, we furtheramended the agreement to expand Ajinomoto’s rights into additional productcategories and geographies that were not previously licensed by us.  Under the terms of the August amendment,Ajinomoto has agreed to pay us an upfront license fee.  Through December 31, 2008, we havereceived $16.3 million in upfront fees and research and development funding,one milestone payment of $500,000 and cost reimbursements of $284,000.  If all milestones are achieved, and includingthe $17.1 million in upfront fees, research and development funding, milestonepayments and cost reimbursements made through December 31, 2008, we may beentitled to up to $18.3 million in upfront fees, research and developmentfunding, milestone payments and cost reimbursements.  In addition to the upfront fees, research anddevelopment funding and milestone payment, we have received minimum periodicroyalty payments from Ajinomoto.  Theseminimum periodic royalty payments are non-refundable.  Under the terms of the contract, Ajinomotowill provide us a sales report and we will record any additional calculatedroyalties as royalties from product sales. There is no guarantee that we will receive any further milestonepayments or royalties under these collaborations.

 

InOctober 2006, we entered into a second collaborative research,commercialization and license agreement with Ajinomoto for the discovery andcommercialization of specified natural flavor ingredients.  Under theterms of the agreement, Ajinomoto has agreed to pay us research funding for upto three years based on research progress during the collaborativeperiod.  In addition, we are eligible to receive payments upon achievementof specific milestones.  Through December 31,2008 we have received $1.1 million in research and development funding.  If all milestones are achieved, and includingthe $1.1 million in research and development funding paid through December 31,2008, we may be entitled to up to $2.3 million in research and developmentfunding and milestone payments.  Inaddition we are entitled to receive minimum periodic royalties and, uponcommercialization, royalty payments based on sales of products containingflavor ingredients developed under the agreement.  We cannot assure you that we will receive anyfuture milestone payments or royalties under this collaboration.

 

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***Cadbury***

 

InJuly 2005, we entered into a collaborative research and license agreementwith Cadbury Adams USA, LLC, a Cadbury company, for the discovery and commercializationof new flavor ingredients in the gum confectionary area.  In July 2007 we extended thecollaborative period for an additional twelve months, through July 2008,and in July 2008 we extended the collaborative period for an additionaltwelve months, through July 2009. Under the terms of the collaboration, Cadbury has agreed to pay usresearch funding for up to four years based on research progress during thecollaborative period. We are also eligible to receive milestone payments uponour achievement of specific product discovery and development goals. Through December 31,2008, we have received $2.8 million in research funding. If all milestones areachieved, and including the $2.8 million in research funding paid through December 31,2008, we may be entitled to up to $4.3 million in research funding andmilestone payments. In addition, in the event of commercialization, we areentitled to receive royalties based on sales of products containing new flavoringredients developed under the agreement. We cannot assure you that we willreceive any future milestone payments or royalties under this collaboration.

 

***Campbell Soup Company***

 

InMarch 2001, we entered into a collaboration agreement with Campbell, aglobal manufacturer and marketer of consumer food products, to work for athree-year collaborative period to discover specified flavors and flavorenhancers in the packaged food, beverage and ingredient product fields ofsoups, including frozen soups. We later amended the agreement to add theproduct field of specified savory beverages in consideration for additionalresearch and development payments and potential milestone and royaltypayments.  In February 2006, weextended the collaborative period until the earlier of March 2009 orsubmission for a GRAS determination, subject to earlier termination underspecified circumstances.

 

Underthe terms of the collaboration, Campbell has agreed to pay to us certainresearch and development funding. We are also eligible to receive a milestonepayment upon our achievement of a specific product development goal. Through December 31,2008, we have received $10.9 million in research and development funding. Ifall milestones are achieved, and including the $10.9 million in research anddevelopment funding paid through December 31, 2008, we may be entitled toup to $11.9 million in research and development funding and milestone payments.In addition, in the event of commercialization, we are entitled to receiveroyalties on future net sales of products containing a discovered flavor orflavor enhancer from the date of introduction of each product in each countryuntil 17 years thereafter or until the expiration of relevant patents in suchcountry, whichever is earlier. We cannot assure you that we will receive any futuremilestone payments or royalties under this collaboration.

 

***The Coca-Cola Company***

 

InApril 2002, we entered into a collaboration agreement with Coca-Cola, theworld’s largest beverage company, to work for a three-year collaborative periodwith Coca-Cola for the discovery and development of specified new flavors andflavor enhancers in the product field of soft drinks and other non-alcoholicbeverages. In addition, we will work with Coca-Cola on a co-exclusive basis forthe discovery and development of flavor enhancers in a specified food, beverageand ingredient product field. In April 2004, we amended the agreement toextend the collaborative period until April 2008, and in April 2008,we amended the agreement to further extend the collaborative period until April 2010.

 

Underthe agreement, Coca-Cola has agreed to pay certain research and developmentfunding over the collaborative period. We are also eligible to receivemilestone payments upon our achievement of specific product discovery anddevelopment goals. Through December 31, 2008, we have received $13.5million in research and development funding and one milestone payment of$500,000. If all milestones are achieved, 

 

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and including the $14.0million in research and development funding and milestone payment paid through December 31,2008, we may be entitled to up to $18.8 million. In addition, in the event ofcommercialization, we are entitled to receive royalties on future sales ofproducts containing a discovered flavor or flavor enhancer until the expirationof relevant patents. We cannot assure you that we will receive any futuremilestone payments or royalties under this collaboration.

 

***Firmenich***

 

***In December 2007,we entered into a collaboration agreement with Firmenich, a global leader inproviding food ingredients and flavor systems to major consumer companies foruse in their brands, to work for a three-year collaborative period to discoverand develop novel compounds that may be used by Firmenich on an exclusive basisworldwide as ingredients that impart a cool taste in flavor systems.***

 

***Under theagreement, Firmenich has agreed to pay research fees and specified paymentsupon the achievement of milestones.  Uponcommercialization, we will be entitled to royalties.  Through December 31, 2008, we havereceived $900,000 in research funding and $50,000 in cost reimbursement.  If all milestones are achieved and includingthe $950,000 in research funding and cost reimbursement paid through December 31,2008, we may be entitled to up to $3.6 million. In addition, in the event of regulatory approval of a discoveredcompound, we are entitled to minimum periodic royalties and in the event ofcommercialization, we are entitled to receive royalties on future sales ofproducts containing a discovered flavor or flavor enhancer until the expirationof relevant patents. We cannot assure you that we will receive any futuremilestone payments or royalties under this collaboration.***

 

InNovember 2008, we entered into a second collaboration agreement withFirmenich for S2383, our novel enhancer of the high-intensity sweetenersucralose.  Under the agreement,Firmenich has agreed to pay to us royalty payments based on sales of S2383 whenit is sold on either a stand-alone basis or within a flavor system.  As of December 31, 2008, we have notreceived any payments under this collaboration.

 

***Nestlé SA***

 

InApril 2002, we entered into an initial collaboration agreement withNestlé, the world’s largest food company, to work for a three-yearcollaborative period to discover specified flavors and flavor enhancers in thefood and beverage product fields of dehydrated and culinary food, frozen foodand wet soup.  In April 2005, weamended the agreement to provide for a three-year extension of thecollaborative research phase.  In March 2006,we further amended the agreement to include commercialization of novel flavorsand flavor enhancers in the pet food category on a worldwide, co-exclusivebasis.  In addition to the expansion, theNestlé agreement has been amended to allow us to reacquire rights to certain ofour flavor ingredients in certain geographic regions. As a result of this amendment,Nestlé now has rights to flavor ingredients in Europe, Asia, Israel, Oceania,Africa, the Middle East and Latin America in specified product categorieswithin the dehydrated and culinary food, frozen food, and/or wet soup productcategories, as well as worldwide rights for the pet food category, while wehave reacquired certain rights in North America and other geographic regions inspecified product categories.  In April 2008,we further amended the agreement to extend the collaborative period for anadditional two years, through April 2010. In September 2008, we further amended the agreement to provide fora specified escalating payment arrangement in lieu of a sales-based royalty fora limited period of time.

 

Underthe terms of the collaboration agreement, Nestlé has agreed to pay to uscertain research and development funding over eight years, subject to earliertermination under specified circumstances. We are also eligible to receivemilestone payments upon our achievement by certain dates of specific productdiscovery and development goals. Through December 31, 2008, we havereceived $12.7 million in research and development funding, reimbursement ofcertain regulatory expenses of $339,000 and four milestone payments of $375,000each. If all milestones are achieved, and including the $14.5 million inresearch and development funding, reimbursement of certain regulatory expensesand milestones paid through December 31, 2008, we may be entitled to up to$18.4 million under the initial collaboration. In addition, we have received royalty payments and minimum periodicroyalty payments from Nestlé.  Theminimum periodic royalty payments are non-refundable.  We cannot assure you that we will receive anyfurther milestone payments under this collaboration.

 

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InOctober 2004, we entered into a second product discovery and developmentcollaboration agreement with Nestlé to work for a five-year collaborativeperiod focusing on the discovery and commercialization of specified novelflavor ingredients in the coffee and coffee whiteners field.  Under the terms of the agreement, Nestlé hasagreed to pay us certain research and development funding over five years,subject to extension or earlier termination under specified circumstances.  This collaborative period has beensubsequently extended to a five-and-one-half year collaborative period, subjectto further extension or earlier termination under specified circumstances.  We are also eligible to receive milestonepayments upon achievement of specific product discovery and developmentgoals.  Through December 31, 2008,we have received $8.3 million in research and development funding and onemilestone of $350,000.  If all milestonesare achieved, and including the $8.6 million in research and developmentfunding and milestone paid through December 31, 2008, we may be entitledto up to $16.2 million under the second collaboration.  In addition, in the event ofcommercialization, we are entitled to receive royalties on future net sales ofproducts containing a discovered flavor ingredient from the date ofintroduction of each product in each country until the expiration of relevantpatents. We cannot assure you that we will receive any milestone payments orroyalties under this collaboration.

 

***Solae, LLC***

 

InApril 2007, we entered into a collaboration agreement with Solae, theleading supplier of soy protein for food-based products, for the discovery andexclusive worldwide commercialization of novel flavor ingredients for soyproteins.  Under the terms of theagreement, Solae has agreed to pay us research fees for up to three years.  We are also eligible to receive milestonepayments upon achievement of specific product discovery and developmentgoals.  In September 2008, weamended the agreement to increase the level of research support for the period September 2008through February 2009.  Through December 31,2008, we have received $1.9 million in research and development funding and onemilestone payment of $250,000. If all milestones are achieved, and includingthe $2.2 million in research and development funding and milestone paid throughDecember 31, 2008, we may be entitled to up to $5.8 million under thecollaboration agreement. In addition, in the event of commercialization, we areentitled to receive royalty payments based on sales of products containingflavor ingredients developed under the agreement.  We cannot assure you that we will receive anymilestone payments or royalties under this collaboration.

 

**OurTechnology**

 

Wehave discovered or in-licensed many of the key receptors that mediate taste inmammals. Having isolated human taste receptors, we have created proprietarytaste receptor-based assay systems that provide a biochemical or electronicreadout when a test compound affects the receptor. To enable faster compounddiscovery, we integrated our proprietary taste receptor-based screening assaysinto a robot-controlled automated system that uses plates containing an arrayof individual wells, each of which can screen a different compound. Ourreceptor-based discovery and development process has enabled us to improve ourability to find novel flavor ingredients over the traditional use of simpletaste tests.

 

***Receptor Discovery and Assay Development Technology***

 

Thereare currently five recognized primary senses of taste: umami (which is thesavory taste of glutamate), sweet, salt, bitter and sour. In addition, thereare secondary taste sensations such as cool, hot and fat.  Scientists generally believe that each ofthese taste sensations is recognized by a distinct taste receptor or family oftaste receptors in the mouth or on the tongue. A taste receptor functionseither by physically binding to a flavor ingredient in a process analogous tothe way a key fits into a lock or by acting as a channel to allow ions to flowdirectly into a taste cell. The brain recognizes tastes by determining which ofthe numerous receptors in the mouth have been contacted by a given flavoringredient. Savory, sweet and bitter taste ingredients bind to taste receptorsspecific to each taste on the surface of taste bud cells. In contrast, thetaste of salt and the sour taste are thought to be recognized by taste channelsthat allow the passage of particular ions into the taste bud cells.  The tastes of cooling and heating aremediated by receptors found in certain nerves.

 

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The current status in thedevelopment of proprietary taste receptor-based assay systems for human tastereceptors is as follows:

 

·                  *Savory Receptor. *Glutamate is anatural component of foods, including tomatoes, mushrooms, parmesan cheese, andmeats. It is often added to foods in the form of MSG to provide a savoryflavor. The human savory receptor is composed of two proteins called hT1R1 andhT1R3. The T1R proteins are members of the G protein-coupled receptor, or GPCR,family and are expressed on the surface of certain taste bud cells. We createdSavoryScreenHT, a proprietary high-throughput savory taste receptor-based assaysystem and demonstrated that it responded to MSG and inosine monophosphate, orIMP. We screened over 200,000 compounds in SavoryScreenHT and identified anumber of savory enhancers, including S807, S336, S263 and S976, which weredetermined to be GRAS in March 2005.

 

·                  *Sweet Receptor. *The human sweetreceptor is composed of two proteins called hT1R2 and hT1R3. The hT1R3 proteinis shared in common with the savory receptor. Like the savory receptor, thesweet receptor is also a member of the GPCR family and is expressed on thesurface of certain taste bud cells. We created SweetScreenHT, a proprietaryhigh-throughput sweet taste receptor-based assay system, and demonstrated thatit responded to many different sweet-tasting compounds including carbohydratesweeteners and artificial sweeteners.  Wehave screened over 300,000 compounds in SweetScreenHT identified novelcompounds that enhance the sweet taste of sucralose and sucrose. Our sucraloseenhancer, S2383, was determined to be GRAS in November 2008. Our sucroseenhancer, S6973, is currently undergoing development activities, such asscale-up activities, analysis of physical properties, and safety studies neededto support regulatory filings for S6973 in the U.S. and elsewhere. We are alsousing SweetScreenHT to identify natural compounds that could potentiallyfunction as high potency sweeteners for no-calorie or low-calorie foods andbeverages.

 

**·**                  *Bitter Receptors*. There are 25 bitter receptors in humans.  These are also members of the GPCR proteinfamily.  Work from model systems showedthat the 25 bitter receptors are likely present together in the same tastecell.  The bitter receptors are believedto have evolved as a defense mechanism to warn of and prevent the ingestion ofpoisonous substances.  It is thought thateach bitter receptor recognizes a different set of bitter-tastingcompounds.  We believe that 22 of thesereceptors are the primary means by which we sense bitter tastes.  Using our receptor-based assays andoptimization processes, we have identified blockers for 18 different bitterreceptors and we are currently screening to find blockers for the remainingreceptors.  In this way, we are creatinga novel “toolbox” of bitter blockers that have the potential to be used toreduce the bitter taste of a wide variety of products.  We are using this toolbox approach in ourefforts to reduce the bitterness of products marketed by our two collaboratorsfor the bitter blocker program.  In thefirst collaboration, during 2008 we identified S0812 and other bitter blockersthat met the criteria for reducing the bitterness of several variations of onecollaborator’s product, as well as additional product prototypes.  We have therefore initiated developmentactivities intended to support regulatory filings for these bitter blockers inthe U.S. and elsewhere.  The developmentphase includes scale-up manufacturing and safety studies.  Our second collaboration, which is withSolae, involves the discovery and development of new bitter blockers thatmodulate and control bitterness in certain soy-based products.  During 2008, we reached critical milestonesrelated to our demonstration that it is possible to block the receptorsresponsible for the bitter taste associated with hydrolyzed soy protein.  We recently achieved a taste proof of conceptwith promising blockers that reduced soy bitterness in taste tests.

 

·                  *Salt Receptor.* Untilnow, the primary receptor responsible for salt taste perception had not beenidentified by Senomyx or in the scientific literature. During 2007, Senomyxidentified and evaluated approximately 15,000 proteins found in taste buds and establisheddetailed criteria to determine which of these functions as the receptor thatresponds to sodium chloride (table salt).  During 2008, we reported amajor scientific finding with the discovery of SNMX-29, the protein we believeis the primary receptor responsible for human salt taste.  During 2008,Senomyx 

 

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developed new screening assays based on SNMX-29,and initiated screening of the Company’s libraries.  We have identified over 100 enhancers of bothsodium chloride and potassium chloride that are active in the assays.  Potassium chloride is often used to helpmaintain a salty taste in low-sodium products, but its use is limited due toundesirable off-tastes.  An enhancer thatfacilitates reduction of potassium chloride could enable further decreases insodium content without unwanted taste effects. Enhancers that were active in the assays are being optimized to increasetheir solubility, potency and taste characteristics.  Taste tests to determine their efficacy havebeen initiated.

 

·                  *Cool Receptor. *The protein TRPM8 is an ion channel that is activated by both cooltemperature and cooling agents such as menthol and WS-3. We developed theCoolScreenHT assay, a high-throughput screening assay using the human TRPM8protein, and we validated the assay using a set of known cooling agents.  We have initiated taste tests of samples thatwere active in the CoolScreenHT assay. In a recent advance, preliminary results indicated that a newlyidentified sample provided a cooling taste effect.  This and other samples will be investigatedfurther.

 

***Screening Technologies andCompound Libraries***

 

We have developed oracquired access to expansive libraries of potential flavor ingredientscurrently comprised of approximately 500,000 natural samples and syntheticcompounds. We intend to continue to acquire or develop additional compounds andnatural samples to add to our libraries. We have designed and selected our libraries to comprise compounds thatwe believe are likely to lead to safe and economical for use in packaged foodand beverage products. We are using our BitterScreenHT, CoolScreenHT andSweetScreenHT assay systems to screen the compounds in our libraries for theireffects on specific taste receptors. These systems use many of the sametechnologies that pharmaceutical companies use to discover medicines. Our assaysystems are much more sensitive than the human tongue, and can therefore beused to discover novel flavor ingredients that could not be identified usingtaste tests.  We also use these systemsto assist us in optimizing our lead compounds by rapidly and iterativelytesting the potency of the flavor ingredients generated in the optimizationprocess as the lead compound progresses to become a product candidate.

 

**RegulatoryProcess**

 

Flavoring substances,including flavor ingredients intended for use in foods and beverages in theUnited States, are regulated under provisions of the FD&C Act administeredby the FDA. Flavor ingredients sold in countries and regions outside of theUnited States are also subject to regulations imposed by national governmentsor regional regulatory authorities, as is the case in the European Union.  These regulations are subject to frequentrevisions and interpretation.

 

***Regulation of Flavor Ingredients in theUnited States***

 

In the United States, flavoringredients are regulated by the FDA as approved food additives, or as GRASingredients under the FD&C Act. The Food Additive Amendments of 1958prompted the flavor industry to establish in 1960 the FEMA Expert Panel.  FEMA has administered the GRAS program forflavors on behalf of the industry for over 40 years.  Other possible routes to approval of aflavor-modifying compound are a GRAS self-determination (independent of FEMA)with or without FDA notification, or a food additive petition to the FDA. Ourgoal is that the flavor ingredients we may discover will be subject to one ofthe regulatory review processes described below.

 

***GRAS Review Process.***    Flavor ingredients thatqualify for the GRAS review process are generally intended to be consumed insmall quantities and have data supporting their safety under conditions of intendeduse. An Expert Panel, convened to undertake a GRAS review, determines whetheran ingredient is generally recognized as safe under the conditions of itsintended use. These experts are qualified by scientific training and experienceto evaluate the safety of certain new ingredients used in food and may declarethem as having been adequately shown through scientific procedures to begenerally recognized as 

 

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safe under the conditions oftheir intended use. Under the GRAS process, manufacturers are required toobtain safety data from the scientific literature or through the conduct ofsafety studies, determine the estimated daily intake of the flavor ingredientper person and submit a report to the GRAS review panel describing thephysical, chemical, safety, and metabolic properties of the flavor ingredient.The entire GRAS determination process, including the safety and metabolicstudies, application preparation and GRAS panel review, can take up to twoyears or longer. However, if there are prior safety data on the ingredient oran ingredient with a related structure, then fewer safety studies may berequired for the GRAS review and the GRAS review process can be considerablyshorter than two years.

 

The most common types ofGRAS review are:

 

·                  *FEMA Expert Panel. *The FEMA Expert Panelis an independent panel of experts for which FEMA provides administrativeassistance.  The FEMA Expert Panel, whichmay be used by FEMA members and certain other parties, meets up to three timesper year. The conclusions of the Expert Panel regarding a flavor or flavorenhancer are provided directly to the FDA and published in the journal FoodTechnology. To our knowledge, the FDA has not challenged the FEMA Expert Panel’sconclusion that the use of a flavoring substance is GRAS. In 2007, the FEMAExpert Panel published its findings on 175 new ingredients determined to beGRAS for specific flavor applications. We joined FEMA as an associate member in2003.  We became a full active member ofFEMA in 2006.  Four of our savoryingredients were determined to be GRAS by the FEMA Expert Panel in 2005 and oursucralose enhancer was determined to be GRAS by the FEMA Expert Panel in 2008.

 

·                  *Specifically Convened Independent Panel. *An independent, qualified panel of experts in pertinent scientificdisciplines may be formed by the manufacturer to evaluate the safety of aspecific compound for GRAS status. This process is known as a “selfdetermination of GRAS status.”  The basisfor the GRAS self determination is not required to be submitted to theFDA.  However, the FDA may requestinformation on ingredients that have been self determined to be GRAS, or theinformation may be provided voluntarily.

 

***Benefits of the FEMA GRAS Process***

 

There are three key benefitsof the FEMA GRAS review process:

 

·                  *Rapid Time for Commercialization. *Four ingredients developed as part of our savory program have receivedFEMA GRAS determination.  The process from selection for development untilreceipt of that determination took approximately 12 months.  The process from selection for developmentuntil receipt of FEMA GRAS determination for our sucralose enhancer, S2383,took approximately 16 months.  We expectthat future flavor ingredients we develop will take a similar amount oftime.  However, the length of time mayvary depending on the properties of the flavor ingredient.  This is much shorter than the typical amountof time to obtain FDA approval under the food additive petition processapplicable to other food ingredients. Once the compound is determined to beFEMA GRAS, it can be immediately commercialized in the United States andseveral other countries that recognize the FEMA GRAS status. As describedabove, the initial phase of commercialization may include compoundmanufacturing, incorporation of the flavor ingredient into products, and thecommercialization of products in consumer test markets.

 

·                  *Low Development Costs. *The total costs for the FEMA GRAS process, including synthesis ofmaterial for regulatory studies, contract safety studies and preparation of theFEMA GRAS application is generally under $1 million per compound.

 

·                  *Facilitated Approval in Other Countries. *Approval of flavors for use outside of the United States varies widelyby country. According to FEMA, seven countries, including Brazil, New Zealandand Australia, recognize ingredients on the FEMA GRAS list.  An additionalset of countries recognize ingredients on the FEMA GRAS list “in principle”.These include Canada, Philippines and Turkey. Approval in these countries mayrequire specific applications to the food safety authority of the individualcountries but usually not additional safety testing.

 

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***Food Additive Petition Process.***   Food ingredients for which the GRAS process is not available may beevaluated as food additives. Food additives require FDA approval prior to usein foods. An ingredient may be ineligible for GRAS determination, and may beconsidered a food additive, because there is insufficient general knowledge orfor a variety of other reasons, including conditions of intended use resultingin high dietary exposure or the ingredient’s safety profile. If the ingredientis considered a food additive, a food additive petition must be filed andapproved by the FDA. Food additive petitions contain information on thechemical nature of the ingredient, the manufacturing process, information onuse in food, estimates of human exposure from use of the compound in food andall known information related to the safety of the ingredient.  The FDAreviews the petition content, requests additional information if necessary,publishes a proposed rule for use in food, reviews comments on theproposed rule and publishes a final rule, if the use is determined to beacceptable.  The safety data requirementsfor food additives are the same as for GRAS substances.  We estimate that a food additive petitioncould cost up to $7 million and may take up to four years to complete.  Furthermore, additional studies adding costand time to approval may be required depending on the results of the initialsafety studies.  Examples of ingredientsthat have gone through a food additive petition process include the artificialsweeteners aspartame, acesulfame K and sucralose. It may be necessary for anyhigh potency sweeteners that we discover or develop to follow this regulatoryroute.

 

**LicenseArrangements**

 

We have licensed rights fromseveral companies and academic institutions, including the following:

 

***University of California***

 

In March 2000, weentered into a license agreement with the University of California under whichwe obtained exclusive rights to certain technologies held by the University ofCalifornia that are involved in the biology of taste, including specifiedreceptors in two taste receptor families, T1Rs and T2Rs. The license may beconverted to a non-exclusive license, or terminated, by the University ofCalifornia if we fail to meet specified milestones relating to the discovery ofspecified products and the sale of specified products and services. Ourexclusive rights are also subject to rights granted by the University ofCalifornia to the United States Government and a private medical foundation. InOctober 2006, we entered into an amended and restated agreement with theUniversity of California to include certain additional relatedtechnologies.  The agreement, asoriginally drafted and as amended and restated, required a license issue fee,payable in installments through 2005, and calls for annual maintenance feescommencing in 2006 or royalties or service revenues on sales of any productsdeveloped using technologies licensed under the agreement. Royalties willaccrue in each country for as long as there exists a valid patent claimcovering a product developed under the agreement.  The agreement will remain in effect until theexpiration of the last to expire patent licensed under the agreement. We mayterminate the agreement at any time, without cause, upon notice to theUniversity of California. The University of California may terminate theagreement upon a breach of our obligations under the agreement.

 

**Competition**

 

Our goal is to be the leaderin discovering novel flavor ingredients for use in a wide range of packagedfood, beverage and ingredient products. Other companies are possibly pursuingsimilar technologies and the commercialization of products and servicesrelevant to flavor ingredients. Although we are not aware of any othercompanies that have the scope of proprietary technologies and processes that wehave developed in our field, there are a number of competitors who possesscapabilities relevant to the flavor ingredient field.

 

In particular, we facesubstantial competition from companies pursuing the commercialization ofproducts and services relevant to taste using more traditional methods for thediscovery of flavor ingredients, or for the reduction of salt, sugar, MSG orbitter taste. These competitors include leading flavor companies, such asFirmenich, Givaudan SA, International Flavors & Fragrances Inc.,Symrise and Takasago. These companies provide flavors and other products, suchas oils, extracts and distillates, to 

 

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consumer products companiesfor use in a wide variety of products including foods, beverages,confectionaries, dairy products and pharmaceuticals. Competitors currentlydeveloping or marketing high potency sweeteners include Ajinomoto, Cargill,Nutrasweet, PureCircle and Tate & Lyle. Competitors currentlydeveloping or marketing menthol or cooling agents include Jindal Drugs, Mentha &Allied, Sharp Menthol, Symrise, Takasago and Millenium SpecialtyChemicals.  We currently compete and will continue to compete in thefuture with these companies in collaborating with and selling flavor productsand technologies to manufacturers of packaged food, beverage and ingredientproducts. Many of these companies have substantially greater capital resources,research and development resources and experience, manufacturing capabilities,regulatory expertise, sales and marketing resources, established relationshipswith consumer products companies and production facilities.

 

We may in the future facecompetition from life sciences and other technology companies and othercommercial enterprises. These entities engage as we do in biotechnology,biology or chemistry and could apply this technology to the discovery anddevelopment of flavor ingredients. We are aware of one other company, RedpointBio, that is involved in research on sweetness potentiators, salt substitutesand bitter blockers, specifically AMP. While we do not believe that any of these collaborations is competitivewith our product discovery and development efforts, we cannot guarantee thatproducts developed as a result of our competitors’ existing or futurecollaborations will not compete with our flavor ingredients.

 

Universities and public andprivate research institutions are also potential competitors. While theseorganizations primarily have educational objectives, they may developproprietary technologies related to the sense of taste or secure patentprotection that we may need for the development of our technologies andproducts. We may attempt to license these proprietary technologies, but theselicenses may not be available to us on acceptable terms, if at all.

 

Methods for reducing sodiuminclude the use of potassium chloride in combination with flavors and maskingagents.  Although savory flavorenhancers, such as IMP, are commercially available, they are not very potent,are not patent protected and are sold as a commodity. The blocking of bittertaste is typically accomplished by attempting to mask the bitter taste with asweetener or another flavor ingredient. Although AMP has received GRAS determination, we do not believe thiscompound has been widely adopted into packaged food, beverage and ingredientproducts.  Existing cooling agents, suchas menthol and WS-3, are currently in use. However, our competitors, either alone or with their collaborativepartners, may succeed in developing technologies or discovering flavoringredients that are similar or preferable in the areas of, among others,effectiveness, safety, cost and ease of commercialization, and our competitorsmay obtain intellectual property protection or commercialize such productssooner than we do. Developments by others may render our product candidates orour technologies obsolete. In addition, our current product discovery anddevelopment collaborators are not prohibited from entering into research anddevelopment agreements with third parties in any particular field.

 

**Patentsand Proprietary Rights**

 

We will be able to protectour proprietary rights from unauthorized use by third parties only to theextent that our proprietary rights are described by valid and enforceablepatents or are effectively maintained as trade secrets. Accordingly, we arepursuing and will continue to pursue patent protection for our proprietarytechnologies. As of December 31, 2008 we are the owner or the exclusivelicensee of 82 issued United States patents, 122 pending United States patentapplications, 70 issued foreign patents and 270 pending foreign applicationscovering various aspects of our proprietary technology. Our issued patents haveterms that expire in 2014 through 2027. 

 

Our policy is to file patentapplications and to protect technologies, inventions and improvements toinventions that are commercially important to the development of our business.For example, we may seek patent protection for receptors and nucleic acidsequences encoding receptors that are involved in taste and the use of suchreceptors to identify ingredients that modulate taste. We also rely ontrademarks to protect our proprietary technology. Generally, United Statespatents have a term of 17 years from the date of issue or 20 years from theearliest claimed priority date, whichever is later, for patents issued fromapplications 

 

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filed with the United StatesPatent and Trademark Office prior to June 8, 1995 or 20 years from theapplication filing date or earlier claimed priority date in the case of patentsissued from applications filed on or after June 8, 1995. Patents in mostother countries have a term of 20 years from the date of filing the patentapplication. Our success depends significantly upon our ability to developingredients and technologies that are protected by our intellectual propertyand that do not infringe any competitor patents. We intend to continue to filepatent applications as we discover and develop new flavor ingredients andtechnologies.

 

Seeking and obtaining patentsmay provide some degree of protection for our intellectual property. However,our patent positions are highly uncertain and may involve complex legal andfactual questions. No consistent standard regarding the allowability andenforceability of claims in many of the pending patent applications has emergedto date. As a result, we cannot predict the breadth of claims that willultimately be allowed in our patent applications, if any, including those wein-licensed or how we may be able to enforce our patent claims against ourcompetitors. In addition, we may not have been the first to file patentapplications for or to invent inventions relating to the technologies uponwhich we rely, which would preclude us from obtaining issued patents on therelevant inventions. We are aware of other companies and academic institutionswhich have been performing research and have applied for patents in the area ofmammalian taste. In particular, other companies and academic institutions andinventor applicants have announced that they have identified taste receptors,published data on taste receptor sequence information or have filed patentapplications on receptors and their use, including Ajinomoto, the CaliforniaInstitute of Technology, Dendreon, Duke University, the German Institute ofHuman Nutrition, Givaudan SA, Monell Chemical Senses, Mount Sinai School ofMedicine, Novartis, Pfizer, Redpoint Bio, The Scripps Research Institute, SloanKettering, the University of California, Virginia Commonwealth University and Wiessenbach.If any of these companies or academic institutions or inventor applicants aresuccessful in obtaining broad patent claims, such patents could potentiallyblock our ability to use various aspects of our discovery and developmentprocess and might prevent us from developing or commercializing newlydiscovered flavor ingredients or otherwise conducting our business.

 

We also rely in part ontrade secret protection for our confidential and proprietary information andprocess. Our policy is to execute confidentiality agreements with our employeesand consultants upon the commencement of an employment or consultingrelationship. These agreements generally require that all confidentialinformation developed by the individual or made known to the individual by usduring the course of their employment shall be our exclusive property. However,there can be no assurance that we will be able to effectively enforce theseagreements or that the subject proprietary information will not be disclosed.

 

We are not a party to anylitigation, opposition, interference, or other potentially adverse ex parte orinter-party governmental or non-governmental proceeding with regard to ourpatent and trademark positions. However, if we become involved in litigation,interference proceedings, oppositions or other intellectual propertyproceedings, for example as a result of an alleged infringement, or athird-party alleging an earlier date of invention, we may have to spendsignificant amounts of money and time and, in the event of an adverse ruling,we could be subject to liability for damages, invalidation of our intellectualproperty and injunctive relief that could prevent us from using technologies ordeveloping products, any of which could have a significant adverse effect onour business financial condition and results of operation. In addition, anyclaims relating to the infringement of third-party proprietary rights, orearlier date of invention, even if not meritorious, could result in costlylitigation, lengthy governmental proceedings, divert management’s attention andresources and require us to enter royalty or license agreements which are notadvantageous if available at all.

 

**Sales and Marketing**

 

While we do not currentlyintend to establish internal sales and marketing capabilities, we aredeveloping the capability to enable us to work closely with our collaboratorsand their suppliers in the incorporation of our flavor ingredients into theirproducts.  Under our current collaborationagreements, our collaborators are responsible for sales, marketing, anddistribution of any packaged food or beverage 

 

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product incorporating ourflavor ingredients. As a result, we expect to commercialize our flavoringredients without incurring significant sales, marketing and distributioncosts. Our seven current collaborators, Ajinomoto, Cadbury, Campbell,Coca-Cola, Firmenich, Nestlé and Solae, are recognized leaders in the sales,marketing and distribution of packaged food, beverage and ingredient products.

 

**Manufacturing**

 

We intend to utilize thirdparties to manufacture our flavor ingredients. Under six of our existingproduct discovery and development collaborations, our collaborator may, in itssole discretion, manufacture itself or through a third party manufacturer theflavor ingredients it licenses from us. The remaining four collaborationsrequire the collaborator to identify with us a mutually agreed upon third partyto manufacture the flavor ingredients it licenses from us.  In some of these agreements, we maintaineither the first right of negotiation or an option to manufacture based on provisionswithin the agreement.

 

There are a number ofreliable third party contract manufacturers available to produce our flavoringredients.  We do not anticipate anycapacity issues because of our low volume requirements and the number ofreliable and available manufacturers.

 

**Employees**

 

As of December 31,2008, we had 129 full-time employees, including 30 with Ph.D. degrees. Of ourfull-time workforce, 98 employees are engaged in research and development and31 are engaged in business development, finance and administration. We alsoretain outside consultants. None of our employees are covered by collectivebargaining arrangements, and our management considers its relationships withour employees to be good.

 

**ExecutiveOfficers**

 

The following table setsforth certain information concerning our executive officers and their ages asof December 31, 2008:

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                                                               |
|-----------------------|------------|---------|------------|--------------------------------------------------------------------------------------------|
| Kent Snyder           |       | 55      |       | President, Chief Executive Officer and Chairman of the Board of  Directors                 |
| Mark J. Zoller, Ph.D. |       | 55      |       | Executive Vice President of Discovery & Development and Chief  Scientific Officer |
| John Poyhonen         |       | 48      |       | Senior Vice President, Chief Financial and Business Officer                                |
| Sharon Wicker         |       | 53      |       | Senior Vice President of Commercial Development and Chief Strategy  Officer                |
| David Berger          |       | 39      |       | Vice President, General Counsel and Corporate Secretary                                    |

 

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**Kent Snyder**, President and Chief Executive Officer,joined us in June 2003 and has served as a member of our board ofdirectors since that time. In May 2008, Mr. Snyder assumed the roleof Chairman of the Board of Directors. Prior to joining us, from October 2001 to June 2003, Mr. Snyderwas retired. From July 1991 to October 2001, Mr. Snyder heldvarious marketing and sales management positions with Agouron Pharmaceuticals, Inc.,a Pfizer company. Mr. Snyder was President of Global Commercial Operationsat Agouron. Prior to holding the position of President of Global Commercialoperations, Mr. Snyder served as Senior Vice President of CommercialAffairs and Vice President of Business Development.  Mr. Snyder is a director of Santarus, Inc.,a publicly-held biopharmaceutical company, and VentiRx Pharmaceuticals, Inc.,a privately-held biopharmaceutical company. Mr. Snyder received his B.S. from the University of Kansas and hisM.B.A. from Rockhurst College.

 

**Mark J.Zoller, Ph.D**., joinedus in March 2000 as Vice President of Research and was promoted toExecutive Vice President of Discovery and Development and Chief ScientificOfficer in January 2006, which position he still holds. From May 1992to December 1999, Dr. Zoller held a number of scientific managementpositions at ARIAD Pharmaceuticals, most recently as Senior Vice President,Genomics and Scientific Director of the Hoechst-ARIAD Genomics Center, which inDecember 1999 was acquired by Aventis Pharmaceuticals. Dr. Zollerreceived his B.A. in Chemistry from Pomona College and his Ph.D. in Chemistryfrom the University of California, San Diego.

 

**JohnPoyhonen**, Senior VicePresident and Chief Financial and Business Officer, joined us in October 2003as Vice President and Chief Business Officer and was promoted in April 2004to Vice President, Chief Financial and Business Officer.  In January 2006, he was promoted toSenior Vice President, Chief Financial and Business Officer.  From 1996 until October 2003, Mr. Poyhonenserved in various sales and marketing positions for Agouron Pharmaceuticals, aPfizer company, most recently as Vice President of National Sales. Prior toholding this position, Mr. Poyhonen served as Vice President of Marketingand Vice President of National Accounts. Mr. Poyhonen is a director of ArdeaBiosciences, Inc., a publicly-held biopharmaceutical company.  Mr. Poyhonen received his B.A. inMarketing from Michigan State University and his M.B.A. from the University ofKansas.

 

**SharonWicker,**Senior Vice President of Commercial Development and Chief StrategyOfficer, joined us in April 2006. From 2003 to 2006, Ms. Wicker held various strategic marketingpositions, most recently as President, Flavor Business Unit at A.M. ToddCompany.  From 1999 to 2003, Ms. Wickerserved as Vice President of Frozen Meals for Heinz North America.  From 1994 to 1999 Ms. Wicker served asVice President and General Manager of the Meals Strategic Business Unit ofConAgra.  From 1984 to 1994 Ms. Wickerheld a variety of marketing and general management positions for General Mills,including assignments as Brand Manager for Cheerios and Betty Crocker desserts.Ms. Wicker received her BS in Food Science and Nutrition from ColoradoState University and her M.B.A. from Michigan State University.

 

**DavidBerger,**Vice President, General Counsel and Corporate Secretary, joined us in January 2008.From early 2003 through 2007 Mr. Berger was responsible for all commercialaspects of legal affairs at Biosite Incorporated, most recently as VicePresident, Legal Affairs.  Prior tojoining Biosite, he was an attorney at Cooley Godward LLP.  Mr. Berger received his J.D. at StanfordLaw School and was granted a B.A. in Economics at the University of California,Berkeley.

 

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**Item1A.  Risk Factors**

 

*You should consider carefully thefollowing information about the risks described below, together with the otherinformation contained in this annual report on Form 10-K and in our otherpublic filings, in evaluating our business. If any of the following risksactually occurs, our business, financial condition, results of operations andfuture growth prospects would likely be materially and adverselyaffected.  In these circumstances, the market price of our common stockwould likely decline.*

 

**Risks Related To OurBusiness**

 

***We are dependent on our product discovery and development collaboratorsfor all of our revenue and we are dependent on our current and any futureproduct discovery and development collaborators to develop and commercializeany flavor ingredients we may discover.***

 

A key element of our strategy is to commercializeour flavor ingredients through product discovery and developmentcollaborations. To date, substantially all of our revenue has been derivedsolely from research and development payments, milestone payments and costreimbursement payments received under our collaborations. Substantially all ofour revenue in the foreseeable future will result from these types of paymentsfrom these collaborations until such time, if ever, that we earn materialroyalties on future sales of consumer products incorporating our flavoringredients.

 

Our agreement, as amended, with Campbell providesfor research and development funding until March 2009 and gives Campbellthe right to terminate the agreement earlier without cause, provided that itpay a specified termination fee if it terminates the agreement prior to March 28,2009. Our agreement with Coca-Cola provides for research and developmentfunding until April 2010 and gives Coca-Cola the right to conclude thecollaborative program earlier for any reason upon payment to us of an earlyconclusion fee.  Our initial agreementwith Nestlé (as amended in April 2005 and April 2008) provides forresearch and development funding through April 2010 and gives Nestlé theright to terminate the agreement earlier without cause on July 18, 2009, October 18,2009 and January 18, 2010 upon 30 days’ written notice.  Our most recent agreement with Nestléregarding the discovery and commercialization of novel flavor ingredients inthe coffee and coffee whitener fields provides for research and developmentfunding through July 2011 and gives Nestlé the right to terminate theagreement earlier without cause, provided that it pay additional specifiedresearch funding if it terminates the agreement prior to July 26,2011.  Our agreement with Cadbury (as amended in July 2008) providesfor research and development funding through July 2009 and gives Cadburythe right to terminate the agreement earlier without cause upon 90 days’written notice.  Our initial agreementwith Ajinomoto provides for research and development funding through March 2009and gives Ajinomoto the right to terminate the agreement without cause providedthat it pay additional specified research funding if it terminates theagreement prior to March 23, 2009. Our most recent agreement with Ajinomoto provides for research anddevelopment funding through October 2009 and gives Ajinomoto the right toterminate the agreement without cause provided that it pay additional specifiedresearch funding if it terminates the agreement prior to October 5,2009.  Our agreement with Solae providesfor research and development funding through April 2010, and gives Solaethe right to terminate the agreement without cause upon 90 days’ prior noticeprovided it pay additional specified research funding if it terminates theagreement prior to April 23, 2010. Our initial agreement with Firmenich permits Firmenich to terminate theagreement without cause upon 90 days written notice on any anniversary of theeffective date of the agreement provided that it pay additional specifiedresearch funding if it terminates prior to December 14, 2010.  Our most recent agreement with Firmenichpermits Firmenich to terminate the agreement without cause upon 90 days writtennotice on any anniversary of the effective date.  If any or all of our material agreements withour collaborators expire or are terminated, our revenue could significantlydecline and if all of our agreements expire or are terminated, our revenuewould be substantially eliminated, which would have a material adverse effecton our business, financial condition and results of operations. Ourcollaborators may not renew their agreements with us or, if they do, they maynot be on terms that are as favorable to us as our current agreements.  For example, our discovery and developmentcollaboration with Kraft Foods Global, Inc. concluded on December 9,2007, one year earlier than the scheduled term of the agreement.

 

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Our current collaboration agreements provide that wewill receive royalties of up to 4% on our collaborators’ sales of retail andfood service products, and up to 5% on our collaborators’ sales of ingredientsupplies containing our flavor ingredients. The actual royalties payable vary by agreement and depend on a number offactors including, for example, the product field, cost of goods savings,degree of flavor enhancement and sales volume of collaborator productsincorporating our flavor ingredients.  Itis possible that our collaborators will not incorporate our flavor ingredientsinto any or all of their products within their exclusive or co-exclusiveproduct fields on a timely basis or at all.

 

We are dependent on our current and any otherpossible future collaborators to commercialize any flavor ingredients that wesuccessfully develop and to provide the sales, marketing and distributioncapabilities required for the success of our business. We have limited or nocontrol over the amount and timing of resources that our current or any futurecollaborators may devote to our programs or potential products. Ourcollaborators may decide not to devote the necessary resources to thecommercialization of our flavor ingredients, or may pursue a competitor’sproduct if our flavor ingredients do not have the characteristics desired bythe collaborator. These characteristics include, among other things,enhancement properties, temperature stability, solubility, taste, cost and anadequate safety profile. If these collaborators fail to conduct theircommercialization, sales and marketing or distribution activities successfullyand in a timely manner, we will earn little or no royalty revenues from ourflavor ingredients and we will not be able to achieve our objectives or build asustainable or profitable business.

 

Our present and any future product discovery anddevelopment collaboration opportunities could be harmed if:

 

·                  our existing or any future collaboratorsterminate their collaboration agreements with us prior to the expiration of theagreements;

·                  we do not achieve our research anddevelopment objectives under our collaboration agreements prior to thetermination of the collaboration periods;

·                  we disagree with our collaborators as to theparties’ respective licensing rights to our flavor ingredients, methods orother intellectual property we develop;

·                  we are unable to manage multiple simultaneouscollaborations;

·                  potential collaborators fail to spend theirresources on research and development or commercialization of our flavoringredients due to general market conditions or for any other reason; or

·                  consolidation in our target markets limitsthe number of potential collaborators.

 

***Our business andoperating results may be adversely affected by unfavorable economic and marketconditions.***

 

Our business depends on ourability to maintain and enter into new collaborative research, development andcommercialization agreements with leading food, beverage and flavor companies.Our arrangements typically require our collaborators to make a significantcommitment of capital and other resources. In most instances these investmentsare discretionary on the part of our collaborators. The recent deterioration ofeconomic conditions may reduce the amount of discretionary investment that ourcurrent and prospective collaborators may be willing to make in our programs.In some instances the result may be that companies elect to defer or delayentering into a collaborative agreement with us, or existing collaborators mayterminate or not renew an existing program when it expires. Therefore, weakeconomic conditions, or a reduction in research and development funding, evenif economic conditions improve, would likely adversely impact our business,operating results and financial condition in a number of ways, including longerbusiness development cycles, unfavorable financial or other commercial terms,and longer development timelines.

 

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***We may not be able to negotiate additional collaboration agreementshaving terms satisfactory to us or at all.***

 

We may not be able to enter into additional productdiscovery and development collaborations due to the exclusive nature of ourcurrent product discovery and development collaborations. Each of our currentcollaboration agreements provides that we will conduct research and developmenton flavor ingredients for use within one or more defined packaged food,beverage and ingredient product fields on an exclusive or co-exclusive basisfor the respective collaborator during the collaborative period specified inthe agreement. In the case of exclusive agreements, or co-exclusive agreementswhere all fields and geographies are granted, we will not be able to enter intoadditional collaborations with any other food, beverage and ingredient companycovering the same product field during the applicable collaborative period. Inaddition, our collaborators’ competitors may not wish to do business with us atall due to our relationship with our collaborators. If we are unable to enterinto additional product discovery and development collaborations, our abilityto sustain or expand our business will be significantly diminished.

 

***We may not be successful in developing flavor ingredients useful forformulation into products.***

 

In order to develop flavor ingredients, we must havefirst identified the correct human taste receptor for the taste of interest anddevelop high-throughput assays to test for compounds that affect the taste ofinterest. If we are not able to identify the correct human taste receptor forthe taste of interest, our assays may not successfully identify compounds thataffect the taste of interest. For example, in the event that SNMX-29 is not theprimary human salt-taste receptor, we may not be able to develop an effectivesalt taste enhancer.  Similarly, we may not succeed in identifying thespecific receptors needed to reduce or block bitter taste in soy-based productsunder our collaboration with Solae. In addition, we may not be successful inthe development of a high-throughput assay to each human taste receptor ofinterest to us. Even if we succeed in the identification of a human tastereceptor of interest to us and develop an appropriate high-throughput assay, wemay not succeed in developing flavor ingredients with the appropriateattributes required for use in successful commercial products. Successfulflavor ingredients require, among other things, appropriate biologicalactivity, including the correct taste property for the product application, anacceptable safety profile, including lack of toxicity or allergenicity, andappropriate physical or chemical properties, including relative levels ofsolubility, stability, volatility and resistance to heat. Our developmentprograms are intended to evaluate these characteristics of novel flavor ingredients.Therefore, until we complete our development of a given novel flavor ingredientwe will not be able to determine whether that flavor ingredient will possessall of the appropriate attributes necessary for commercialization. Successfulflavor ingredients must also be cost-efficient for our collaborators, whichincludes, among other things, the cost to manufacture a flavor ingredient atcommercial scale as well as other costs associated with the reformulation ofproducts that include our flavor ingredients. We have only limited experiencein evaluating these costs and we may not be able to accurately predict whetherour flavor ingredients will be cost-efficient for our current collaborators orpotential future collaborators. We may not be able to develop flavoringredients that meet all of these criteria and possess the appropriateattributes necessary for commercialization. It is possible that flavor ingredients that initially appear to meetthese criteria are later found to fail these criteria or other criteria that welater deem important.  In that case, wemay not commercialize such an ingredient when anticipated, or at all, or thepotential commercial utility for such an ingredient may be more limited than weexpected.

 

***If we or our collaborators are unable to obtain and maintain the************GRASdetermination or other regulatory approval required before certain of ourflavor ingredients can be incorporated into products that are sold, we would beunable to commercialize our flavor ingredients and our business would beadversely affected.***

 

In March 2005, we obtained a FEMA GRAS determination for four ofour savory flavor ingredients.  In November 2008,we obtained a FEMA GRAS determination for one of our sucralose flavoringredients.  Apart from these flavor ingredients,we do not have GRAS determination or other regulatory approval for any otherflavor ingredient at this time. In the United States, the development, sale andincorporation of our flavor ingredients into products are subject to regulationby the FDA and in some instances other government bodies. Obtaining andmaintaining a GRAS determination or other regulatory approval can be costly andtake many years.

 

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Depending on the amount or intended use of aparticular flavor ingredient added to a product and the number of productcategories in which the flavor ingredient will be incorporated, specific safetyassessment protocols and regulatory processes must be satisfied before we orour collaborators can commercially market and sell products containing anyflavor ingredients that we may discover. A key element of our strategy is todevelop flavor ingredients that may be subject to review under the FEMA GRASprocess.  In our experiences with thesavory and sucralose programs, safety studies, preparation and FEMA GRAS reviewhas ranged from 12 to 16 months and cost less than $1 million.  This experience may not be representative ofthe timing and cost for current and future programs.  This approach is less expensive than thealternative of filing a food additive petition with the FDA, approval of whichcan take up to four years. The FEMA GRAS process may take longer than 12 to 16months and cost more than $1 million depending on the properties of theflavor ingredient, and if we elect to perform additional safety studies or ifadditional safety studies are requested by the FEMA Expert Panel or arenecessary to explain unexpected safety study findings. There is a risk that oneor more of our product candidates for which we seek FEMA GRAS determination maynot qualify for a FEMA GRAS determination. This may occur for a variety ofreasons, including the flavor ingredient’s intended use, the amount of theflavor ingredient intended to be added to packaged foods and beverages, thenumber of product categories in which the flavor ingredient will beincorporated, whether the flavor ingredient imparts sweetness, the safety profileof the flavor ingredient and the FEMA Expert Panel’s interpretation of thesafety data. Even if we obtain a GRAS determination with respect to a flavoringredient, the FDA has the ability to challenge such determination, whichcould materially adversely affect our ability to market products on schedule orat all. In the event that a particular flavor ingredient does not qualify forFEMA GRAS determination, we could be required to pursue a lengthy FDA approvalprocess or dedicate our development efforts to alternative ingredients, whichwould further delay commercialization. In addition, laws, regulations or FDApractice governing the regulatory approval process, the availability of theGRAS determination process or the manufacture or labeling of such products, maychange in a manner that could adversely affect our ability to commercializeproducts on schedule or at all.

 

Sales of our flavor ingredients outside of theUnited States will be subject to foreign regulatory requirements, which aresubject to change and inherent uncertainty. In most cases, whether or not aGRAS determination has been obtained, approval of a product by the comparableregulatory authorities of foreign countries must still be obtained prior tomanufacturing or marketing the product in those countries. A GRAS determinationin the United States or in any other jurisdiction does not ensure approval inother jurisdictions because the requirements from jurisdiction to jurisdictionmay vary widely and may change over time. Because of the inherent uncertaintyassociated with the regulatory approval process outside the United States,predicting the outcome or timing of review of any of our submissions to foreignregulatory authorities, present or in the future, is difficult.  Accordingly, our estimates and forecasts forthose submissions and potential approvals may not be accurate.  The process of obtaining foreign approvalscould result in significant delays, difficulties and costs for us and requireadditional safety studies and additional expenses. If we experience delays orif we fail to comply with these regulatory requirements or to obtain andmaintain required approvals, our ability to generate revenue will bediminished.

 

We and our collaborators may not be successful inovercoming these regulatory hurdles, which could result in product launchdelays, unanticipated expenses, termination of collaborations and flavoringredients not being approved for incorporation into consumer products. Inaddition, even after regulatory approval of our ingredients, we may becomeaware of new information that suggests our ingredients are unsuitable forconsumer use, in which case our regulatory approvals may be revoked or we mayelect to voluntarily cease the commercialization of those ingredients.  These consequences would have a materialadverse effect on our business financial condition and results of operations.

 

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***If we or our collaborators are unable to obtain and maintain theregulatory approval required before any high potency sweeteners can beincorporated into products that are sold, we would be unable to commercializeour high potency sweeteners and our business would be adversely affected.***

 

In the United States, the development, sale andincorporation of our high potency sweeteners into products are subject toregulation by the FDA and in some instances other government bodies. Obtainingand maintaining regulatory approval can be costly and take many years.

 

Depending on the amount or intended use of aparticular high potency sweetener added to a product and the number of productcategories in which the high potency sweetener will be incorporated, specificsafety assessment protocols and regulatory processes must be satisfied beforewe or our collaborators can commercially market and sell products containingany high potency sweeteners that we may discover. An element of our strategy isto develop high potency sweeteners that may be subject to review under the FoodAdditive Petition process, which encompasses filing a food additive petitionwith the FDA, approval of which can take up to four years or more and may costup to $7 million or more.  Governmentresource constraints may also slow the review and approval process.  In addition, laws, regulations or FDApractice governing the regulatory approval process, the availability of theFood Additive Petition process or the manufacture or labeling of such products,may change in a manner that could adversely affect our ability to commercializeproducts on schedule or at all.

 

Sales of our high potency sweeteners outside of theUnited States will be subject to foreign regulatory requirements. In mostcases, whether or not FDA approval has been obtained, approval of a product bythe comparable regulatory authorities of foreign countries must still beobtained prior to manufacturing or marketing the product in those countries.FDA approval in the United States or regulatory approval in any otherjurisdiction does not ensure similar approval in other jurisdictions becausethe requirements from jurisdiction to jurisdiction may vary widely. Obtainingforeign approvals could result in significant delays, difficulties and costsfor us and require additional safety studies and additional expenses. If wefail to comply with these regulatory requirements or to obtain and maintainrequired approvals, our ability to generate revenue will be diminished.

 

We and our collaborators may not be successful inovercoming these regulatory hurdles, which could result in product launchdelays, unanticipated expenses, termination of collaborations and high potencysweeteners not being approved for incorporation into consumer products. These consequenceswould have a material adverse effect on our business financial condition andresults of operations.

 

***Even if we or our collaborators receive regulatory approval andincorporate our flavor ingredients into products, those products may never becommercially successful.***

 

Even if we discover and develop flavor ingredientsthat obtain the necessary GRAS determination or other regulatory approval, oursuccess depends to a significant degree upon the commercial success of packagedfood, beverage and ingredient products incorporating those flavor ingredients.If these products fail to achieve or subsequently maintain market acceptance orcommercial viability, our business would be significantly harmed because ourroyalty revenue is dependent upon consumer sales of these products. Inaddition, we could be unable to maintain our existing collaborations or attractnew product discovery and development collaborators. Many factors may affectthe market acceptance and commercial success of any potential productsincorporating flavor ingredients that we may discover, including:

 

·                  health concerns, whether actual or perceived,or unfavorable publicity regarding our flavor ingredients or those of ourcompetitors;

·                  the timing of market entry as compared tocompetitive products;

·                  the rate of adoption of products by ourcollaborators and other companies in the flavor industry; and

·                  any product labeling that may be required bythe FDA or other United States or foreign regulatory agencies for productsincorporating our flavor ingredients.

 

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***We have a history of operating losses and we may not achieve ormaintain profitability.***

 

We have not been profitable and have generatedsubstantial operating losses since we were incorporated in September 1998.We incurred net losses of approximately $26.9 million for the year ended December 31,2008. As of December 31, 2008, we had an accumulated deficit ofapproximately $176.0 million. We expect to incur additional losses for at leastthe next two years. The extent of our future losses will depend, in part, onthe rate of increase in our operating expenses and the rate of growth, if any,in our revenue from our existing and any future product discovery anddevelopment collaborations as well as from other sources that may becomeavailable to us in the future and on the level of our expenses. To date,substantially all of our revenue has come from research and developmentfunding, upfront fees, cost reimbursement and milestone payments under ourproduct discovery and development collaborations. In order for us to generatefurther royalty revenue and become profitable, we must substantially retain ourexisting product discovery and development collaborations and our collaboratorsmust further commercialize products incorporating one or more of our flavoringredients, from which we can derive additional royalty revenues. Our abilityto generate royalty revenue is uncertain and will depend upon our ability tomeet particular research, development and commercialization objectives.

 

***We expect that our results of operations will fluctuate from period toperiod, and this fluctuation could cause our stock price to decline.***

 

Our operating results have fluctuated in the pastand are likely to vary significantly in the future based upon a number offactors, many of which we have little or no control over. We operate in ahighly dynamic industry and future results could be subject to significantfluctuations. These fluctuations could cause us to fail to meet or exceed ourpublished guidance or financial expectations of securities analysts orinvestors, which could cause our stock price to decline rapidly and significantly.Revenue and expenses in future periods may be greater or less than revenue andexpenses in the immediately preceding period or in the comparable period of theprior year. Therefore, period-to-period comparisons of our operating resultsare not necessarily a good indication of our future performance. Some of thefactors that could cause our operating results to fluctuate include:

 

·                  termination of any of our product discoveryand development collaboration agreements;

·                  our ability to discover and develop flavoringredients or the ability of our product discovery and developmentcollaborators to incorporate them into packaged food, beverage and ingredientproducts;

·                  our receipt of milestone payments in anyparticular period;

·                  the ability and willingness of collaboratorsto commercialize products incorporating our flavor ingredients on expectedtimelines, or at all;

·                  our ability to enter into new productdiscovery and development collaborations and technology collaborations or toextend the terms of our existing collaboration agreements and our paymentobligations, expected revenue and other terms of any other agreements of thistype;

·                  our ability, or our collaborators’ ability,to successfully satisfy all pertinent regulatory requirements;

·                  the demand for our collaborators’ productscontaining our flavor ingredients; and

·                  general and industry specific economicconditions, including the current economic and credit crisis, which may affectour collaborators’ research and development expenditures and commercializationefforts.

 

***We may need to obtain additional capital to fund our operations.***

 

If we are unable to successfully commercialize ourflavor ingredients, maintain our existing product discovery and developmentcollaborations or enter into new collaborations, we will likely need to obtainadditional capital or change our strategy to continue our operations. Inaddition, our business and operations may change in a manner that would consumeavailable resources at a greater rate than anticipated. In such event, we mayneed to raise substantial additional capital to, among other things:

 

·                  fund new research, discovery or developmentprograms;

·                  advance additional product candidates intoand through the safety evaluation and regulatory approval process; and

·                  acquire rights to products or productcandidates, technologies or businesses.

 

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If we require additional capital to continue ouroperations, we cannot assure you that additional financing will be available onterms acceptable to us, or at all. In particular, although we have previouslybeen successful in obtaining financing through offerings of our equity securities,there can be no assurance that we will be able to do so in the future,especially given the current economic and credit crisis.  If adequate funds are not available or arenot available on acceptable terms, our ability to fund our operations, takeadvantage of opportunities, identify and develop flavor ingredients, developtechnologies or otherwise respond to competitive pressures could besignificantly limited. In addition, if financing is not available, we may needto alter our strategy or cease operations. In addition, issuances of debt oradditional equity could impact the rights of the holders of our common stock,may dilute our stockholders’ ownership and may impose restrictions on ouroperations. These restrictions could include limitations on additionalborrowing, specific restrictions on the use of our assets as well asprohibitions on our ability to create liens, pay dividends, redeem our stock ormake investments.

 

***If we lose our key personnel or are unable to attract and retainqualified personnel, it could adversely affect our business.***

 

Our success depends to a significant degree upon thecontinued contributions of our executive officers, management and scientificstaff. If we lose the services of one or more of these people and, in particular,Kent Snyder, our President and Chief Executive Officer, or Mark Zoller, Ph.D.,our Executive Vice President of Discovery & Development and ChiefScientific Officer, the relationships we have with our collaborators wouldlikely be negatively impacted and we may be delayed or unable to develop newproduct candidates, commercialize our existing product candidates or achieveour other business objectives, any of which could cause our stock price todecline. Dr. Zoller is currently on a medical leave of absence until earlyJune 2009, although it is possible that his leave could be extended.  We have entered into employment letteragreements with the following executive officers: Kent Snyder, Mark Zoller,Ph.D., John Poyhonen, our Senior Vice President, Chief Financial and BusinessOfficer, Sharon Wicker, our Senior Vice President and Chief Strategy Officerand David Berger, our Vice President, General Counsel and CorporateSecretary.  All of our employees are at-willemployees, which means that either we or the employee may terminate theiremployment at any time. We currently have no key person insurance.

 

In addition, our discovery and development programsdepend on our ability to attract and retain highly skilled scientists,including molecular biologists, biochemists, chemists and engineers. We may notbe able to attract or retain qualified employees in the future due to theintense competition for qualified personnel among technology-based businesses,particularly in the San Diego area. We also face competition from universitiesand public and private research institutions in recruiting and retaining highlyqualified scientific and management personnel. If we are not able to attractand retain the necessary personnel to accomplish our business objectives, wemay experience constraints that will adversely affect our ability to meet thedemands of our current or any future product discovery and developmentcollaborators in a timely fashion or to support our independent discovery anddevelopment programs.

 

***We may encounter difficulties managing our growth, which couldadversely affect our business.***

 

Our strategy includes entering into and working onsimultaneous flavor ingredient discovery and development programs acrossmultiple markets. We increased the number of our full-time employees from sevenon December 31, 1999 to 129 on December 31, 2008 and we may continueto grow to meet our strategic objectives. If our growth continues, it willcontinue to place a strain on us, our management and our resources. Our abilityto effectively manage our operations, growth and various projects requires usto continue to improve our operational, financial and management controls,reporting systems and procedures and to attract and retain sufficient numbersof talented employees. We may not be able to successfully implement these taskson a larger scale and, accordingly, we may not achieve our research,development and commercialization goals. If we fail to improve our operational, financial and managementinformation systems, or fail to effectively monitor or manage our new andfuture employees or our growth, our business would suffer significantly. Inaddition, no assurance can be made that we will be able to maintain adequatefacilities to house our staff, conduct our research or achieve our businessobjectives.

 

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***We will rely on third parties tomanufacture our flavor ingredients on a commercial scale.***

 

We do not have experience in manufacturing, nor dowe have the resources or facilities to manufacture, flavor ingredients on acommercial scale. Therefore, the commercialization of our flavor ingredientswill depend in part on our or our collaborators’ ability to contract withthird-party manufacturers of our flavor ingredients on a large scale, at acompetitive cost, with the specified quality and in accordance with relevantfood, beverage and ingredient regulatory requirements. Any such third-partymanufacturers may encounter manufacturing difficulties at any time that couldresult in delays in the commercialization of potential flavor ingredients. Ourinability to find capable third-party manufacturers or to enter into agreementson acceptable terms with third-party manufacturers could delaycommercialization of any products we may develop and may harm our relationshipswith our existing and any future product discovery and developmentcollaborators and our customers. Moreover, if we are required to change fromone third-party manufacturer to another for any reason, the commercializationof our products may be delayed further. In addition, if third-partymanufacturers fail to comply with the FDA’s good manufacturing practice regulationsor similar regulations in other countries, then we may be subject to adverseregulatory action including product recalls, warning letters and withdrawal ofour products, or our collaborators’ or customers’ products, from the market.

 

Further, because our flavor ingredients areregulated as food products under the FD&C Act, we and the third partieswith which we collaborate or contract to manufacture, process, pack, import orotherwise handle our products or our product ingredients, may be required tocomply with certain registration, prior notice submission, recordkeeping andother regulatory requirements. Failure of any party in the chain ofdistribution to comply with any applicable requirements under the FD&C Actor the FDA’s implementing regulations, or similar regulations in othercountries, may adversely affect the manufacture and/or distribution of ourproducts in commerce.

 

***If we acquire products, technologies or other businesses, we will incura variety of costs, may have integration difficulties and may experiencenumerous other risks that could adversely affect our business.***

 

If appropriate opportunities become available, wemay consider acquiring businesses, technologies or products that we believe area strategic fit with our business. We currently have no commitments oragreements with respect to, and are not actively seeking, any materialacquisitions. We have limited experience in identifying acquisition targets,successfully acquiring them and integrating them into our current infrastructure.We may not be able to successfully integrate any businesses, products,technologies or personnel that we might acquire in the future without asignificant expenditure of operating, financial and management resources, if atall. In addition, future acquisitions might be funded by issuances ofadditional debt or equity, which could impact your rights as a holder of ourcommon stock and may dilute your ownership percentage. Any of the foregoingcould have a significant adverse effect on our business, financial conditionand results of operations.

 

**Risks Related To OurIndustry**

 

***Our ability to compete in the flavor ingredient market may decline ifwe do not adequately protect our proprietary technologies.***

 

Our success depends in part on our ability to obtainand maintain intellectual property that protects our technologies and flavoringredients. Patent positions may be highly uncertain and may involve complexlegal and factual questions, including the ability to establish patentabilityof sequences relating to taste receptors, proteins, chemical synthesistechniques, compounds and methods for using them to modulate taste for which weseek patent protection. No consistent standard regarding the allowability orenforceability of claims in many of our pending patent applications has emergedto date. As a result, we

 

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cannot predict the breadth of claims that will ultimately be allowed inour patent applications, if any, including those we have in-licensed or theextent to which we may enforce these claims against our competitors. The degreeof future protection for our proprietary rights is therefore highly uncertain andwe cannot assure you that:

 

·                  we were the first to file patent applicationsor to invent the subject matter claimed in patent applications relating to thetechnologies upon which we rely;

·                  others will not independently develop similaror alternative technologies or duplicate any of our technologies;

·                  others did not publicly disclose our claimedtechnology before we conceived the subject matter included in any of our patentapplications;

·                  any of our patent applications will result inissued patents;

·                  any of our patent applications will notresult in interferences or disputes with third parties regarding priority ofinvention;

·                  any patents that have issued or may be issuedto us, our collaborators or our licensors will provide a basis for commerciallyviable products or will provide us with any competitive advantages or will notbe challenged by third parties;

·                  we will develop additional proprietarytechnologies that are patentable;

·                  the patents of others will not have anadverse effect on our ability to do business; or

·                  new proprietary technologies from thirdparties, including existing licensors, will be available for licensing to us onreasonable commercial terms, if at all.

 

In addition, patent law outside the United States isuncertain and in many countries intellectual property laws are undergoingreview and revision. The laws of some countries do not protect intellectualproperty rights to the same extent as domestic laws. It may be necessary oruseful for us to participate in opposition proceedings to determine thevalidity of our competitors’ patents, litigation to enforce our or our licensedintellectual property against others or to defend the validity of any of our orour licensors’ future patents, which could result in substantial costs and woulddivert our efforts and attention from other aspects of our business.  We cannot be certain of the outcome of anysuch proceedings or litigation.

 

Technologies licensed to us by others, orin-licensed technologies, are important to our business. In particular, wedepend on high-throughput screening technologies that we licensed from AuroraBiosciences, technology related to certain taste receptor sequences that welicense from the University of California and others and technology related tocompound libraries that we license from third parties. In addition, we may inthe future acquire rights to additional technologies by licensing such rightsfrom existing licensors or from third parties. Such in-licenses may be costly.Also, we generally do not control the patent prosecution, maintenance orenforcement of in-licensed technologies. Accordingly, we are unable to exercisethe same degree of control over this intellectual property as we do over ourinternally developed technologies. Moreover, some of our academic institutionlicensors, collaborators and scientific advisors have rights to publish dataand information to which we have rights. If we cannot maintain theconfidentiality of our technologies and other confidential information inconnection with our collaborations, our ability to protect our proprietaryinformation or obtain patent protection in the future may be impaired, whichcould have a significant adverse effect on our business, financial conditionand results of operations.

 

***Many of the patent applications we and our licensors have filed havenot yet been substantively examined and may not result in patents being issued.***

 

Many of the patent applications filed by us and ourlicensors were filed recently with the United States Patent and TrademarkOffice and most have not been substantively examined and may not result inpatents being issued. Some of these patent applications claim sequences thatwere identified from different publicly available sequence information sourcessuch as the High-Throughput Genomic Sequences division of GenBank. It isdifficult to predict whether any of our or our licensors’ applications willultimately be found to be patentable or, if so, to predict the scope of anyallowed claims. In addition, the disclosure in our or our licensors’ patentapplications, particularly in respect of the utility of our claimed inventions,may not be

 

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sufficient to meet thestatutory requirements for patentability in all cases. Furthermore, recentchanges in rules promulgated by the United States Patent and TrademarkOffice may adversely affect the patentability of inventions claimed in our andour licensors’ patent applications.  As aresult, it is difficult to predict whether any of our or our licensors’applications will be allowed, or, if so, to predict the scope of any allowedclaims or the enforceability of the patents. Even if enforceable, others may beable to design around any patents or develop similar technologies that are notwithin the scope of such patents. Our and our licensors’ patent applicationsmay not issue as patents that will provide us with any protection orcompetitive advantage.

 

***Disputes concerning the infringement or misappropriation of ourproprietary rights or the proprietary rights of others could be time consumingand extremely costly and could delay our research and development efforts.***

 

Our commercial success, ifany, will be significantly harmed if we infringe the patent rights of thirdparties or if we breach any license or other agreements that we have enteredinto with regard to our technology or business. Our success will also depend, in part, on our ability to prevent othersfrom infringing our patent rights.

 

We are aware of other companies and academicinstitutions that have been performing research in the areas of tastemodulation and flavor ingredients. In particular, other companies, academicinstitutions and inventor applicants have announced that they have conductedtaste-receptor or ion channel research and have published data on tastereceptor sequence information and taste receptors or filed patent applicationsor obtained patent protection on taste modulation or taste receptors and theiruses, including Ajinomoto, California Institute of Technology, Cargill,Dendreon, Duke University, Firmenich, the German Institute of Human Nutrition,Givaudan SA, International Flavors & Fragrances Inc., JohannesGutenberg University, Monell Chemical Senses Corp., Mount Sinai School ofMedicine, Nestlé, Novartis, NutraSweet, Nutrinova GMBH, Pfizer, Inc.,Redpoint Bio, Sloan Kettering, Symrise, Tate & Lyle, The ScrippsResearch Institute, Unilever, the University of California, the University ofWisconsin, Virginia Commonwealth University and Wissenbach. To the extent anyof these companies, academic institutions or inventor applicants currentlyhave, or obtain in the future, broad patent claims, such patents could blockour ability to use various aspects of our discovery and development process andmight prevent us from developing or commercializing newly discovered flavoringredients or otherwise conducting our business. The University of California,for example, claims certain patent rights relating to the coexpression of T1Rreceptors that may not have been licensed to us. While our technology isfocused on the use of human T1R receptors, we cannot assure you that it doesnot infringe such patent rights.  In such event, if we are not able toamend our license with the University of California to include such patentrights and our technology is found to interfere with or infringe such patentrights, our business, financial condition and results of operations couldsuffer a significant adverse effect.  Inaddition, it is possible that some of the flavor ingredients that arediscovered using our technology may not be patentable or may be covered byintellectual property of third parties.

 

We are not currently a partyto any litigation, interference, opposition, protest, reexamination, reissue orany other potentially adverse governmental, ex parte or inter-party proceedingwith regard to our patent or trademark positions.  However, the life sciencesand other technology industries are characterized by extensive litigationregarding patents and other intellectual property rights. Many life sciencesand other technology companies have employed intellectual property litigationas a way to gain a competitive advantage. We may become involved in litigation,interference proceedings, oppositions, reexamination, protest or otherpotentially adverse intellectual property proceedings as a result of allegedinfringement by us of the rights of others or as a result of priority ofinvention disputes with third parties. Similarly, we may initiate proceedings to enforce our patent rights andprevent others from infringing our or our licensed intellectual propertyrights.  In any of these circumstances,we might have to spend significant amounts of money, time and effort defendingour position and we may not be successful. In addition, any claims relating tothe infringement of third-party proprietary rights or proprietarydeterminations, even if not meritorious, could result in costly litigation,lengthy governmental proceedings, divert management’s attention and resources,or require us to enter into royalty or license agreements that are notadvantageous to us.

 

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Should any person have filed patent applications orobtained patents that claim inventions also claimed by us, we may have toparticipate in an interference proceeding declared by the relevant patentregulatory agency to determine priority of invention and, thus, the right to apatent for these inventions in the United States. Such a proceeding couldresult in substantial cost to us even if the outcome is favorable. Even ifsuccessful on priority grounds, an interference action may result in loss ofclaims based on patentability grounds raised in the interference action.Litigation, interference proceedings or other proceedings could divertmanagement’s time and efforts. Even unsuccessful claims could result insignificant legal fees and other expenses, diversion of management’s time anddisruption in our business. Uncertainties resulting from initiation andcontinuation of any patent proceeding or related litigation could harm ourability to compete and could have a significant adverse effect on our business,financial condition and results of operations.

 

An adverse ruling arising out of any intellectualproperty dispute, including an adverse decision as to the priority of ourinventions, could undercut or invalidate our intellectual property position. Anadverse ruling could also subject us to significant liability for damages,including possible treble damages, prevent us from using technologies ordeveloping products, or require us to negotiate licenses to disputed rightsfrom third parties. Although patent and intellectual property disputes in thetechnology area are often settled through licensing or similar arrangements,costs associated with these arrangements may be substantial and could includelicense fees and ongoing royalties. Furthermore, necessary licenses may not beavailable to us on satisfactory terms, if at all. Failure to obtain a licensein such a case could have a significant adverse effect on our business,financial condition and results of operations.

 

***If we are unable to protect our trade secrets and other proprietaryinformation, we could lose any competitive advantage we may have, which couldadversely affect our business.***

 

We rely in part on trade secret protection for ourconfidential and proprietary information, know how and processes. Our policy isto execute proprietary information and invention agreements with our employeesand consultants upon the commencement of an employment or consultingrelationship. These agreements generally require that all confidentialinformation developed by the individual or made known to the individual by usduring the course of the individual’s relationship with us be kept confidentialand not be disclosed to third parties. These agreements also generally providethat inventions conceived by the individual in the course of their employmentshall be our exclusive property. Similarly, in the course of our collaborationsor in the negotiation of potential collaborations we often discloseconfidential and proprietary information under written agreements that obligatethose third parties to keep our information confidential and to use ourconfidential information only for the purposes that we specify. There can be noassurance that we will be able to effectively enforce these agreements or thatproprietary information is our exclusive property. There can be no assurancethat the subject proprietary information will not be disclosed, that otherswill not independently develop substantially equivalent proprietary informationand techniques or otherwise gain access to our trade secrets or that we canmeaningfully protect our trade secrets. Costly and time-consuming litigationcould be necessary to enforce and determine the scope of our proprietaryrights, and failure to obtain or maintain trade secret protection couldadversely affect our competitive business position.

 

***Many potential competitors, including those who have greater resourcesand experience than we do, may develop products or technologies that make oursobsolete or noncompetitive.***

 

The life sciences and other technology industriesare characterized by rapid technological change, and the area of sensory ortaste receptor research is a rapidly evolving field. Our future success willdepend on our ability to maintain a competitive position with respect totechnological advances. Technological developments by others may result in ourflavor ingredients and technologies becoming obsolete.

 

In particular, we face substantial competition fromcompanies pursuing the commercialization of products and services relevant totaste using more traditional methods for the discovery of flavor ingredients,or for the reduction of salt, sugar, MSG or bitter taste. These competitorsinclude leading flavor companies, such as Firmenich, Givaudan SA, InternationalFlavors & Fragrances Inc., Symrise and

 

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Takasago. These companies provide flavors and other products, such asoils, extracts and distillates, to consumer products companies for use in awide variety of products including foods, beverages, confectionaries, dairyproducts and pharmaceuticals. Competitors currently developing or marketinghigh potency sweeteners include Ajinomoto, BRAIN AG (or Biotechnology Researchand Information Network AG), Cargill, Natur Research Ingredients, Nutrasweet,Nutrinova GMBH, Symrise and Tate & Lyle. Competitors currentlydeveloping or marketing menthol or cooling agents include Jindal Drugs, Mentha &Allied, Sharp Menthol, Symrise, Takasago and Millenium SpecialtyChemicals.  We currently compete and will continue to compete in thefuture with these companies in collaborating with and selling flavor productsand technologies to manufacturers of packaged food, beverage and ingredientproducts. Many of these companies have substantially greater capital resources,research and development resources and experience, manufacturing capabilities,regulatory expertise, sales and marketing resources, established relationshipswith consumer products companies and production facilities.

 

Savory flavor enhancers, particularly IMP, arecommercially available, and we will compete with the companies that producethese flavors. IMP is widely available and is a generally accepted foodadditive by the packaged food, beverage and ingredient industries. As a result,our existing and future collaborators may choose to incorporate IMP or similarsavory flavor enhancers into their packaged food, beverage and ingredientproducts instead of our savory flavor ingredients.  We may compete withbitter masking or bitter blocking compounds, such as AMP.  We may also compete with known methods forreducing sodium, such as the use of potassium chloride in combination withflavors and masking agents.  In addition,we may compete with existing cooling agents, such as menthol and WS-3, that arecurrently in use.

 

We may in the future face competition from lifesciences and other technology companies and other commercial enterprises. Theseentities engage as we do in biotechnology, biology or chemistry research andcould apply this technology to the discovery and development of flavor ingredients.We are aware of one other company, Redpoint Bio, that is involved in researchon sweetness potentiators, salt substitutes and bitter blockers, specificallyAMP. We cannot guarantee that products developed as a result of ourcompetitors’ existing or future collaborations will not compete with our flavoringredients.

 

Universities and public and private researchinstitutions are also potential competitors. While these organizationsprimarily have educational objectives, they may develop proprietary technologiesrelated to the sense of taste or secure patent protection that we may need forthe development of our technologies and products. We may attempt to licensethese proprietary technologies, but these licenses may not be available to uson acceptable terms, if at all.

 

Our competitors, either alone or with theircollaborative partners, may succeed in developing technologies or discoveringflavor ingredients that are more effective, safer, more affordable or moreeasily commercialized than ours, and our competitors may obtain intellectualproperty protection or commercialize products sooner than we do. Developmentsby others may render our product candidates or our technologies obsolete. Inaddition, our current product discovery and development collaborators are notprohibited from entering into research and development collaboration agreementswith third parties in any product field. Our failure to compete effectivelywould have a significant adverse effect on our business, financial conditionand results of operations.

 

***We may be sued for product liability and exposed to other productsafety-related risks, which could adversely affect our business and harm ourreputation.***

 

Because our business strategy involves thedevelopment and sale by our collaborators of commercial products incorporatingour flavor ingredients, we may be sued for product liability. Productsincorporating our flavor ingredients are also subject to risks such as productcontamination or spoilage, product tampering or other adulteration.  From time to time we receive reports ofobserved effects after individuals taste solutions or products that includenovel flavor ingredients that we are testing or developing, including reportssuch as irritation of the mouth, tingling of the tongue, lips or gums, andmodulation or loss of taste sensation. Our practice is to track reports of anyobserved effects and, in particular, to evaluate whether any adverse effect maybe related to our novel flavor ingredient or whether another cause isdeterminable. In some instances, these effects may be observed only at higherlevels of use or exposure, in which case we

 

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may elect to proceed with development, and subsequentcommercialization, of a novel flavor ingredient at use levels that we believeare appropriate for only a subset of all potential applications. Nevertheless,we may be held liable if any flavor ingredient we test, develop orcommercialize, or any product our collaborators test, develop or commercializethat incorporates any of our flavor ingredients, causes injury or illness or isfound otherwise unsuitable during product testing, manufacturing, marketing,sale or consumer use. In addition, the safety studies we must perform and theregulatory approvals we must obtain prior to incorporating our flavoringredients into a commercial product will not protect us from any suchliability.

 

Any alleged illness or injury associated with any ofour flavor ingredients, product defect, product liability judgment or productrecall may negatively impact our financial results depending on the reaction ofour collaborators, scope, competitive reaction and consumer attitudes.  Even if such an allegation or productliability claim lacks merit, cannot be substantiated, is unsuccessful or is notfully pursued, the negative publicity surrounding any assertion that our flavoringredients or products that incorporate our flavor ingredients caused illness,injury or death could adversely affect our reputation with existing andpotential collaborators and licensees and our corporate image and could cause adecline in our stock price.

 

Our product liability insurance may not fully coverour potential liabilities associated with the sale of commercial productsincorporating any of our flavor ingredients. Inability to obtain sufficientinsurance coverage to protect against potential product liability claims couldprevent or inhibit the commercialization of products developed by us or ourproduct discovery and development collaborators. We may be obligated toindemnify our product discovery and development collaborators for productliability or other losses they incur as a result of our flavor ingredients. Anyindemnification we receive from such collaborators for product liability thatdoes not arise from our flavor ingredients may not be sufficient to satisfy ourliability to injured parties. If we are sued for any injury caused by our flavoringredients or products incorporating our flavor ingredients, our liabilitycould exceed our total assets.

 

***We use hazardous materials. Any claims relating to improper handling,storage or disposal of these materials could be time consuming and costly.***

 

Our discovery and development process requires ouremployees to routinely handle hazardous chemical, radioactive and biologicalmaterials. Our operations also produce hazardous waste products. Federal, stateand local laws and regulations govern the use, manufacture, storage, handlingand disposal of these materials. As a result of the increase in size of ouroperations, we are now classified as a large quantity generator of hazardouswaste. This classification may result in increased scrutiny of our operationsby the Environmental Protection Agency. Compliance with applicableenvironmental laws and regulations may be expensive, and current or futureenvironmental regulations may impair our discovery and development efforts.

 

In addition, we cannot entirely eliminate the riskof accidental contamination or discharge and any resultant injury from thesematerials. Our insurance policies have limited coverage for damages or cleanupcosts related to hazardous waste disposal or contamination. We may be forced tocurtail operations or be sued for any injury or contamination that results fromour use or the use by others of these materials, and our liability may exceedour total assets.

 

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**Risks Related To Our Common Stock**

 

***The price of our common stock is volatile.***

 

The market prices forsecurities of biotechnology companies historically have been highly volatile,and the market has from time to time experienced significant price and volumefluctuations that are unrelated to the operating performance of particularcompanies. Since our initial public offering in June 2004, the price ofour common stock has ranged from approximately $2 per share to approximately$23 per share. The market price of our common stock may fluctuate in responseto many factors, including:

 

·                  developments concerning our collaborativeagreements;

·                  delays in commercialization of our flavoringredients;

·                  results of safety evaluation of our flavoringredients;

·                  developments related to the United States andinternational regulatory approval of our products;

·                  results of consumer acceptance testing of ourflavor ingredients by our collaborators;

·                  announcements of technological innovations byus or others;

·                  the discovery of a product defect or thecommencement of a product recall;

·                  an allegation of illness or injury relatingto our flavor ingredients, whether meritorious or not, or any product liabilityjudgment;

·                  developments in patent or other proprietaryrights;

·                  changes in our management, key personnel ormembers of our Board of Directors;

·                  future sales of our common stock by existingstockholders;

·                  comments by securities analysts;

·                  general market conditions, including thecurrent economic and credit crisis;

·                  fluctuations in our operating results;

·                  government regulation;

·                  failure of any of our flavor ingredients, ifapproved, to achieve commercial success; and

·                  public concern as to the safety of our flavoringredients.

 

***Anti-takeover provisions in our charter documents and under Delawarelaw may make an acquisition of us more complicated and the removal andreplacement of our directors and management more difficult.***

 

Provisions of our amended and restated certificateof incorporation and bylaws, as well as provisions of Delaware law, could makeit more difficult for a third party to acquire us, even if doing so wouldbenefit our stockholders. These provisions may also make it difficult forstockholders to remove and replace our board of directors and management. Theseprovisions:

 

·                  authorize the issuance of “blank check”preferred stock by our board of directors, without stockholder approval, whichcould increase the number of outstanding shares and prevent or delay a takeoverattempt;

·                  limit who may call a special meeting of stockholders;

·                  prohibit stockholder action by writtenconsent, thereby requiring all stockholder actions to be taken at a meeting ofour stockholders; and

·                  establish advance notice requirements fornominations for election to the board of directors or for proposing mattersthat can be acted upon at stockholder meetings.

 

In addition, the requirements of Section 203 ofthe Delaware General Corporation Law may discourage, delay or prevent a thirdparty from acquiring us.

 

***Our shareholder rights plan may hinder or prevent change of controltransactions.***

 

Our shareholder rights plans may discouragetransactions involving an actual or potential change in our ownership.  In addition, our board of directors may issueshares of preferred stock without any further action by you.  Such issuances may have the effect ofdelaying or preventing a change in our ownership.  If changes in our ownership are discouraged,delayed or prevented, it would be more difficult for our current board ofdirectors to be removed and replaced, even if you and other stockholdersbelieve such actions are in the best interests of us and our stockholders.

 

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***We have never paid cash dividends on our capital stock and we do notanticipate paying dividends in the foreseeable future.***

 

We have paid no cash dividends on any of ourclasses of capital stock to date, and we currently intend to retain our futureearnings, if any, to fund the development and growth of our business. Inaddition, the terms of any future debt or credit facility may preclude us frompaying any dividends. As a result, capital appreciation, if any, of our commonstock will be your sole source of potential gain for the foreseeable future.

 

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**Item 1B.   *Unresolved Staff Comments***

 

None.

 

**Item 2.    *Properties***

 

We currently lease approximately 65,000 square feetof laboratory and office space at 4767 Nexus Center Drive, San Diego,California, 92121.  Our lease for thisfacility expires on February 28, 2017. Our current monthly leaseobligation for rent is approximately $210,000. We are responsible for expensesassociated with the use and maintenance of the building, such as utilities andcommon area maintenance. These costs will vary each month, and we expect thatthese costs will be approximately $100,000 per month.

 

We believe that our facilities are adequate to meetour business requirements for the near-term and that additional space will beavailable on commercially reasonable terms, if required.

 

**Item 3.    *Legal Proceedings***

 

We are not a party to any material legal proceedingsat this time.

 

**Item 4.    *Submission of Matters to a Vote of Security Holders***

 

No matters were submitted to a vote of our securityholders during the quarter ended December 31, 2008.

 

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** **

**PART II**

 

**Item 5.    *Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities***

 

**Common Stock Market Price**

 

Our common stock commenced trading on the NASDAQStock Market on June 22, 2004 under the symbol “SNMX.” The following tablesets forth the high and low sales prices per share of our common stock astraded on the NASDAQ Stock Market for the periods indicated.

 
| **Fiscal 2008 Quarter ended** | ** ** | **March 31,  2008** | ** ** | **June 30,  2008** | ** ** | **September  30, 2008** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| High                                         |       | $                        | 7.95       |                    | $          | 6.86                         |       | $                           | 5.76       |   | $ | 5.03 |   |
| Low                                          |       | $                        | 4.62       |                    | $          | 4.35                         |       | $                           | 3.66       |   | $ | 1.80 |   |

 
| **Fiscal 2007 Quarter ended** | ** ** | **March 31,  2007** | ** ** | **June 30,  2007** | ** ** | **September  30, 2007** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------|------------|--------------------------|------------|-------------------------|------------|------------------------------|------------|-----------------------------|------------|
| High                                         |       | $                        | 14.85      |                    | $          | 16.36                        |       | $                           | 14.00      |   | $ | 12.40 |   |
| Low                                          |       | $                        | 11.26      |                    | $          | 11.89                        |       | $                           | 10.21      |   | $ | 6.29 |   |

 

The last sale price for our common stock as reportedby the NASDAQ Stock Market on January 31, 2009 was $3.55 per share.  As of January 31, 2009, there wereapproximately 70 shareholders of record of our common stock.

 

We have never declared or paid any cash dividends toour shareholders. We do not presently plan to pay cash dividends in theforeseeable future and intend to retain any future earnings for reinvestment inour business.

 

Information about our equity compensation plans isincluded in Item 12 of Part III of this annual report.

 

**Repurchases of Equity Securities**

 

There were no repurchasesof equity securities in the fourth quarter of 2008.

 

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**Performance Measurement Comparison (1)**

 

The following graph showsa comparison of the 54-month total cumulative returns of an investment of $100in cash in (i) our common stock on June 22, 2004, the first tradingdate following our initial public offering, (ii) the Nasdaq CompositeIndex, U.S. Companies on May 31, 2004 and (iii) the NasdaqBiotechnology Index on May 31, 2004. The comparisons in the graph are required by the SEC and are notintended to forecast or be indicative of the possible future performance of ourcommon stock.  The graph assumes that alldividends have been reinvested (to date, we have not declared any dividends).

 

**COMPARISON OF 54 MONTH CUMULATIVE TOTAL RETURN***

Among Senomyx, Inc., The NASDAQ Composite Index

And The NASDAQ Biotechnology Index

 

 

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*$100 invested on 6/22/04 in stock & 5/31/04 inindex-including reinvestment of dividends.

Fiscal year ending December 31.

 

(1) Thissection is not “soliciting material,” is not deemed “filed” with the SEC, isnot subject to the liabilities of Section 18 of the Securities ExchangeAct of 1934, as amended, and is not to be incorporated by reference in any ofour filings under the Securities Act of 1933, as amended, or the SecuritiesExchange Act of 1934, as amended, whether made before or after the date hereofand irrespective of any general incorporation language in any such filing.

 

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**Item 6.    *Selected Financial Data***

 

The Statement of OperationsData and Balance Sheet Data presented below should be read in conjunction withItem 7, Management’s Discussion and Analysis of Financial Condition andResults of Operations, and Item 8, Financial Statements and Supplementary Dataincluded in this annual report on Form 10-K.  Amounts are in thousands, except share andper share amounts.

 
| ** **                                                       | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Statements of Operations Data:**                               |       |                                        |       |   |   |   |   |   |   |   |   |
| Revenues:                                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Development revenue                                              |       | $                                           | 16,819     |   | $ | 18,197 |   | $ | 12,230 |   | $ | 9,385 |   | $ | 8,347 |   |
| Commercial revenue                                               |       | 347                                         |       | 23 |   | — |   | — |   | — |   |
| Total revenues                                                   |       | 17,166                                      |       | 18,220 |   | 12,230 |   | 9,385 |   | 8,347 |   |
| Operating expenses:                                              |       |                                        |       |   |   |   |   |   |   |   |   |
| Research and development                                         |       | 31,800                                      |       | 29,874 |   | 25,393 |   | 20,330 |   | 18,318 |   |
| General and administrative                                       |       | 13,555                                      |       | 13,572 |   | 13,735 |   | 10,229 |   | 10,178 |   |
| Total operating expenses                                         |       | 45,355                                      |       | 43,446 |   | 39,128 |   | 30,559 |   | 28,496 |   |
| Loss from operations                                             |       | (28,189                                     | )          | (25,226 | ) | (26,898 | ) | (21,174 | ) | (20,149 | ) |
| Interest income                                                  |       | 1,255                                       |       | 3,395 |   | 3,841 |   | 1,344 |   | 435 |   |
| Net loss                                                         |       | $                                           | (26,934    | ) | $ | (21,831 | ) | $ | (23,057 | ) | $ | (19,830 | ) | $ | (19,714 | ) |
| Basic and diluted net loss per share(1):                         |       |                                        |       |   |   |   |   |   |   |   |   |
| Historical                                                       |       | $                                           | (0.88      | ) | $ | (0.72 | ) | $ | (0.77 | ) | $ | (0.77 | ) | $ | (1.40 | ) |
| Pro forma                                                        |       |                                        |       |   |   |   |   |   |   | $ | (0.89 | ) |
| Shares used to compute basic and diluted  net loss per share(1): |       |                                        |       |   |   |   |   |   |   |   |   |
| Historical                                                       |       | 30,602,481                                  |       | 30,326,768 |   | 29,809,854 |   | 25,916,229 |   | 14,040,727 |   |
| Pro forma                                                        |       |                                        |       |   |   |   |   |   |   | 22,143,380 |   |

 

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(1)          Please see Note 1 to our financial statements for an explanationof the method used to calculate the historical net loss per share and thenumber of shares used in the computation of the per share amounts.  The pro forma basic and diluted net loss pershare gives effect to the conversion of our convertible preferred stock intoshares of common stock as if converted at the date of original issuance.

 

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| ** **                                                 | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Balance Sheet Data:**                                    |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents and investments  available-for-sale |       | $                                     | 40,106     |   | $ | 62,624 |   | $ | 74,104 |   | $ | 83,813 |   | $ | 40,847 |   |
| Working capital                                            |       | 31,869                                |       | 51,977 |   | 65,455 |   | 80,178 |   | 36,841 |   |
| Total assets                                               |       | 54,466                                |       | 79,249 |   | 90,182 |   | 88,531 |   | 43,802 |   |
| Accumulated deficit                                        |       | (176,048                              | )          | (149,114 | ) | (127,283 | ) | (104,226 | ) | (84,396 | ) |
| Total stockholders’ equity                            |       | 36,940                                |       | 56,627 |   | 69,477 |   | 82,445 |   | 38,373 |   |
|                                                            |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Item 7.    *Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

 

*Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with our Financial Statements and the relatedNotes to Financial Statements in Item 8, “Financial Statements andSupplementary Data” in this annual report on Form 10-K.*

 

*Certain**statements contained inthis annual report on Form 10-K, including statements regarding thedevelopment, growth and expansion of our business, our intent, belief orcurrent expectations, primarily with respect to our future operatingperformance, and the products we expect to offer and other statements regardingmatters that are not historical facts, are “forward-looking statements” withinthe meaning of Section 27A of the Securities Act and Section 21E ofthe Securities Exchange Act of 1934, as amended, and are subject to the “safeharbor” created by these sections. Future filings with the SEC, future pressreleases and future oral or written statements made by us or with our approval,which are not statements of historical fact, may also contain forward-lookingstatements. Because such statements include risks and uncertainties, many ofwhich are beyond our control, actual results may differ materially from thoseexpressed or implied by such forward-looking statements. Some of the factorsthat could cause actual results to differ materially from those expressed orimplied by such forward-looking statements can be found under the caption “RiskFactors” and elsewhere in this annual report on Form 10-K.  Readers are cautioned not to place unduereliance on forward-looking statements. The forward-looking statements speakonly as of the date on which they are made, and we undertake no obligation toupdate such statements to reflect events that occur or circumstances that existafter the date on which they are made.*

 

**Overviewand Recent Developments**

 

We are a leading companyfocused on using proprietary taste receptor-based assays and screeningtechnologies to discover and develop novel flavors, flavor enhancers and tastemodulators, which we refer to as flavor ingredients, for the packaged food,beverage and ingredient industries. We believe our flavor ingredients willenable packaged food, beverage and ingredient companies to improve thenutritional profile of their products while maintaining or enhancing taste andgenerating cost of goods savings. We license our flavor ingredients to ourcollaborators on an exclusive or co-exclusive basis, which we believe willprovide these companies with a competitive advantage. We have product discoveryand development collaborations with seven of the world’s leading packaged food,beverage and ingredient companies: Ajinomoto, Cadbury, Campbell, Coca-Cola,Firmenich, Nestlé, and Solae. We currently anticipate that we will derive allof our revenues from existing and future collaborations. Depending upon the collaboration,our collaboration agreements provide for upfront fees, research and developmentfunding, reimbursement of certain regulatory costs, milestone payments basedupon our achievement of research or development goals and, in the event ofcommercialization, commercialization milestones, minimum periodic royalties androyalties on sales of consumer products incorporating our flavor ingredients.Senomyx’s principal current programs focus on the development of savory, sweetand salt flavor enhancers, high potency sweeteners, bitter blockers and coolingagents.

 

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We have incurred significantlosses since our inception in 1998 and, as of December 31, 2008 ouraccumulated deficit was $176.0 million. We expect to incur additional losses over at least the next two years aswe continue to develop flavor ingredients. Our results of operations have fluctuated from period to period andlikely will continue to fluctuate substantially in the future based upon:

 

·                  terminationof any of our product discovery and development collaboration agreements;

·                  ourability to discover and develop flavor ingredients or the ability of ourproduct discovery and development collaborators to incorporate them intopackaged food, beverage and ingredient products;

·                  ourreceipt of milestone payments in any particular period;

·                  theability and willingness of collaborators to commercialize productsincorporating our flavor ingredients on expected timelines, or at all;

·                  ourability to enter into new product discovery and development collaborations andtechnology collaborations or to extend the terms of our existing collaborationagreements;

·                  ourpayment obligations, expected revenue and other terms of any other agreementsof this type;

·                  ourability, or our collaborators’ ability, to successfully satisfy all pertinentregulatory requirements;

·                  thedemand for our collaborators’ products containing our flavor ingredients; and

·                  generaland industry specific economic conditions, including the current economic andcredit crisis, which may affect our collaborators’ research and developmentexpenditures and commercialization efforts.

 

In January 2008, weannounced that we entered into a Collaborative Research, Development,Commercialization and License Agreement with Firmenich for novel flavoringredients intended to provide a cooling taste effect.  Under the termsof the agreement, Firmenich has agreed to pay us research funding for up tothree years based on research progress during the collaborative period. In addition, we are eligible to receive milestone payments upon achievement ofspecific product discovery and development goals. The combined total ofresearch funding and milestone payments could exceed $3.5 million if allmilestones are met. Upon commercialization, we will receive royalty paymentsbased on sales of products containing new flavor ingredients developed underthe agreement.

 

In April 2008,we amended our Collaborative Research and License Agreement dated April 18,2002 with Nestlé to extend the collaborative period for an additional twoyears, through April 18, 2010. During the extension period, we will continue to work with Nestlé on thediscovery and commercialization of new flavors and flavor enhancers in thedehydrated and culinary food and frozen food fields, among other productcategories.  Under the terms of theextension, Nestlé has agreed to pay us incremental research funding of up to$3.6 million during the two-year extension period.  In addition, the potential milestone paymentsupon achievement of certain research and development goals remain unchanged.  Upon commercialization, Nestlé will makeroyalty payments based on sales of Nestlé’s products that contain Senomyx novelflavor ingredients discovered under the agreement.  The level of funding for research specifiedin the amendment is commensurate with the funding level prior to the amendment.

 

In April 2008,we amended our Collaborative Research, Development, Commercialization andLicense Agreement dated April 22, 2002 with Coca-Cola, to extend thecollaborative period for an additional two years, through April 22,2010.  During the extension period, wewill continue to work with Coca-Cola on the discovery and commercialization ofnovel flavor ingredients in the non-alcoholic beverages area.  Under the terms of the extension, Coca-Colahas agreed to pay us incremental research funding of up to $4.0 million duringthe two-year extension period.  Inaddition, the potential milestone payments upon achievement of certain researchand development goals remain unchanged. Upon commercialization, Coca-Cola will make royalty payments based onsales of Coca-Cola’s products that contain Senomyx novel flavor ingredientsdiscovered under the agreement.  Thelevel of funding for research specified in the amendment is commensurate withthe funding level prior to the amendment.

 

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In July 2008,we announced the amendment of our Collaborative Research and License Agreementdated July 15, 2005 with Cadbury to extend the collaborative period for anadditional 12 months, through July 15, 2009.  Under the terms of the extension, Cadbury hasagreed to pay us incremental research funding of up to $600,000.  During the extension period, we intend tocontinue to work with Cadbury for the discovery and commercialization of flavoringredients in the gum confectionary area.  The potential milestonepayments upon achievement of certain product discovery and development goalsremain unchanged.  Uponcommercialization, we will receive royalty payments based on sales of productscontaining flavor ingredients developed under the agreement.

 

In November 2008,we announced that we entered into a Collaborative Commercialization and LicenseAgreement with Firmenich for S2383, our novel enhancer of the high-intensitysweetener sucralose.  Under the terms of the agreement, Firmenich hasagreed to pay to us royalty payments based on sales of S2383 when it is sold oneither a stand-alone basis or within a flavor system.

 

**Revenue**

 

We derive revenue from ourproduct discovery and development collaborations. To date, our revenue has comesolely from upfront fees, research and development funding, reimbursement ofcertain regulatory costs, milestone payments and royalty payments under ourproduct discovery and development collaboration agreements. As of December 31,2008, we have recognized cumulative revenue under our collaborations of $84.6million. If any of these collaborative agreements were to be terminated, thiscould have a significant effect on future revenues.

 

From our inception date tothe present, research and development payments represented the primary sourceof our revenue. Based on current collaborations, we anticipate thatsubstantially all of our revenues in the near future will be derived fromresearch and development payments.  Wemay receive additional milestone payments in the future upon the achievement ofcertain goals set forth in our collaboration agreements.

 

In addition, as ourcollaborators launch products incorporating our flavor ingredients, we receiveminimum periodic royalties and royalty payments based upon the sales of thoseproducts, which in the future could be significantly larger than research anddevelopment funding or milestone payments. In order for us to generate materialroyalty revenue and become profitable, we must retain our existing or establishnew product discovery and development collaborations and our collaborators mustcommercialize products incorporating one or more of our flavor ingredients. Ourability to generate material royalty revenue is uncertain and will depend uponour ability to meet particular research, development and commercializationobjectives.

 

**Researchand Development**

 

Our research and developmentexpenses consist primarily of costs associated with our discovery and developmentefforts in connection with our primary programs focused on the development ofsavory, sweet and salt flavor enhancers, high potency sweeteners, bitterblockers and cooling agents. We track research and development costs by thetype of cost incurred rather than by project. Research and development costsare comprised of salaries and other personnel-related expenses, facilities anddepreciation, research and development supplies, patent and licensing, outsideservices and non-cash stock-based compensation expenses. We charge research anddevelopment expenses to operations as incurred.

 

The research and developmentpayments we have received from our collaboration agreements historically havenot covered all of our research and development expenses. We expect that ourresearch and development expenses are likely to increase in the future as aresult of our existing product discovery and development collaborations,internal product discovery and development activities and technologydevelopment and any expansion of these activities.

 

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At this time, due to therisks inherent in the discovery of flavor ingredients, we are unable toestimate with any certainty the costs we will incur in the continueddevelopment of our flavor ingredients for commercialization.  We anticipate that we will makedeterminations regarding the research and development projects to pursue andthe funding of each project on an ongoing basis in response to the progress ofeach discovery and development program, as well as an ongoing assessment of itsmarket potential. We cannot be certain when any material net cash inflow fromthe commercialization of our flavor ingredients will commence.

 

Our ability to complete thedevelopment of our current product candidates is subject to many risks anduncertainties. These risks include the risks, among others, that:

 

·                  weare substantially dependent upon our collaborators for research and developmentfunding;

·                  ourcollaborators may terminate their respective collaboration programs early;

·                  wemay not be able to discover flavor ingredients with the desired tasteattributes;

·                  wemay not be successful in developing flavor ingredients with attributes requiredfor use in commercial products;

·                  wemay be unable to maintain FEMA GRAS determination for our savory productcandidates and for our sucralose product candidate; and

·                  wemay be unable to obtain FEMA GRAS determination or regulatory approval forcandidates in our other programs.

 

If we do not complete thedevelopment of our flavor ingredients on a timely basis, our collaborators mayterminate or not renew our collaboration agreements, we may begin receivingrevenue from the commercialization of products incorporating our flavoringredients later than anticipated, or not at all, and it may be more difficultto enter into new collaboration agreements. In any of these cases, we mayrequire substantial additional funding in order to continue development of ourflavor ingredients.

 

**Generaland Administrative**

 

General and administrativeexpenses consist primarily of salaries and other personnel-related expensesrelated to business development, legal, financial, commercial development andother administrative functions and Sarbanes-Oxley compliance.  General and administrative expenses alsoinclude non-cash stock-based compensation expenses.  We expect that our general and administrativeexpenses are likely to increase in the future as a result of supportingadditional commercial development activities, business development and researchand development.

 

**Resultsof Operations**

 

**YearsEnded December 31, 2008, 2007 and 2006**

 

***Revenue Under Collaboration Agreements***

 

We recorded revenue of $17.2million, $18.2 million and $12.2 million during the years ended December 31,2008, 2007 and 2006, respectively.  Research and development payments,upfront fees, milestone payments and royalty revenues under collaborations withAjinomoto, Cadbury, Campbell, Coca-Cola, Firmenich, Nestlé and Solae accountedfor 100% of total revenue for the year ended December 31, 2008.  The decrease of $1.0 million from 2007 to2008 was primarily due to the recognizing of a smaller portion of the revenuerecognized related to amendments of existing collaborations in 2008 as comparedto 2007.  Research and developmentpayments, upfront fees, milestone payments and royalty revenues undercollaborations with Ajinomoto, Cadbury, Campbell, Coca-Cola, Firmenich, KraftFoods, Nestlé and Solae accounted for 100% of total revenue for the year ended December 31,2007.  The increase of $6.0 million from2006 to 2007 was primarily due to revenue recognized related to amendments ofexisting collaborations.  Research anddevelopment payments, upfront fees and milestone payments under collaborationswith Ajinomoto, Cadbury, Campbell, Coca-Cola, Kraft Foods and Nestlé accountedfor approximately 100% of total revenue for the year ended December 31,2006. 

 

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***Research and Development Expenses***

 

Our research and developmentexpenses (including stock-based compensation expenses charged to research anddevelopment) were $31.8 million, $29.9 million and $25.4 million for the yearsended December 31, 2008, 2007 and 2006, respectively.  A comparisonof research and development expenses by category is as follows (in thousands):

 
| ** **                              | ** ** | **Years Ended  December 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                              | ** ** | **2008**                                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Salaries and personnel                  |       | $                                       | 12,818     |   | $ | 11,535 |   | $ | 9,133 |   |
| Facilities and depreciation             |       | 5,835                                   |       | 5,721 |   | 5,133 |   |
| Research and development supplies       |       | 4,422                                   |       | 5,047 |   | 3,328 |   |
| Patent and licensing                    |       | 3,122                                   |       | 2,503 |   | 1,854 |   |
| Outside services                        |       | 2,533                                   |       | 1,521 |   | 2,202 |   |
| Non-cash stock-based compensation       |       | 2,312                                   |       | 2,588 |   | 3,048 |   |
| Miscellaneous                           |       | 758                                     |       | 959 |   | 695 |   |
| Total research and development expenses |       | $                                       | 31,800     |   | $ | 29,874 |   | $ | 25,393 |   |

 

***Salaries and Personnel.***  Our expenses for research and development personnel, includingconsultants, were $12.8 million, $11.5 million and $9.1 million for the yearsended December 31, 2008, 2007 and 2006, respectively. The increase insalaries and personnel expenses is primarily due to the addition of staff tosupport research and development operations and to the impact of annual salaryadjustments.  Our research anddevelopment staff increased from an average of 79 for the year ended December 31,2006 to an average of 88 for the year ended December 31, 2007, and furtherincreased to an average of 97 for the year ended December 31, 2008.  In addition, the increase in salaries andpersonnel expenses was due to the impact of annual salary adjustments.  For 2009, we expect to see a slight increasein salaries and personnel expenses due to the impact of annual salaryadjustments and to the impact of 2008 hires being employed for the full year.

 

***Facilities and Depreciation.***    Our facilities anddepreciation expenses were $5.8 million, $5.7 million and $5.1 million for theyears ended December 31, 2008, 2007 and 2006, respectively. The increaseof $114,000 from 2007 to 2008 was primarily due to increased depreciationexpense due to scientific equipment being placed in service in 2008, partiallyoffset by reduced facilities expense. The increase of $588,000 from 2006 to 2007 was primarily attributable toan increase in depreciation expense of $1.1 million primarily due to tenantimprovements in our current facility being placed in service during 2006 and beingdepreciated for an entire year in 2007, as compared to only part of a year for2006, partially offset by a decrease in our facilities expenses of $511,000 dueto decreased rent expense for our new facility as compared to our formerfacility.  We relocated to our newfacility in November 2006.  For2009, we expect to see a slight increase in facilities and depreciationexpenses due to increased repair and maintenance costs on capital equipment andfacilities.

 

***Research and Development Supplies.***  Our expenses for supplies used inresearch and development were $4.4 million, $5.0 million and $3.3 million forthe years ended December 31, 2008, 2007 and 2006, respectively.  Thedecrease of $625,000 from 2007 to 2008 was primarily due to reduced compoundacquisition expenses in 2008 compared to 2007. The increase of $1.7 million from 2006 to 2007 was primarilyattributable to higher research and development screening and other labsupplies expenses and to higher compound acquisition expenses.  For 2009, we expect to see a decrease inresearch and development supplies due to anticipated progress in our scientificprograms.

 

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***Patent and Licensing.***  Our patent and licensing expenses were $3.1 million, $2.5million and $1.9 million for the years ended December 31, 2008, 2007 and2006, respectively.  The increases of $619,000 from 2007 to 2008 and$649,000 from 2006 to 2007 were primarily attributable to outsourced patentfiling related activities associated with our expanding intellectual propertyportfolio.  For 2009, we do not expect tosee any significant change in our patent and licensing expenses as compared to2008.

 

***Outside Services.***  Our outside services expenses were $2.5 million, $1.5 millionand $2.2 million for the years ended December 31, 2008, 2007 and 2006,respectively.  The increase of $1.0 million from 2007 to 2008 wasprimarily due to an increase in costs for safety studies and for outsideresearch activities, partially offset by a decrease in costs for chemistryoutsourcing.  The decrease of $681,000from 2006 to 2007 was primarily attributable to a decrease in costs forchemistry outsourcing, as we redeployed these resources to internalactivities.  For 2009, we expect to seean increase in outside services expenses due to anticipated progress in ourscientific programs.

 

***Non-cash Stock-basedCompensation.***  Our non-cash stock-based compensationexpenses were $2.3 million, $2.6 million and $3.0 million for the years ended December 31,2008, 2007 and 2006, respectively.  Thedecrease of $276,000 from 2007 to 2008 was primarily due to decreases incompensation expense in 2008 compared to 2007 for stock options granted to bothemployees prior to 2006 and to non-employees, as the expense for these optionsis accounted for on an accelerated basis, which results in more expense beingrecognized for the options earlier in the options’ vesting period.  This decrease was partially offset byincreases in expense related to stock options granted to employees during 2006,2007 and 2008.  The decrease of $459,000from 2006 to 2007 was primarily attributable to decreases in compensationexpense in 2007 compared to 2006 for stock options granted to both employeesprior to 2006 and to non-employees, as the expense for these options isaccounted for on an accelerated basis, which results in more expense beingrecognized for the options earlier in the options’ vesting period.  This decrease was partially offset byincreases in expense related to stock options granted to employees during 2006and 2007.  Options granted to employeesafter 2005 are accounted for on a straight-line basis.  For 2009, we expect to see a slight increase innon-cash stock-based compensation expense due to the granting of options in2009 and the recognition of a full year’s worth of expense for options grantedin 2008.

 

***General and Administrative Expenses***

 

Our general andadministrative expenses (including non-cash stock-based compensation expensescharged to general and administrative) were $13.6 million, $13.6 million and$13.7 million for the years ended December 31, 2008, 2007 and 2006,respectively.

 

The $17,000 decrease inexpenses from 2007 to 2008 was primarily due to a decrease in non-cash,stock-based compensation expense of approximately $233,000, partially offset byan increase in salaries and personnel costs of $213,000.  The decrease in non-cash stock-basedcompensation expense of approximately $233,000 was due to stock options grantedto employees prior to 2006, as the expense for these options is accounted foron an accelerated basis, which results in more expense being recognized for theoptions earlier in the options’ vesting period. This decrease was partially offset by increases in expense related tostock options granted to employees during 2006, 2007 and 2008.  The increase in salaries and personnel costswas primarily due to the impact of salary adjustments.

 

The $163,000 decrease in expensesfrom 2006 to 2007 was primarily attributable to decreases in consultingexpenses, non-cash stock-based compensation expenses and recruiting andrelocation expenses, partially offset by increases in salaries and personnelcosts.  The decrease in consultingexpenses of approximately $356,000 from 2006 to 2007 was due to the one-timeuse of strategic planning consultants in the first quarter of 2006.  The decrease in non-cash stock-basedcompensation expense of approximately $225,000 was due to stock options grantedto both employees prior to 2006 and to non-employees, as the expense for theseoptions is accounted for on an accelerated basis, which results in more expensebeing recognized for the options earlier in the options’ vesting period.  This decrease was partially offset byincreases in expense related to stock options granted to employees during 2006and 2007.  The decrease in recruiting andrelocation expenses of approximately $167,000 was due to the addition of keygeneral and administrative personnel in the second quarter of 2006.  The increase in expenses for salaries andpersonnel of approximately $599,000 was primarily due to the impact of salaryadjustments.

 

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For 2009, we expect to see aslight increase in our general and administrative expenses due to an expectedslight increase in non-cash stock-based compensation expense, which is expectedto be due to the granting of options in 2009 and the recognition of a full year’sworth of expense for options granted in 2008.

 

***Interest Income***

 

Interest income was $1.3million, $3.4 million and $3.8 million for the years ended December 31,2008, 2007 and 2006, respectively.  The decrease of $2.1 million from 2007to 2008 was primarily due to lower average rates of return on invested balancesand lower invested balances in 2008 compared to 2007.  The decrease of $446,000 was primarilyattributable to less cash invested for 2007 compared to 2006 that was partiallyoffset by higher average rates of return on those invested balances for 2007compared to 2006.

 

***Liquidity and Capital Resources***

 

Since our inception, we havefinanced our business primarily through private and public placements of stock,research and development payments under our product discovery and developmentcollaborations and interest income.  As of December 31, 2008 we hadreceived in excess of $170.5 million in proceeds from the sales of common andpreferred stock.  In addition, we had received $86.4 million innon-refundable license fees, research and development payments, costreimbursements and milestone payments from our collaboration agreements, and$12.1 million in interest income.  As of December 31, 2008, over theremaining life of our current collaboration agreements, we expect to receive anadditional $14.5 million in non-refundable research and development paymentsfrom our collaborators.  We may not receive these payments if the collaborationsare terminated.  In addition, we mayreceive payments in the event we achieve research or development milestones androyalty payments in the event our collaborators commercialize productsincorporating our flavor ingredients.

 

At December 31, 2008,we had $40.1 million in cash, cash equivalents and investmentsavailable-for-sale as compared to $62.6 million at December 31, 2007, adecrease of $22.5 million.  This overall decrease resulted primarily fromthe use of cash to fund our operations.

 

***Operating Activities***

 

Operating activities usedcash of $22.0 million for the year ended December 31, 2008 compared to$12.4 million for the year ended December 31, 2007. Operating cash flow in2008 compared to the prior year reflects an increase in our net loss of $5.1million.  Non-cash expenses increased$966,000 to $7.9 million for the year ended December 31, 2008 from $6.9million for the year ended December 31, 2007.  The increase in non-cash expenses wasprimarily due to a decrease in the accretion of discount on available for salesecurities of $927,000 and an increase in depreciation expense of $588,000.  These were partially offset by a decrease innon-cash stock-based compensation for non-employees of $552,000.  Net decreases in other current assetsprovided cash of $1.1 million for the year ended December 31, 2008, whilenet increases in other current assets used cash of $810,000 for the year ended December 31,2007.  Net decreases in operatingliabilities used cash of $4.1 million for the year ended December 31,2008, while net increases in operating liabilities provided cash of $3.4million for the year ended December 31, 2007.

 

Operating activities usedcash of $12.4 million for the year ended December 31, 2007 compared to$8.1 million for the year ended December 31, 2006.  Operating cash flow in 2007 compared to theprior year reflects a decrease in our net loss of $1.2 million.  Non-cash expenses decreased $658,000 to $6.9million for the year ended December 31, 2007 from $7.6 million for theyear ended December 31, 2006.  Thedecrease in non-cash operating expenses was primarily due to an increase in theamortization of leasehold obligation of $867,000 (a contra-expense), relativedecreases in both non-employee and employee non-cash stock-based compensationexpense for $591,000 and $93,000, respectively, and an increase in accretion ofdiscount on available-for-sale securities of $490,000.  These reductions in non-cash expenses werepartially offset by a relative increase in depreciation expense of $1.4million.  Net changes in other currentassets used cash of $810,000 for the year ended December 31, 2007, whilenet decreases in other current assets provided cash of $1.1 million for theyear ended December 31, 2006.  Netincreases in operating liabilities provided cash of $3.4 million and $6.4million for the years ended December 31, 2007 and 2006, respectively.

 

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***Investing Activities***

 

Investingactivities provided cash of $35.1 million for the year ended December 31,2008.  Cash provided in 2008 reflects thematurities of available-for-sale securities of $101.0 million.  These maturities were partially offset bypurchases of available-for-sale securities of $63.5 million and purchases ofproperty and equipment of $2.5 million, primarily scientific equipment.

 

Investingactivities provided cash of $9.0 million for the year ended December 31,2007.  Cash provided in 2007 reflects thematurities of available-for-sale securities of $104.8 million.  These maturities were partially offset bypurchases of available-for-sale securities of $92.6 million and purchases ofproperty and equipment of $3.2 million for newly hired employees and for thenew facility.

 

Investingactivities used cash of $47.2 million for the year ended December 31,2006.  Cash used in 2006 reflects thepurchases of available-for-sale securities of $110.2 million and purchases ofproperty and equipment of $5.7 million for newly hired employees and for thenew facility.  These purchases werepartially offset by the maturities of available-for-sale securities of $68.7million.

 

***Financing Activities***

 

Financingactivities provided cash of $943,000, $2.1 million and $2.6 million for theyears ended December 31, 2008, 2007 and 2006, respectively.  Cash provided by financing activities in 2008reflects the net proceeds from the sale of common stock of $943,000, primarilyfrom purchases from our employee stock purchase program and the exercise ofstock options.  Fewer stock options wereexercised in 2008 as compared to 2007 due to the lower average stock priceduring the year.  Cash provided byfinancing activities in 2007 reflects the net proceeds from the sale of commonstock of $2.1 million, primarily from the exercise of stock options.  Cash provided by financing activities in 2006reflects the net proceeds from the sale of common stock of $2.6 million,primarily from the exercise of stock options.

 

Asof December 31, 2008 future minimum payments due under our contractualobligations are as follows (in thousands):

 
| ** **       | ** ** | **Payments Due by Period** | ** ** |
|------------------|------------|-------------------------------------------|------------|
| ** **       | ** ** | **Total**                                 | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
| Operating leases |       | $                                         | 23,015     |   | $ | 2,564 |   | $ | 5,313 |   | $ | 5,596 |   | $ | 9,542 |   |
| License payments |       | 15                                        |       | 15 |   | — |   | — |   | — |   |
| Total            |       | $                                         | 23,030     |   | $ | 2,579 |   | $ | 5,313 |   | $ | 5,596 |   | $ | 9,542 |   |

 

Asof December 31, 2008, we had no long-term debt obligations.

 

Asof December 31, 2008, we have net open purchase orders (defined as totalopen purchase orders at year end less any accruals or invoices charged to oramounts paid against such purchase orders) totaling approximately$771,000.  In the next 12 months, we alsoplan to spend approximately $1.0 to $2.0 million on capital expenditures.

 

Ourlicense agreement with the University of California calls for annualmaintenance fees commencing in 2006 or royalties or service revenues on salesof any products developed using technologies licensed under the agreement.  Royalties are calculated as a percentage ofcovered sales.  The agreement specifiesminimum periodic royalty payments commencing in 2014 and continuing through theexpiration of the last to expire patent licensed under the agreement.

 

Ourfuture capital uses and requirements depend on numerous forward-lookingfactors.  These factors may include, but are not limited to, thefollowing:

 

·                  therate of progress and cost of research and development activities;

·                  thenumber and scope of our research activities;

 

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·                  thecosts of filing, prosecuting, defending and enforcing any patent claims andother intellectual property rights;

·                  ourability to establish and maintain product discovery and developmentcollaborations;

·                  theeffect of competing technological and market developments;

·                  theterms and timing of any collaborative, licensing and other arrangements that wemay establish; and

·                  theextent to which we acquire or in-license new products, technologies orbusinesses.

 

Webelieve our available cash, cash equivalents, investments and existing sourcesof funding will be sufficient to satisfy our anticipated operating and capitalrequirements through at least the next 12 months.

 

Untilwe can generate significant cash from our operations, we expect to continue tofund our operations with existing cash resources that were primarily generatedfrom the proceeds of offerings of our equity securities and research anddevelopment payments and milestone payments under our product discovery anddevelopment collaborations.  From time totime we may also consider raising additional cash from the sale of equity orother securities.  As of December 31,2008, under our existing collaboration agreements, assuming all milestones areachieved and we receive all research and development funding, we may beentitled to up to $26.9 million.  In 2009, we anticipate receiving $9.6million in non-refundable research and development funding.  This does not include any additional paymentswe may receive related to the achievement of additional milestones, or to newcollaborations or extensions of existing collaborations.  This does not include any additional paymentswe will receive related to royalties from the sale of products containing ourflavor ingredients.  We may not receivethe payments if the collaborations are terminated or not renewed, or if we donot achieve the milestones set forth in the collaboration agreements.  Inaddition, the timing of the receipt of milestone payments in particular isuncertain, as we may achieve milestones significantly earlier or later than wecurrently expect.  We cannot predict at this time the level of ourcollaborators’ royalty-generating sales, as these sales to date have been basedon launches of new products without established sales histories.

 

Wecontinue to pursue additional collaborations, which could result in additionalrevenue.  We may not recognize revenues for research and developmentfunding, milestones, minimum periodic royalties or royalties if thecollaborations are terminated, or if we do not achieve the milestones set forthin the collaboration agreements.  Our expenses will vary based upon (butnot limited to) the forward-looking factors listed above.

 

***Off-Balance Sheet Arrangements***

 

Asof December 31, 2008 and 2007, we did not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as special purpose or structured finance entities, which would havebeen established for the purposes of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes.  As such,we are not materially exposed to any financing, liquidity, market or creditrisk that could arise if we had engaged in these relationships.

 

**CriticalAccounting Policies**

 

Ourdiscussion and analysis of our financial condition and results of operationsare based on our financial statements, which have been prepared in accordancewith United States generally accepted accounting principles, or GAAP.  Thepreparation of these financial statements requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities andexpenses and related disclosure of contingent assets and liabilities.  Onan ongoing basis, we evaluate these estimates, including those related torevenue recognition, stock-based compensation, long-lived assets, accruedliabilities, and income taxes.  These estimates are based on historicalexperience and various other assumptions that we believe to be reasonable underthe circumstances, the results of which form the basis for judgments about thecarrying values of assets and liabilities.  Actual results may differ fromthese estimates under different assumptions or conditions.  While oursignificant accounting policies are described in more detail in Note 1 to ourfinancial statements, we believe the following accounting policies to becritical to the judgments and estimates used in the preparation of ourfinancial statements:

 

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***Revenue Recognition***

 

Ourrevenue recognition policies are in compliance with Staff Accounting Bulletin,or SAB, No. 104, *Revenue Recognition*,and Emerging Issues Task Force, or EITF, Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*.  Some of our agreements contain multipleelements, including technological and territorial licenses and research anddevelopment services.  In accordance withthese agreements, we may be eligible for upfront fees, research and developmentfunding, cost reimbursements, development milestones, commercializationmilestones, minimum periodic royalty payments and royalty payments.

 

Developmentrevenues include revenues from license fees, research and development funding,development milestones and cost reimbursement. Non-refundable license fees, if not associated with future performance,are recognized when received. Non-refundable license fees, if associated withfuture performance, are attributed to a specific program or collaboration andrecognized over the period of service for that specific program orcollaboration.  Amounts received forresearch funding are recognized as revenues as the services are performed.Revenue is deferred for fees received before earned.  Revenue from development milestones isrecognized when earned, as evidenced by written acknowledgment from thecollaborator or other persuasive evidence that the milestone has been achieved,provided that (i) the milestone event is substantive and its achievabilitywas not reasonably assured at the inception of the agreement and (ii) ourperformance obligations after the milestone achievement will continue to befunded by the collaborator at a level comparable to before the milestoneachievement. If both of these criteria are not met, the milestone payment isrecognized over the remaining minimum period of our performance obligationsunder the agreement.  Revenue from costreimbursements is recognized when earned, as evidenced by writtenacknowledgment from the collaborator or other persuasive evidence.

 

Commercialrevenues include revenues from commercialization milestones, minimum periodicroyalty payments and royalties on product sales made by our collaboratorsincorporating our flavor ingredients. Revenue from commercialization milestones is recognized over the royaltyterm.  Non-refundable minimum periodicroyalty payments are recognized as revenues over related annual royaltyperiods.  Annual royalty terms arespecific to each collaboration and collaborator and can vary from year toyear.  These terms vary based on factorssuch as the characteristics of the flavor ingredient and the product categoriesand geographies licensed by the collaborator. Periodically, as contractually specified, our collaborators are requiredto provide a report detailing all sales of products containing our flavoringredients.  To the extent that minimumperiodic royalty payments through the end of any applicable period exceedcalculated royalties, the collaborators are required to remit to us thedifference between royalties calculated and minimum periodic royalty paymentsmade to date.  We recognize thisdifference as royalties on product sales at the time the report isreceived.  To the extent that minimumperiodic royalty payments made to date exceed calculated royalties, we are notrequired to refund the difference. Although we do not currently have any collaborations that includerefundable minimum periodic royalty payments, in such a case, revenue would bedeferred for refundable minimum periodic royalty payments received beforeearned.  Royalties on product sales madeby our collaborators incorporating our flavor ingredients are recognized whenthe royalty report is received, which is generally one quarter in arrears.  As applicable, commercial revenues arereported net of royalties payable under our third party licensingagreements.  To date, substantially allof our commercial revenues have been related to minimum periodic royalty payments.

 

***Stock-Based Compensation***

 

Wegrant options to purchase our common stock to our employees and directors underour equity incentive plan. Eligible employees can also purchase shares of ourcommon stock under our employee stock purchase plan at the lower of: (i) 85%of the fair market value on the first day of a two-year offering period; or (ii) 85%of the fair market value on the last date of each six-month purchase periodwithin the two-year offering period.  Inaddition, we grant options to purchase our common stock to non-employees underour equity incentive plan.

 

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Stock-basedcompensation expense recognized under Statement of Financial AccountingStandards, or SFAS, No. 123R, *Share-Based Payment*,for the years ended December 31, 2008, 2007 and 2006 were $6.3 million,$6.2 million and $6.3 million, respectively. At December 31, 2008, totalunrecognized estimated compensation expense related to non-vested stock optionsgranted prior to that date was $9.8 million, which is expected to be recognizedover a weighted average period of 1.8 years. Total stock options granted toemployees and non-employee directors during the years ended December 31,2008, 2007 and 2006 represented 3.9%, 3.6% and 4.1%, respectively, ofoutstanding shares as of the end of each fiscal year.

 

Weestimate the value of stock-based awards on the date of grant using theBlack-Scholes option pricing model.  Thedetermination of the fair value of stock-based payment awards on the date ofgrant using an option-pricing model is affected by our stock price as well asassumptions regarding a number of complex and subjective variables. Thesevariables include, but are not limited to, our expected stock price volatilityover the term of the awards, risk-free interest rate and the expected term ofthe awards.

 

Forpurposes of estimating the fair value of stock options granted during 2008using the Black-Scholes model, we have made a subjective estimate regarding ourstock price volatility (weighted average of 62.8%). We used an average of thehistorical volatility of our stock for the period our stock has been publiclytraded and the historical volatilities of the common stock of several publiclytraded companies management feels are comparable to us, consistent with theguidance in SFAS No. 123R and Staff Accounting Bulletin, or SAB, No. 107.  If our stock price volatility assumption wereincreased to 75%, the weighted average estimated fair value of stock optionsgranted during the year ended December 31, 2008 would increase by $0.55per share, or 13.1%.

 

Theexpected term of options granted is derived from the average midpoint betweenvesting and the contractual term, as described in SAB No. 107.  For options granted during the year ended December 31,2008, we have calculated a weighted average expected term of 6.0 years.  If the expected term of the options grantedwas increased to 8.0 years, the weighted average estimated fair value of stockoptions granted during the year ended December 31, 2008 would increase by$0.50 per share, or 11.8%.

 

Therisk-free interest rate for the expected term of the option is based on theaverage U.S. Treasury yield curve at the balance sheet date for the expectedterm (weighted average of 2.7% for the year ended December 31, 2008)which, if increased to 5.0%, would increase the weighted average estimated fairvalue of stock options granted during the year ended December 31, 2008 by$0.21 per share, or 5.1%. 

 

For2008, 2007 and 2006, we have reduced stock-based compensation expenserecognized in the Statement of Operations for 2008, 2007 and 2006 to reflectfor estimated forfeitures.  SFAS 123Rrequires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates.  Pre-vesting forfeitures wereestimated to be approximately 6.8%, 3.7% and 7.2% for the years ended December 31,2008, 2007 and 2006, respectively, based on historical experience.  To date, we have not required any materialadjustments to our expected forfeitures.

 

***Fair Value of Financial Assetsand Liabilities***

 

In September 2006,the Financial Accounting Standards Board, or FASB, issued SFAS No. 157,*Fair Value Measurement*,which defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements.  Effective January 1, 2008, we adoptedthe provisions of SFAS No. 157. We did not record any cumulativeadjustment as a result of adopting SFAS No. 157.

 

In general, fairvalues determined by Level 1 inputs utilize quoted prices (unadjusted) inactive markets for identical assets or liabilities that we have the ability toaccess.  We classify money market fundsas Level 1 assets.  At December 31,2008, our Level 1-classified investments totaled $30.8 million.  Fair values determined by Level 2 inputsutilize inputs other than quoted prices included in Level 1 that are observablefor the asset or liability, either directly or indirectly. Level 2 inputsinclude quoted prices for similar assets and liabilities in active markets, andinputs other than quoted prices that are observable for the asset or liability,such as interest rates and yield curves that are observable at commonly quotedintervals. We classify U.S. government agency securities as Level 2assets.  At December 31, 2008, our 

 

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Level 2-classifiedinvestments totaled $9.1 million.  Level3 inputs are unobservable inputs for the asset or liability, and includesituations where there is little, if any, market activity for the asset or liability.At December 31, 2008, we did not hold any Level 3-classifiedinvestments.  In certain cases, theinputs used to measure fair value may fall into different levels of thefair value hierarchy. In such cases, the level in the fair valuehierarchy within which the fair value measurement in its entirety falls hasbeen determined based on the lowest level input that is significant to the fairvalue measurement in its entirety. Our assessment of the significanceof a particular input to the fair value measurement in its entirety requiresjudgment, and considers factors specific to the asset or liability.

 

Foradditional information regarding the adoption of SFAS No. 157, see Note1of our financial statements, *Organization and Summaryof Significant Accounting Policies*, and Note 3 of our financialstatements, *Fair Value Disclosures*.

 

***Leasehold Incentive Obligation***

 

In conjunction with our lease of our facility, we received a tenantimprovement allowance of up to $155 per square foot, or $10.1 million.  As the tenant improvements were constructed,we recorded both the covered tenant improvements (as property and equipment)and an offsetting leasehold incentive obligation on our balance sheet.  As construction on the facility has beencompleted and we have taken occupancy of the new facility, we are recordingdepreciation expense to depreciate the covered tenant improvements andrecording an offsetting reduction to rent expense to amortize the leaseholdincentive obligation over the initial term of the facility lease, in accordancewith FASB Technical Bulletin 88-1, *Issues Relating toAccounting for Leases*.

 

***Income Taxes***

 

InJuly 2006, the FASB issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes — An Interpretation of FASBStatement No. 109,*or FIN 48, which clarifies the accountingfor uncertainty in income taxes recognized in an entity’s financial statementsin accordance with SFAS No. 109, *Accounting for IncomeTaxes*, and prescribes a recognition threshold and measurementattributes for financial statement disclosure of tax positions taken orexpected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on theincome tax return must be recognized at the largest amount that ismore-likely—than-not to be sustained upon audit by the relevant taxingauthority.  An uncertain income taxposition will not be recognized if it has less than a 50% likelihood of beingsustained.  Additionally, FIN 48 providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15,2006.

 

Weadopted the provisions of FIN 48 on January 1, 2007, and we commencedanalyzing filing positions in all of the federal and state jurisdictions wherewe are required to file income tax returns, as well as all open tax years inthese jurisdictions.  As a result ofadoption, we recorded no additional tax liability.  The total amount of unrecognized tax benefitsas of January 1, 2007 was $958,000. As of December 31, 2008 we have completed our analysis of whetherthe deferred tax assets for net operating losses of $105.8 million and researchand development credits of $2.6 million generated in years prior to 2008 would besubject to an annual limitation as a result of an ownership change.  Our analysis concluded that our deferred taxassets for net operating losses and research and development credits will besubject to an annual limitation.  Assuch, $3.1 million of net operating losses will expire and $760,000 of researchand development credits will expire as a result of multiple ownership changeswhich occurred.  In addition, we havedetermined that we will reserve a portion of the available research anddevelopment credit carryforward as required by FIN 48. For additionalinformation regarding the adoption of FIN 48 and for further discussion of ourcritical accounting estimates related to income taxes, see Note 7, IncomeTaxes.

 

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**NewAccounting Pronouncements**

 

InMay 2008, the FASB issued SFAS No. 162, *TheHierarchy of Generally Accepted Accounting Principles*.  SFAS No. 162 identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements that are presented in conformitywith GAAP in the United States (the GAAP hierarchy). SFAS No. 162 iseffective 60 days following the SEC’s approval of the Public Company AccountingOversight Board amendments to AU Section 411, *The Meaning of**Present Fairly inConformity With Generally Accepted Accounting Principles*. We do notexpect the adoption of SFAS No. 162 to have a material impact on ourfinancial statements.

 

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**Item 7A.    *Quantitative and Qualitative Disclosures About MarketRisk***

 

Ourprimary exposure to market risk is interest income sensitivity, which isaffected by changes in the general level of United States interest rates. Dueto the nature of our investments, we believe that we are not subject to anymaterial market risk exposure. We do not have any foreign currency or otherderivative financial instruments.

 

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**Item 8.    *Financial Statements and Supplementary Data***

 

**Indexto Financial Statements**

 
| **Description**                                          | ** ** | **Page** |
|----------------------------------------------------------|------------|----------|
|                                                     |       |     |
| Report  of Independent Registered Public Accounting Firm |       | 60       |
|                                                     |       |     |
| Balance  Sheets                                          |       | 61       |
|                                                     |       |     |
| Statements  of Operations                                |       | 62       |
|                                                     |       |     |
| Statements of Stockholders’ Equity                  |       | 63       |
|                                                     |       |     |
| Statements  of Cash Flows                                |       | 65       |
|                                                     |       |     |
| Notes to Financial Statements                            |       | 66       |

 

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**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

TheBoard of Directors and Stockholders of Senomyx, Inc.

 

Wehave audited the accompanying balance sheets of Senomyx, Inc. as of December 31,2008 and 2007, and the related statements of operations, stockholders’ equity,and cash flows for each of the three years in the period ended December 31,2008. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Senomyx, Inc. at December 31,2008 and 2007, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2008, in conformity withU.S. generally accepted accounting principles.

 

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), Senomyx Inc.’s internal control overfinancial reporting as of December 31, 2008, based on criteria establishedin Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 10,2009 expressed an unqualified opinion thereon.

 

 
|                   | /s/ Ernst & Young  LLP |
|------------------------|---------------------------------|
|                   |                            |
| San Diego, California  |                            |
| February 10, 2009 |                            |

 

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**Senomyx, Inc.**

**BalanceSheets**

**(In thousands, except share and pershare data)**

 
| ** **                                                                                                                                                                | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **Assets:**                                                                                                                                                               |       |                  |       |   |   |
| Current assets:                                                                                                                                                           |       |                  |       |   |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                 |       | $                     | 34,006     |   | $ | 19,983 |   |
| Investments available-for-sale                                                                                                                                            |       | 6,100                 |       | 42,641 |   |
| Other current assets                                                                                                                                                      |       | 942                   |       | 2,090 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Total current assets                                                                                                                                                      |       | 41,048                |       | 64,714 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Property and equipment, net                                                                                                                                               |       | 13,418                |       | 14,535 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Total assets                                                                                                                                                              |       | $                     | 54,466     |   | $ | 79,249 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| **Liabilities and stockholders’ equity**                                                                                                                             |       |                  |       |   |   |
| Current liabilities:                                                                                                                                                      |       |                  |       |   |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Accounts payable and accrued expenses                                                                                                                                     |       | $                     | 5,908      |   | $ | 5,779 |   |
| Leasehold incentive obligation                                                                                                                                            |       | 987                   |       | 987 |   |
| Deferred revenue                                                                                                                                                          |       | 2,284                 |       | 5,971 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Total current liabilities                                                                                                                                                 |       | 9,179                 |       | 12,737 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Deferred rent                                                                                                                                                             |       | 1,272                 |       | 1,073 |   |
| Leasehold incentive obligation                                                                                                                                            |       | 7,075                 |       | 8,062 |   |
| Deferred revenue                                                                                                                                                          |       | —                |       | 750 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Commitments                                                                                                                                                               |       |                  |       |   |   |
| Stockholders’ equity:                                                                                                                                                |       |                  |       |   |   |
| Preferred stock, $0.001 par value,  7,500,000 shares authorized; no shares issued or outstanding at  December 31, 2008 and 2007                                      |       | —                |       | — |   |
| Common stock, $0.001 par value, 120,000,000  shares authorized; 30,670,123 and 30,476,072 shares issued and outstanding at  December 31, 2008 and 2007, respectively |       | 31                    |       | 30 |   |
| Additional paid-in-capital                                                                                                                                                |       | 212,951               |       | 205,697 |   |
| Accumulated other comprehensive gain                                                                                                                                      |       | 6                     |       | 14 |   |
| Accumulated deficit                                                                                                                                                       |       | (176,048              | )          | (149,114 | ) |
|                                                                                                                                                                      |       |                  |       |   |   |
| Total stockholders’ equity                                                                                                                                           |       | 36,940                |       | 56,627 |   |
|                                                                                                                                                                      |       |                  |       |   |   |
| Total liability and stockholders’ equity                                                                                                                             |       | $                     | 54,466     |   | $ | 79,249 |   |

 

See accompanying notes to financial statements.

 

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**Senomyx, Inc.**

**Statementsof Operations**

**(In thousands, except share and pershare data)**

 
| ** **                                                   | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                         |       |                                        |       |   |   |   |   |
| Revenues:                                                    |       |                                        |       |   |   |   |   |
| Development revenues                                         |       | $                                           | 16,819     |   | $ | 18,197 |   | $ | 12,230 |   |
| Commercial revenues                                          |       | 347                                         |       | 23 |   | — |   |
|                                                         |       |                                        |       |   |   |   |   |
| Total revenues                                               |       | 17,166                                      |       | 18,220 |   | 12,230 |   |
|                                                         |       |                                        |       |   |   |   |   |
| Operating expenses:                                          |       |                                        |       |   |   |   |   |
| Research and development                                     |       | 31,800                                      |       | 29,874 |   | 25,393 |   |
| General and administrative                                   |       | 13,555                                      |       | 13,572 |   | 13,735 |   |
|                                                         |       |                                        |       |   |   |   |   |
| Total operating expenses                                     |       | 45,355                                      |       | 43,446 |   | 39,128 |   |
|                                                         |       |                                        |       |   |   |   |   |
| Loss from operations                                         |       | (28,189                                     | )          | (25,226 | ) | (26,898 | ) |
|                                                         |       |                                        |       |   |   |   |   |
| Interest income                                              |       | 1,255                                       |       | 3,395 |   | 3,841 |   |
|                                                         |       |                                        |       |   |   |   |   |
| Net loss                                                     |       | $                                           | (26,934    | ) | $ | (21,831 | ) | $ | (23,057 | ) |
|                                                         |       |                                        |       |   |   |   |   |
| Basic and diluted net loss per share                         |       | $                                           | (0.88      | ) | $ | (0.72 | ) | $ | (0.77 | ) |
|                                                         |       |                                        |       |   |   |   |   |
| Shares used to compute basic and diluted  net loss per share |       | 30,602,481                                  |       | 30,326,768 |   | 29,809,854 |   |

 

See accompanying notes to financial statements.

 

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**Senomyx, Inc.**

**Statements of Stockholders’Equity**

**(In thousands, except for share data)**

 
| ** **                                                                             | ** ** | **Common Stock** | ** ** | **Additional  paid-in** | ** ** | **Deferred** | ** ** | **Accumulated other  comprehensive** | ** ** | **Accumulated** | ** ** | **Total  stockholders’** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|-------------------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **capital**  | ** ** | **compensation**                          | ** ** | **gain/(loss)** | ** ** | **deficit**                   | ** ** | **equity** | ** ** |
| ** **                                                                             | ** ** | ** **            | ** ** | ** **              | ** ** | ** **   | ** ** | ** **                                | ** ** | ** **      | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Balance at December 31, 2005                                                      |       | 29,678,697            |       | $                       | 30         |         | $          | 187,792                                   |       | $               | (1,143     | )                             | $          | (8 | ) | $ | (104,226 | ) | $ | 82,445 |   |
| Issuance of common stock related to the  exercise of options                           |       | 337,514               |       | —                  |       | 1,733        |       | —                                    |       | —          |       | —                        |       | 1,733 |   |
| Issuance of common stock related to  employee stock plan purchases                     |       | 150,188               |       | —                  |       | 861          |       | —                                    |       | —          |       | —                        |       | 861 |   |
| Compensation related to stock options  issued to consultants                           |       | —                |       | —                  |       | 1,193        |       | —                                    |       | —          |       | —                        |       | 1,193 |   |
| Compensation related to stock options  granted to employees and non-employee directors |       | —                |       | —                  |       | 6,312        |       | —                                    |       | —          |       | —                        |       | 6,312 |   |
| Reduction of deferred compensation due to  adoption of SFAS 123(R)                     |       | —                |       | —                  |       | (1,143       | )          | 1,143                                     |       | —          |       | —                        |       | — |   |
| Comprehensive loss:                                                                    |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Unrealized loss on investments                                                         |       | —                |       | —                  |       | —       |       | —                                    |       | (10             | )          | —                        |       | (10 | ) |
| Net loss                                                                               |       | —                |       | —                  |       | —       |       | —                                    |       | —          |       | (23,057                       | )          | (23,057 | ) |
| Comprehensive loss                                                                     |       | —                |       | —                  |       | —       |       | —                                    |       | —          |       | —                        |       | (23,067 | ) |
| Balance at December 31, 2006                                                      |       | 30,166,399            |       | 30                      |       | 196,748      |       | —                                    |       | (18             | )          | (127,283                      | )          | 69,477 |   |
|                                                                                   |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Issuance of common stock related to the  exercise of options                           |       | 230,492               |       | —                  |       | 1,285        |       | —                                    |       | —          |       | —                        |       | 1,285 |   |
| Issuance of common stock related to  employee stock plan purchases                     |       | 79,181                |       | —                  |       | 843          |       | —                                    |       | —          |       | —                        |       | 843 |   |
| Compensation related to stock options  granted to consultants                          |       | —                |       | —                  |       | 602          |       | —                                    |       | —          |       | —                        |       | 602 |   |
| Compensation related to stock options  granted to employees and non-employee directors |       | —                |       | —                  |       | 6,219        |       | —                                    |       | —          |       | —                        |       | 6,219 |   |
| Comprehensive loss:                                                                    |       |                  |       |                    |       |         |       |                                      |       |            |       |                          |       |   |   |
| Unrealized gain on investments                                                         |       | —                |       | —                  |       | —       |       | —                                    |       | 32              |       | —                        |       | 32 |   |
| Net loss                                                                               |       | —                |       | —                  |       | —       |       | —                                    |       | —          |       | (21,831                       | )          | (21,831 | ) |
| Comprehensive loss                                                                     |       | —                |       | —                  |       | —       |       | —                                    |       | —          |       | —                        |       | (21,799 | ) |
| Balance at December 31, 2007                                                      |       | 30,476,072            |       | 30                      |       | 205,697      |       | —                                    |       | 14              |       | (149,114                      | )          | 56,627 |   |
|                                                                                        |            |                       |            |                         |            |              |            |                                           |            |                 |            |                               |            |  |  |  |  |  |  |  |  |

 

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**Senomyx, Inc.**

**Statements of Stockholders’ Equity**

**(In thousands, except for share data)**

 
| ** **                                                                             | ** ** | **Common Stock** | ** ** | **Additional   paid-in** | ** ** | **Deferred** | ** ** | **Accumulated other  comprehensive** | ** ** | **Accumulated** | ** ** | **Total  stockholders’** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|--------------|------------|-------------------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **Shares**            | ** ** | **Amount**                    | ** ** | **capital**  | ** ** | **compensation**                          | ** ** | **gain/(loss)** | ** ** | **deficit**                   | ** ** | **equity** | ** ** |
| ** **                                                                             | ** ** | ** **            | ** ** | ** **                    | ** ** | ** **   | ** ** | ** **                                | ** ** | ** **      | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Balance at December 31, 2007                                                      |       | 30,476,072            |       | $                             | 30         |         | $          | 205,697                                   |       | $               | —     |                          | $          | 14 |   | $ | (149,114 | ) | $ | 56,627 |   |
| Issuance of common stock related to the  exercise of options                           |       | 31,269                |       | —                        |       | 175          |       | —                                    |       | —          |       | —                        |       | 175 |   |
| Issuance of common stock related to  employee stock plan purchases                     |       | 162,782               |       | 1                             |       | 767          |       | —                                    |       | —          |       | —                        |       | 768 |   |
| Compensation related to stock options  granted to consultants                          |       | —                |       | —                        |       | 50           |       | —                                    |       | —          |       | —                        |       | 50 |   |
| Compensation related to stock options  granted to employees and non-employee directors |       | —                |       | —                        |       | 6,262        |       | —                                    |       | —          |       | —                        |       | 6,262 |   |
| Comprehensive loss:                                                                    |       |                  |       |                          |       |         |       |                                      |       |            |       |                          |       |   |   |
| Unrealized loss on investments                                                         |       | —                |       | —                        |       | —       |       | —                                    |       | (8              | )          | —                        |       | (8 | ) |
| Net loss                                                                               |       | —                |       | —                        |       | —       |       | —                                    |       | —          |       | (26,934                       | )          | (26,934 | ) |
| Comprehensive loss                                                                     |       | —                |       | —                        |       | —       |       | —                                    |       | —          |       | —                        |       | (26,942 | ) |
|                                                                                   |       |                  |       |                          |       |         |       |                                      |       |            |       |                          |       |   |   |
| Balance at December 31, 2008                                                      |       | 30,670,123            |       | $                             | 31         |         | $          | 212,951                                   |       | $               | —     |                          | $          | 6 |   | $ | (176,048 | ) | $ | 36,940 |   |

 

See accompanying notes to financial statements.

 

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**Senomyx, Inc.**

**Statementsof Cash Flows**

**(In thousands)**

 
| ** **                                                                                                            | ** ** | **Years Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Operating Activities**                                                                                              |       |                                        |       |   |   |   |   |
| Net loss                                                                                                              |       | $                                           | (26,934    | ) | $ | (21,831 | ) | $ | (23,057 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:                                          |       |                                        |       |   |   |   |   |
| Depreciation                                                                                                          |       | 3,555                                       |       | 2,967 |   | 1,584 |   |
| Accretion of discount on available-for-sale  securities                                                               |       | (990                                        | )          | (1,917 | ) | (1,427 | ) |
| Amortization of leasehold incentive  obligation                                                                       |       | (987                                        | )          | (947 | ) | (80 | ) |
| Stock-based compensation for employees and  non-employee directors                                                    |       | 6,262                                       |       | 6,219 |   | 6,312 |   |
| Stock-based compensation for non-employees                                                                            |       | 50                                          |       | 602 |   | 1,193 |   |
| Change in operating assets and liabilities:                                                                           |       |                                        |       |   |   |   |   |
| Other current assets                                                                                                  |       | 1,148                                       |       | (810 | ) | 1,061 |   |
| Accounts payable and accrued expenses                                                                                 |       | 155                                         |       | 833 |   | 702 |   |
| Deferred revenue                                                                                                      |       | (4,437                                      | )          | 1,498 |   | 3,495 |   |
| Deferred rent                                                                                                         |       | 199                                         |       | 860 |   | 62 |   |
| Leasehold incentive obligation                                                                                        |       | —                                      |       | 176 |   | 2,092 |   |
| Net cash used in operating activities                                                                                 |       | (21,979                                     | )          | (12,350 | ) | (8,063 | ) |
|                                                                                                                  |       |                                        |       |   |   |   |   |
| **Investing activities**                                                                                              |       |                                        |       |   |   |   |   |
| Purchases of property and equipment                                                                                   |       | (2,464                                      | )          | (3,166 | ) | (5,657 | ) |
| Purchases of available-for-sale securities                                                                            |       | (63,465                                     | )          | (92,632 | ) | (110,207 | ) |
| Maturities of available-for-sale securities                                                                           |       | 100,988                                     |       | 104,778 |   | 68,650 |   |
| Net cash provided by (used in) investing  activities                                                                  |       | 35,059                                      |       | 8,980 |   | (47,214 | ) |
|                                                                                                                  |       |                                        |       |   |   |   |   |
| **Financing activities**                                                                                              |       |                                        |       |   |   |   |   |
| Proceeds from issuance of common stock                                                                                |       | 943                                         |       | 2,128 |   | 2,594 |   |
| Net cash provided by financing activities                                                                             |       | 943                                         |       | 2,128 |   | 2,594 |   |
|                                                                                                                  |       |                                        |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                                                 |       | 14,023                                      |       | (1,242 | ) | (52,683 | ) |
| Cash and cash equivalents at beginning of  year                                                                       |       | 19,983                                      |       | 21,225 |   | 73,908 |   |
| Cash and cash equivalents at end of year                                                                              |       | $                                           | 34,006     |   | $ | 19,983 |   | $ | 21,225 |   |
|                                                                                                                  |       |                                        |       |   |   |   |   |
| **Supplemental schedule of non-cash  investing and financing activities:**                                       |       |                                        |       |   |   |   |   |
| Purchases of property and equipment  included in accounts payable, accrued expenses and other current liabilities     |       | $                                           | 11         |   | $ | 37 |   | $ | 540 |   |
| Purchases of property and equipment and  leasehold incentive obligation directly reimbursed by lessor of new facility |       | —                                      |       | — |   | $ | 7,808 |   |

 

See accompanying notes to financial statements.

 

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**Senomyx, Inc.**

**Notes toFinancial Statements**

 

**1. Organization and Summary of Significant AccountingPolicies**

 

***Organization and Business***

 

Senomyx, Inc. (the “Company”) was incorporated onSeptember 16, 1998 in Delaware and commenced operations in January 1999.The Company is focused on using proprietary taste receptor-based assays andoptimization techniques to discover and develop novel flavors, flavor enhancersand bitter blockers for the packaged food, beverage and ingredient supplyindustries. The Company has product discovery and development collaborationswith seven of the world’s leading packaged food, beverage and ingredientcompanies: Ajinomoto Co., Inc. (“Ajinomoto”), Cadbury, Campbell SoupCompany (“Campbell”), The Coca-Cola Company (“Coca-Cola”), Firmenich SA (“Firmenich”),Nestlé SA (“Nestlé”) and Solae LLC (“Solae”). The Company’s collaboration agreements provide for upfront license fees,research and development funding, reimbursement of certain regulatory costs,milestone payments if the Company achieves development or commercializationgoals, minimum periodic royalties and royalties on sales of consumer productsincorporating the Company’s flavor ingredients. The Company’s current programsfocus on the development of savory, sweet and salt flavor enhancers, highpotency sweeteners, bitter blockers and cooling agents.

 

***Use of Estimates***

 

The preparation of financial statements in conformitywith United States generally accepted accounting principles (“GAAP”) requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

***Cash and Cash Equivalents***

 

The Company considers all highly liquid investmentswith a remaining maturity of three months or less when purchased to be cashequivalents. Cash equivalents are recorded at cost, which approximates marketvalue.

 

***Investments Available-for-Sale***

 

The Company’s surplus cash is invested in commercialpaper, corporate notes and United States government agency bonds with maturitydates of one year or less from the settlement date.  The amortized cost of debt securities isadjusted for amortization of premiums and accretion of discounts to maturitywith all amortization and accretion included in interest income. The Company’sshort-term investments are classified as available-for-sale and carried atestimated fair value, as determined by quoted market prices, with unrealizedgains and losses reported in a separate component of accumulated othercomprehensive income. Realized gains and losses and declines in value judged tobe other-than-temporary, if any, on available-for-sale securities are includedin interest income. The cost of securities sold is based on the specificidentification method. Interest on securities classified as available-for-saleis included in interest income.

 

***Fair Value of Financial Instruments***

 

The carrying amount of cash and cash equivalents,investments available-for-sale, accounts payable and accrued expenses areconsidered to be representative of their respective fair value because of theshort-term nature of those items.

 

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***Concentration of Credit Risk and MajorCollaborations***

 

Financial instruments, which potentially subject theCompany to concentrations of credit risk, consist of cash, cash equivalents andinvestments available-for-sale. The Company limits its exposure to credit lossby placing its cash, cash equivalents, and investments with high credit qualityfinancial institutions in instruments with short maturities.

 

The Company derives significant portions of itsrevenues from a relatively small number of collaborators. For the year ended December 31,2008, revenues from its three largest collaborators accounted for 80% of totalrevenues.  For the year ended December 31,2007, revenues from its three largest collaborators accounted for 80% of totalrevenues.  For the year ended December 31,2006, revenues from its four largest collaborators accounted for 87% of totalrevenues.

 

***Property and Equipment***

 

Property and equipment are stated at cost lessaccumulated depreciation and are depreciated over the estimated useful lives ofthe assets (ranging from three to five years) using the straight-line method.Leasehold improvements are amortized over the estimated useful life of theasset or the lease term, whichever is shorter.

 

***Patent Costs***

 

Costs related to filing and pursuing patent applicationsare expensed as incurred, as recoverability of such expenditures isuncertain.  The Company includes allpatent costs related to the filing of patents on developments in Research andDevelopment expenses.

 

***Impairment of Long-Lived Assets***

 

In accordance with Financial Accounting StandardsBoard (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*, if indicators of impairment exist, the Companyassesses the recoverability of the affected long-lived assets by determiningwhether the carrying value of such assets can be recovered through undiscountedfuture operating cash flows. If impairment is indicated, the Company measuresthe amount of such impairment by comparing the fair value to the carryingvalue. There have been no indicators of impairment through December 31,2008.

 

***Leasehold Incentive Obligation***

 

In conjunction with the lease agreement covering thefacility occupied by the Company (the “Nexus Lease”), the Company received atenant improvement allowance of $155 per square foot leased, or $10.1million.  As the tenant improvements wereconstructed, the Company recorded both the covered tenant improvements (asproperty and equipment) and an offsetting leasehold incentive obligation on theCompany’s balance sheet.  Through theinitial term of the Nexus Lease, the Company records depreciation expense todepreciate the tenant improvements and records an offsetting reduction to rentexpense (to amortize the leasehold incentive obligation), in accordance withFASB Technical Bulletin 88-1, *Issues Relating toAccounting for Leases*.

 

***Revenue Recognition***

 

TheCompany’s revenue recognition policies are in compliance with the StaffAccounting Bulletin (“SAB”) No. 104, *Revenue Recognition*,and Emerging Issues Task Force (“EITF”) Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*.  Some of the Company’s agreements containmultiple elements, including technological and territorial licenses andresearch and development services.  Inaccordance with these agreements, the Company may be eligible for upfront fees,research and development funding, cost reimbursements, development milestones,commercialization milestones, minimum periodic royalty payments and royaltypayments.

 

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Developmentrevenues include revenues from license fees, research and development funding,development milestones and cost reimbursement. Non-refundable license fees, if not associated with future Companyperformance, are recognized when received. Non-refundable license fees, ifassociated with future Company performance obligations, are attributed to aspecific program or collaboration and recognized over the period of service forthat specific program or collaboration. Amounts received for research funding are recognized as revenues as theservices are performed. Revenue is deferred for fees received before earned.  Revenue from development milestones isrecognized when earned, as evidenced by written acknowledgment from thecollaborator or other persuasive evidence that the milestone has been achieved,provided that (i) the milestone event is substantive and its achievabilitywas not reasonably assured at the inception of the agreement and (ii) theCompany’s performance obligations after the milestone achievement will continueto be funded by the collaborator at a level comparable to before the milestoneachievement. If both of these criteria are not met, the milestone payment isrecognized over the remaining minimum period of the Company’s performanceobligations under the agreement.  Revenuefrom cost reimbursements is recognized when earned, as evidenced by writtenacknowledgment from the collaborator or other persuasive evidence.

 

Commercialrevenues include revenues from commercialization milestones, minimum periodicroyalty payments and royalties on product sales made by the Company’scollaborators incorporating the Company’s flavor ingredients.  Revenue from commercialization milestones isrecognized over the royalty term. Non-refundable minimum periodic royalty payments are recognized asrevenues over the related annual royalty periods.  Annual royalty terms are specific to eachcollaboration and collaborator and can vary from year to year.  These terms vary based on factors such as thecharacteristics of the flavor ingredient and the product categories and geographieslicensed by the collaborator.  Periodically,as contractually specified, the Company’s collaborators are required to providea report detailing all sales of products containing the Company’s flavoringredients.  To the extent thatcalculated royalties on sales of such products exceed the minimum periodicroyalty payments made to date, the collaborators are required to remit to theCompany the difference between royalties calculated and minimum periodicroyalty payments made to date.  TheCompany recognizes this difference as royalties on product sales at the timethe report is received.  To the extentthat minimum periodic royalty payments through the end of any applicable periodexceed calculated royalties, the Company is not required to refund the difference.  Although the Company currently does not haveany collaborations that include refundable minimum periodic royalty payments,in such a case, revenue would be deferred for refundable minimum periodicroyalty payments received before earned. Royalties on product sales made by the Company’s collaboratorsincorporating the Company’s flavor ingredients are recognized when the royaltyreport is received which is generally one quarter in arrears.  As applicable, commercial revenues arereported net of royalties payable under the Company’s third-party licensingagreements.  To date, substantially allof the Company’s commercial revenues have been related to minimum periodicroyalty payments.

 

***Research and Development***

 

Research and development costs, including thoseincurred in relation to the Company’s collaborative agreements, are expensed inthe period incurred. Research and development costs primarily consist ofsalaries and related expenses for personnel, facilities and depreciation,research and development supplies, patents and licenses and outside services.

 

***Comprehensive Income (Loss)***

 

SFAS No. 130, *ReportingComprehensive Income*, requires that all components of comprehensiveincome, including net income, be reported in the financial statements in theperiod in which they are recognized. Comprehensive income (loss) is defined asthe change in equity during a period from transactions and other events andcircumstances from non-owner sources. The Company’s accumulated othercomprehensive gain, as of December 31, 2008 and 2007, consisted of unrealizedgains and losses on investments available-for-sale and is reported instockholders’ equity.

 

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***Deferred Rent***

 

Rent expense is recorded on a straight-line basis overthe initial term of any lease. The difference between rent expense accrued andamounts paid under any lease agreement is recorded as deferred rent in theaccompanying balance sheets.

 

***Stock-Based Compensation***

 

Theweighted-average estimated fair value of employee stock options granted duringthe years ended December 31, 2008, 2007 and 2006 were $4.21, $8.39 and$9.54 per share, respectively, using the Black-Scholes model with the followingweighted average assumptions (annualized percentages):

 
| ** **              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| ** **              | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected volatility     |       | 62.81                                       | %          | 67.33 | % | 60.43 | % |
| Risk-free interest rate |       | 2.69                                        | %          | 4.62 | % | 4.88 | % |
| Dividend yield          |       | 0.0                                         | %          | 0.0 | % | 0.0 | % |
| Expected term           |       | 6 years                                     |       | 6 years |   | 6 years |   |

 

Theweighted-average estimated fair value of employee stock purchase rights grantedduring the years ended December 31, 2008, 2007 and 2006 were $2.04, $5.63and $6.94 per share, respectively, using the Black-Scholes model with thefollowing weighted average assumptions (annualized percentages):

 
| ** **              | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| ** **              | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected volatility     |       | 65.93                                       | %          | 64.59 | % | 67.33 | % |
| Risk-free interest rate |       | 1.99                                        | %          | 4.46 | % | 4.90 | % |
| Dividend yield          |       | 0.0                                         | %          | 0.0 | % | 0.0 | % |
| Expected term           |       | 1.25 years                                  |       | 1.25 years |   | 1.25 years |   |

 

Expectedvolatility is based on the Company’s historical volatility and the historicalvolatilities of the common stock of comparable publicly traded companies. Therisk-free interest rate for the expected term of the option is based on theaverage United States Treasury yield curve at the balance sheet date forthe expected term.  The expected term ofoptions granted is derived from the average midpoint between vesting and thecontractual term, as described in SAB No. 107, *Share-Based Payment. *The assumptions related to expected volatility and risk-freeinterest rate used for the valuation of stock options under the Company’s stockplan differ from those used for the valuation of stock purchase rights underthe Company’s employee stock purchase plan primarily due to the difference intheir respective expected terms.

 

Asstock-based compensation expense recognized in the Statement of Operations for2008 and 2007 is based on awards ultimately expected to vest, it should bereduced for estimated forfeitures.  SFAS123R requires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates.  Pre-vesting forfeitures wereestimated to be approximately 6.8%, 3.7% and 7.2% for the years ended December 31,2008, 2007 and 2006, respectively, based on historical experience.

 

Compensationexpense related to stock-based compensation for options and awards grantedsubsequent to the adoption of SFAS 123R is recognized on a straight-linebasis.  Compensation expense related tostock-based compensation is allocated to research and development or generaland administrative based upon the department to which the associated employeeor non-employee reports.

 

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Totalestimated stock-based compensation expense, related to all of the Company’sstock-based awards granted to employees and non-employee directors, recognizedfor the years ended December 31, 2008, 2007 and 2006 was comprised asfollows (in thousands):

 
| ** **                                                           | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                           | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Research and development                                             |       | $                                           | (2,262     | ) | $ | (1,997 | ) | $ | (1,939 | ) |
| General and administrative                                           |       | (4,000                                      | )          | (4,222 | ) | (4,373 | ) |
| Employee and non-employee director  stock-based compensation expense |       | $                                           | (6,262     | ) | $ | (6,219 | ) | $ | (6,312 | ) |

 

AtDecember 31, 2008, total unrecognized estimated compensation expenserelated to non-vested stock options granted prior to that date was $9.8million, which is expected to be recognized over a weighted average period of1.8 years.

 

***Net Loss Per Share***

 

The Company calculated net loss per share inaccordance with SFAS No. 128, *EarningsPer Share*, and SAB No. 98, *Earnings Per Share*.Basic earnings per share (“EPS”) is calculated by dividing the net loss by theweighted average number of common shares outstanding for the period, withoutconsideration for common stock equivalents. Diluted EPS is computed by dividingthe net income or loss by the weighted average number of common shareequivalents outstanding for the period determined using the treasury-stockmethod.  Dilutive common shareequivalents include the dilutive effect of in-the-money shares, which iscalculated based on the average share price for each period using the treasurystock method. Under the treasury stock method, the exercise price of a share,the amount of compensation cost, if any, for future service that the Companyhas not yet recognized, and the amount of estimated tax benefits that would berecorded in paid-in capital, if any, when the share is exercised are assumed tobe used to repurchase shares in the current period.  For purposes of this calculation, commonstock subject to repurchase by the Company, convertible preferred stock,options, and warrants are considered to be common stock equivalents and areonly included in the calculation of diluted earnings per share when theireffect is dilutive.

 

The following table sets forth the computation ofbasic and diluted net loss per share for the respective periods.

 
| ** **                                                     | ** ** | **Years Ended December 31,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                     | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Historical:**                                                |       |                                        |       |   |   |   |   |
| Net loss (in thousands)                                        |       | $                                           | (26,934    | ) | $ | (21,831 | ) | $ | (23,057 | ) |
|                                                           |       |                                        |       |   |   |   |   |
| Weighted average common shares                                 |       | 30,602,635                                  |       | 30,350,277 |   | 29,910,453 |   |
| Weighted average unvested common shares  subject to repurchase |       | (154                                        | )          | (23,509 | ) | (100,599 | ) |
|                                                           |       |                                        |       |   |   |   |   |
| Denominator for basic and diluted earnings  per share          |       | 30,602,481                                  |       | 30,326,768 |   | 29,809,854 |   |
|                                                           |       |                                        |       |   |   |   |   |
| Basic and diluted net loss per share                           |       | $                                           | (0.88      | ) | $ | (0.72 | ) | $ | (0.77 | ) |

 

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| ** **                                                                                                  | ** ** | **Years Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2008**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                        |       |                                        |       |   |   |   |   |
| **Historical outstanding antidilutive  securities not included in diluted net loss per share calculation:** | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common stock subject to repurchase                                                                          |       | —                                      |       | 1,275 |   | 59,426 |   |
| Options to purchase common stock                                                                            |       | 5,035,184                                   |       | 4,120,085 |   | 3,489,874 |   |
|                                                                                                        |       |                                        |       |   |   |   |   |
|                                                                                                        |       | 5,035,184                                   |       | 4,121,360 |   | 3,549,300 |   |

 

***Segment Reporting***

 

The Company currently operates in a single operatingsegment.  The Company generates revenuesfrom collaborations that result primarily from its underlying research anddevelopment activities.  In addition,financial results are prepared and reviewed by management as a single operatingsegment.  The Company periodicallyevaluates the benefits of operating in distinct segments and will reportaccordingly when such distinction is made.

 

***Recent Accounting Pronouncements***

 

InMay 2008, the FASB issued SFAS No. 162, *TheHierarchy of Generally Accepted Accounting Principles*.  SFAS No. 162 identifies the sources ofaccounting principles and the framework for selecting the principles to be usedin the preparation of financial statements that are presented in conformitywith GAAP in the United States (the GAAP hierarchy). SFAS No. 162 iseffective 60 days following the SEC’s approval of the Public Company AccountingOversight Board amendments to AU Section 411, *The Meaning of**Present Fairly inConformity With Generally Accepted Accounting Principles*. TheCompany does not expect the adoption of SFAS No. 162 to have a materialimpact on its financial statements.

 

***Adoption of New Accounting Standards***

 

On January 1, 2008 the Company adopted the provisions of SFAS No. 157,*Fair Value Measurement*, related to itsfinancial assets.  The Company measurescertain assets at fair value as discussed through the footnotes to itsquarterly and annual financial statements.

 

On January 1, 2008 the Company adopted the provision of SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities*.  SFASNo. 159 allows certain financial assets and liabilities to be recognized,at the Company’s election, at fair market value, with any gains or losses forthe period recorded in the statement of income.  SFAS No. 159includes available-for-sales securities in the assets eligible for thistreatment.  Currently, the Company records the gains or losses for theperiod in comprehensive income and in the equity section of the balancesheet.  At this time, the Company has notelected to account for any available-for-sale securities using the provisionsof SFAS No. 159.

 

OnJanuary 1, 2008 the Company adopted EITF Issue No. 07-1, *Accounting for Collaborative Arrangements Related to the Developmentand Commercialization of Intellectual Property. *Companies may enter into arrangements with other companies tojointly develop, manufacture, distribute, and market a product. Often theactivities associated with these arrangements are conducted by thecollaborators without the creation of a separate legal entity (that is, thearrangement is operated as a “virtual joint venture”). The arrangementsgenerally provide that the collaborators will share, based on contractuallydefined calculations, the profits or losses from the associated activities.Periodically, the collaborators share financial information related to productrevenues generated (if any) and costs incurred that may trigger a sharingpayment for the combined profits or losses. The consensus requirescollaborators in such an

 

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arrangementto present the result of activities for which they act as the principal on agross basis and report any payments received from (made to) other collaboratorsbased on other applicable GAAP or, in the absence of other applicable GAAP, basedon analogy to authoritative accounting literature or a reasonable, rational,and consistently applied accounting policy election.  As the Company’s collaborative agreements donot incorporate such revenue- and cost-sharing arrangements, the adoption ofEITF Issue No. 07-1 did not have an impact on the Company’s financialstatements.

 

On January 1,2008 the Company adopted the provisions of EITF Issue No. 07-3, *Accounting for Nonrefundable Advance Payments for Goods and Services toBe Used in Future Research and Development Activities*.  The consensus requires companies to defer andcapitalize prepaid, nonrefundable research and development payments to thirdparties over the period that the research and development activities areperformed or the services are provided, subject to an assessment ofrecoverability.  The adoption of EITFIssue No. 07-3 did not have an impact on the Company’s financialstatements.

 

**2. Balance Sheet Details**

 

***Investments Available-for-Sale***

 

The following is a summary of investmentsavailable-for-sale securities at December 31, 2008 (in thousands):

 
| ** **                            | ** ** | **Amortized Cost** | ** ** | **Unrealized Gain** | ** ** | **Unrealized Loss** | ** ** | **Estimated  Fair Value** | ** ** |
|---------------------------------------|------------|-------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------------|------------|
| United States Government Agency Bonds |       | $                       | 6,094      |                     | $          | 6                        |       | $                              | —     |   | $ | 6,100 |   |
|                                  |       |                    |       |                     |       |                     |       |                           |       |
|                                  |       | $                       | 6,094      |                     | $          | 6                        |       | $                              | —     |   | $ | 6,100 |   |

 

The following is a summary of investmentsavailable-for-sale securities at December 31, 2007 (in thousands):

 
| ** **                            | ** ** | **Amortized Cost** | ** ** | **Unrealized Gain** | ** ** | **Unrealized Loss** | ** ** | **Estimated  Fair Value** | ** ** |
|---------------------------------------|------------|-------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------------|------------|
| United States Government Agency Bonds |       | $                       | 33,166     |                     | $          | 16                       |       | $                              | —     |   | $ | 33,182 |   |
| Corporate Notes                       |       | 5,993                   |       | 5                        |       | —                   |       | 5,998                          |       |
| Commercial Paper                      |       | 3,468                   |       | —                   |       | (7                       | )          | 3,461                          |       |
|                                  |       |                    |       |                     |       |                     |       |                           |       |
|                                  |       | $                       | 42,627     |                     | $          | 21                       |       | $                              | (7         | ) | $ | 42,641 |   |

 

Gross realized gains and losses on available-for-salesecurities were immaterial during the years ended December 31, 2008 and2007. All of the available-for-sale securities have a contractual maturity at December 31,2008 of one year or less.

 

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***Property and Equipment***

 

Property and equipment consists of the following (inthousands):

 
| ** **                                      | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                      | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Scientific equipment                            |       | $                                     | 10,225     |   | $ | 8,690 |   |
| Computer equipment                              |       | 3,052                                 |       | 2,568 |   |
| Furniture and fixtures                          |       | 1,027                                 |       | 1,005 |   |
| Leasehold improvements                          |       | 11,792                                |       | 11,679 |   |
|                                            |       |                                  |       |   |   |
|                                            |       | 26,096                                |       | 23,942 |   |
| Less accumulated depreciation and  amortization |       | (12,678                               | )          | (9,407 | ) |
|                                            |       |                                  |       |   |   |
|                                            |       | $                                     | 13,418     |   | $ | 14,535 |   |

 

Depreciation expense was $3.6 million, $3.0 millionand $1.6 million for the years ended December 31, 2008, 2007 and 2006,respectively.

 

 

***Accounts Payable and Accrued Expenses***

 

Accounts payable and accrued expenses consist of thefollowing (in thousands):

 
| ** **                | ** ** | **As of December 31,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|
| ** **                | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Accounts payable          |       | $                                     | 759        |   | $ | 739 |   |
| Accrued employee benefits |       | 4,002                                 |       | 3,766 |   |
| Other accrued expenses    |       | 1,147                                 |       | 1,274 |   |
|                      |       |                                  |       |   |   |
|                      |       | $                                     | 5,908      |   | $ | 5,779 |   |

 

**3.****                                      FairValue Disclosures**

 

InSeptember 2006, the FASB issued SFAS No. 157, which definesfair value, establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. SFAS No. 157 also requires the Company to consider its own creditspreads when measuring the fair value of liabilities, includingderivatives.  Effective January 1,2008, the Company adopted the provisions of SFAS No. 157. The Company didnot record any cumulative adjustment as a result of adopting SFAS No. 157.

 

Thefollowing table presents information about the Company’s financial assetsmeasured at fair value on a recurring basis as of December 31, 2008, andindicates the fair value hierarchy of the valuation techniques utilized by theCompany to determine such fair value. In general, fair values determined byLevel 1 inputs utilize quoted prices (unadjusted) in active markets foridentical assets or liabilities that the Company has the ability toaccess.  The Company classifies moneymarket funds as Level 1 assets.  Fairvalues determined by Level 2 inputs utilize inputs other than quoted pricesincluded in Level 1 that are observable for the asset or liability, eitherdirectly or indirectly. Level 2 inputs include quoted prices for similar assetsand liabilities in active markets, and inputs other than quoted prices that areobservable for the asset or liability, such as interest rates and yield curvesthat are observable at commonly quoted intervals. The Company classifies U. S.government agency securities and commercial paper holdings as Level 2 assets.  Level 3 inputs are unobservable inputs forthe asset or liability, and include situations where there is little, if any,market activity for the asset or liability. The Company does not hold any Level3 assets.  In certain cases, the inputsused to measure fair value may fall into different levels of thefair value hierarchy. In such cases, the level in the fair valuehierarchy within which the fair value measurement in its entirety falls hasbeen determined based on the lowest level input that is significant to the fairvalue measurement in itsentirety. The Company’s assessment of the significance of a particularinput to the fair value measurement in its entirety requires judgment, andconsiders factors specific to the asset or liability.

 

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Assetsthat have recurring measurements are shown below:

 
| ** **                        | ** ** | ** **                                           | ** ** | **Fair Value Measurement at Reporting Date Using**                | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| **Description**                   | ** ** | **Balance as of  December 31,  2008** | ** ** | **Quoted Prices  in Active  Markets for  Identical  Assets (Level 1)** | ** ** | **Significant  Other  Observable  Inputs (Level 2)** | ** ** | **Significant  Unobservable  Inputs (Level 3)** | ** ** |
|                              |       |                                                 |       |                                                                                            |       |   |   |   |   |
| Financial instruments owned:      |       |                                                 |       |                                                                                            |       |   |   |   |   |
| Money market funds                |       | $                                                    | 30,845     |                                                                                            | $          | 30,845 |   | $ | — |   | $ | — |   |
| U.S. government agency securities |       | 9,100                                                |       | —                                                                                          |       | 9,100 |   | — |   |
| Total financial instruments owned |       | $                                                    | 39,945     |                                                                                            | $          | 30,845 |   | $ | 9,100 |   | $ | — |   |

 

**4. Product Discovery and Development Collaborations**

 

*Ajinomoto.*    In March 2006,the Company entered into a collaboration agreement with Ajinomoto for thediscovery and commercialization of novel flavor ingredients on an exclusivebasis in the soup, sauce and culinary aids, and noodle product categories, andon a co-exclusive basis in the bouillon product category within Japan and otherAsian markets.  The agreement requiresAjinomoto to pay an upfront license fee and make research and developmentfunding payments for up to three years. The Company is also eligible to receivemilestone payments upon the achievement of specific product discovery anddevelopment goals and, in the event of commercialization, receive royalties onsales of products containing new flavor ingredients developed under theagreement until the expiration of relevant patents.

 

In April 2007, the Company and Ajinomoto amendedthe agreement to expand Ajinomoto’s rights into North America.  Under the terms of the April amendment,Ajinomoto has agreed to pay the Company a non-refundable upfront license feeand the Company is eligible to receive an additional milestone payment uponachievement of a specific goal.  TheCompany is also eligible to receive minimum periodic royalty payments.

 

In August 2007, the Company and Ajinomoto furtheramended the agreement to expand Ajinomoto’s rights into additional productcategories and geographies that were not previously licensed by theCompany.  Under the terms of the August amendment,Ajinomoto has agreed to pay the Company a non-refundable upfront licensefee.  The Company is also eligible toreceive minimum periodic royalty payments.

 

Through December 31, 2008, the Company hasreceived $16.3 million in upfront fees and research and development funding,one milestone of $500,000 and cost reimbursement payments of $284,000.  If all milestones are achieved, and includingthe $17.1 million in upfront fees, research and development funding, milestoneand cost reimbursements paid through December 31, 2008, the Company may beentitled to up to $18.3 million in upfront fees, research and developmentfunding and milestone payments.  Inaddition to the upfront fees, research and development funding and milestonepayment, the Company has received minimum periodic royalty payments.  These minimum periodic royalty payments arenon-refundable.  Under the terms of thecontract, Ajinomoto will provide the Company a sales report and the Companywill record any additional calculated royalties as royalties from productsales.  There is no guarantee that theCompany will receive any further milestone payments or royalties under thiscollaboration.

 

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In October 2006, the Company entered into asecond collaboration agreement with Ajinomoto for the discovery andcommercialization of specified natural flavor ingredients.  The agreementrequires Ajinomoto to make research and development funding payments for up tothree years. The Company is also eligible to receive milestone payments uponthe achievement of specific product discovery and development goals and, in theevent of commercialization, receive royalties on sales of products containingnew flavor ingredients developed under the agreement.

 

Under the second collaborative agreement, through December 31,2008 the Company has received $1.1 million in research and developmentfunding.  If all milestones are achieved,and including the $1.1 million in research and development funding paid throughDecember 31, 2008, the Company may be entitled to up to $2.3 million inresearch and development funding and milestone payments.  In addition, upon commercialization, theCompany is entitled to receive minimum periodic royalties and royalty paymentsbased on sales of products containing flavor ingredients developed under theagreement.  There is no guarantee thatthe Company will receive any future milestone payments or royalties under thiscollaboration.

 

*Cadbury.*    In July 2005,the Company entered into a collaboration agreement with Cadbury for thediscovery and commercialization of new flavor ingredients in the gumconfectionary area. The agreement requires Cadbury to pay an upfront licensefee and to make research funding payments for up to two years. The Company isalso eligible to receive milestone payments upon the achievement of specificproduct discovery and development goals and, in the event of commercialization,receive royalties on sales of products containing new flavor ingredientsdeveloped under the agreement.

 

In July 2007, the Company amended itsCollaborative Research and License Agreement with Cadbury, dated July 15,2005, to extend the collaborative period for an additional twelve months,through July 15, 2008.  In July 2008,the Company further amended its Collaborative Research and License Agreementwith Cadbury to further extend the collaborative period for an additionaltwelve months, through July 15, 2009. During the extension periods, the Company will continue to work withCadbury on the discovery and commercialization of new flavor ingredients in thegum confectionary area.  Under the termsof the first extension, Cadbury paid the Company incremental research fundingof up to $600,000 based on discovery progress during the initial extension period. Under the terms of the second extension, Cadbury has agreed to pay theCompany incremental research funding of up to $600,000 based on discoveryprogress during the second extension period.

 

Through December 31, 2008, the Company hasreceived $2.8 million in non-refundable upfront license fees and researchfunding. If all milestones are achieved, and including the $2.8 million inresearch and development funding paid through December 31, 2008, theCompany may be entitled to up to $4.3 million. There is no guarantee thatthe Company will receive any milestone payments or royalties under thiscollaboration.

 

*Campbell.*    In March 2001,the Company entered into a collaboration agreement with Campbell to work for athree-year collaborative period for the discovery and development of specifiedflavors and flavor enhancers. The agreement requires Campbell to make researchfunding payments over three years totaling $3.6 million. The Company isalso eligible to receive milestone payments upon the achievement of a specificproduct development goal and, in the event of commercialization, receiveroyalties on future net sales of collaborator products containing a discoveredingredient.

 

The agreement was amended in July 2002 to providefor an option to negotiate the right to expand the field to include additionalspecified products. The Company received $1.8 million from Campbell forthe option. The agreement was further amended in November 2002 to redefinecalculated royalties during the royalty term. In July 2003, the Company received $650,000 in additional upfrontresearch support funding and expense reimbursement.

 

The agreement was further amended in March 2004to extend the collaborative period until the earlier of March 2006 or whena flavor or flavor enhancer selected by Campbell receives Generally Recognizedas Safe (“GRAS”) determination, subject to earlier termination under specifiedcircumstances. Under the terms of the extension, the Company will provideadditional research and receive additional research funding totaling$3.0 million for two additional years.

 

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The agreement was further amended in February 2006to extend the collaborative period until the earlier of March 2009 or whena flavor or flavor enhancer selected by Campbell receives a GRAS determination,subject to earlier termination under specified circumstances. Under the termsof the extension, the Company will provide additional research and receiveadditional research funding totaling up to $3.0 million for threeadditional years.

 

Through December 31, 2008, the Company hasreceived $10.9 million in option payments and research and development funding.If all milestones are achieved, and including the $10.9 million in research anddevelopment funding paid through December 31, 2008, the Company may beentitled to up to $11.9 million. There is no guarantee that the Companywill receive any milestone payments or royalties under this collaboration.

 

*Coca-Cola.*    In April 2002,the Company entered into a collaboration agreement with Coca-Cola for thediscovery and development of specified flavors and flavor enhancers. Theagreement required Coca-Cola to make research funding payments over three yearstotaling $6.0 million. The Company is also eligible to receive milestonepayments upon the achievement of specific product development goals and, in theevent of commercialization, receive minimum periodic royalties and royalties onfuture sales of collaborator products containing a discovered ingredient.  The agreement was amended in April 2004 to extendthe collaborative period until April 2008, subject to earlier terminationunder specified circumstances. The agreement was further amended in April 2008to extend the collaborative period until April 2010.  Under terms of the first extension, theCompany provided additional research and received additional research fundingtotaling $6.0 million for three additional years.  Under the terms of the second extension, theCompany is providing additional research and is receiving additional researchfunding totaling $4.0 million for two additional years.

 

Through December 31, 2008, the Company hasreceived $13.5 million in research and development funding and onemilestone payment of $500,000. If all milestones are achieved, and includingthe $14.0 million in research and development funding and milestone payment,the Company may be entitled to up to $18.8 million. There is no guaranteethat the Company will receive any milestone payments or royalties under thiscollaboration.

 

***Firmenich***.  In December 2007, the Companyentered into a collaboration agreement with Firmenich to work for a three-yearcollaborative period to discover and develop novel compounds that may be usedby Firmenich on an exclusive basis worldwide as ingredients that impart a cooltaste in flavor systems.  Under theagreement, Firmenich has agreed to pay research funding and specified paymentsupon the achievement of milestones of up to $3.5 million.  In addition, in the event of regulatoryapproval of a discovered compound, the Company is entitled to minimum periodicroyalties.  In the event ofcommercialization, the Company is entitled to receive royalties on future salesof products containing a discovered flavor or flavor enhancer until theexpiration of relevant patents.

 

***Through December 31,2008, the Company has received $900,000 in research funding and $50,000 in costreimbursement payments.  If allmilestones are achieved and including the $950,000 in research funding and costreimbursement, the Company may be entitled to up to $3.6 million.  There is no guarantee that the Company willreceive any milestone payments or royalties under this collaboration.***

 

In November 2008,the Company entered into a Collaborative Commercialization and LicenseAgreement with Firmenich for S2383, the Company’s novel enhancer of thehigh-intensity sweetener sucralose.  Under the terms of the agreement,Firmenich has agreed to pay to the Company royalty payments based on sales ofS2383 when it is sold on either a stand-alone basis or within a flavor system.  Through December 31, 2008, the Companyhas not received any royalties based on sales of S2383.  There is no guarantee that the Company willreceive any royalties under this collaboration.

 

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*Kraft Foods Global, Inc.*    In December 2000,the Company entered into a collaboration agreement with Kraft Foods Global Inc.(“Kraft Foods”) for the discovery and development of flavor enhancers. Underthe terms of the collaboration, Kraft Foods agreed to pay research funding ofapproximately $1.4 million per year for three years. In May 2002, theagreement was amended to provide for an additional collaborative program. Thelevel of research support under the original program was reduced from$1.4 million to $1.1 million per year for the remainder of theresearch term. In May 2005 and July 2005, the agreement was furtheramended to extend the collaborative period until June 2005 and July 2007,respectively, and to provide for an additional specified product field.

 

Kraft Foods agreed to make research funding paymentsrelated to the May 2002 program of $1.8 million over the period from May 2002through December 2003, $1.8 million over the period from January 2004through May 2005, $339,000 over the period May 2005 through July 2005,and $1.7 million from July 2005 though November 2006.  The Company earned a milestone payment of$375,000 in 2002 and a milestone payment of $250,000 in 2006 under the May 2002research program.

 

In December 2005, theCompany further amended the agreement to provide for a new three-year discoveryand development collaboration. In November 2006, this agreement wasfurther amended to revise the structure of the research and developmentfunding.  Under the terms of the newcollaboration, Kraft Foods agreed to pay the Company an initial license fee andincremental research and development funding over the three-year period.  The Company was eligible to receive milestonepayments upon achievement of specific product discovery and development goals,and, in the event of commercialization, receive royalties based on sales ofKraft Foods products containing any flavor modifiers developed under theagreement.

 

In July 2007, the Company further amended thecollaboration agreement to extend until December 9, 2008 Kraft Foods’ abilityto evaluate novel flavor modifiers under development by us for potential use byKraft Foods on an exclusive basis in a specified product field in the dessertproduct category and on a co-exclusive basis in the powdered beverage productfield.  On October 31, 2007 theCompany received notification from Kraft Foods terminating the collaborationagreement effective as of December 9, 2007.  All rights previously licensed to Kraft Foodsreturned to the Company upon such termination.

 

Through December 31, 2008, the Company hasreceived $12.1 million in research and development funding and twomilestone payments which totaled $625,000.

 

*Nestlé.*    In April 2002,as amended in April 2005, April 2008 and September 2008, theCompany entered into a collaboration agreement with Nestlé for the discoveryand development of specified flavors and flavor enhancers. The agreementrequires Nestlé to make research funding payments through 2010, subject toearlier termination under specified circumstances.  The Company is also eligible to receivemilestone payments upon the achievement of specific product development goalsand, in the event of commercialization, receive royalties on net sales ofcollaborator products containing a discovered ingredient. The Company received paymentsfor the achievement of four milestones in 2002, 2003, 2004 and 2005.  The Company also received payment for thereimbursement of certain regulatory expenses in 2005.  Through December 31, 2008, the Companyhas received $12.7 million in research and development funding, fourmilestone payments of $375,000 each, and $339,000 in reimbursement of certainregulatory costs. In addition, the Company has received royalties on net salesof collaborator products containing discovered flavor ingredients. If allmilestones are achieved, and including the $14.5 million in research anddevelopment funding, milestones and reimbursement of certain regulatoryexpenses, the Company may be entitled to up to $18.4 million. .  In addition, the Company has received royaltypayments and minimum periodic royalty payments from Nestlé.  The agreement currently has a specifiedescalating payment arrangement in lieu of a sales-based royalty through March 2010.  After March 2010, the agreement willrevert back to a sales-based royalty. There is no guarantee that the Company will receive any furthermilestone payments or royalties under this collaboration.

 

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In October 2004, the Company entered into asecond product discovery and development collaboration agreement with Nestléwhich provides for a five-year collaborative period focusing on the discoveryand commercialization of specified novel flavor ingredients, subject toextension or earlier termination under specified circumstances.  This agreement has subsequently been extendedfor two three-month increments.  Underthe terms of the agreement, Nestlé has agreed to pay to the Company researchand development funding over five and one-half years, subject to earliertermination under specified circumstances. The Company is also eligible toreceive milestone payments upon achievement of specific product discovery anddevelopment goals, and in the event of commercialization, is entitled toreceive royalties on future net sales of products containing a discovered novelflavor ingredient.  There is no guaranteethat the Company will receive any milestone payments or royalties under thiscollaboration.

 

Under this second agreement, through December 31,2008, the Company has received $8.3 million in research and development fundingand one milestone of $350,000. If all milestones are achieved, and includingthe $8.6 million in research and development funding and milestone, the Companymay be entitled to up to $16.2 million. There is no guarantee that theCompany will receive any milestone payments or royalties under thiscollaboration.

 

*Solae.*    In April 2007,as amended in September 2008, the Company entered into a collaborationagreement with Solae for the discovery and commercialization of novel flavoringredients for soy proteins.  Theagreement requires Solae to make research funding payments through 2010,subject to earlier termination under specified circumstances.  The Company is also eligible to receivemilestone payments upon the achievement of specific product discovery anddevelopment goals, and in the event of commercialization, royalties on futuresales of products containing flavor ingredients developed under theagreement.  Through December 31,2008, the Company has received $1.9 million in research and development fundingand one milestone payment of $250,000. If all milestones are achieved and including the $2.2 million inresearch and development funding and milestone, the Company may be entitled toup to $5.8 million.  There is noguarantee that the Company will receive any further milestone payments orroyalties under this collaboration.

 

In connection with the above listed collaborationagreements, the Company has recognized development revenue of $16.8 million,$18.2 million and $12.2 million for the years ended December 31, 2008,2007 and 2006, respectively. As of December 31, 2008 and 2007, the Companyhas deferred revenue of $2.3 million and $6.7 million, respectively.

 

**5. Commitments**

 

***Leases and Loans***

 

The Company leases its primary office facility underthe Nexus Lease that expires on February 28, 2017. The Company moved themajority of its operations to the new facility in November 2006.  Rent payments on the facility commenced April 1,2007. The Nexus Lease provides for an annual minimum 3% rent increase. TheCompany began recognizing rent expense upon the facility being ready tooccupy.  Rent expense for the years endedDecember 31, 2008, 2007 and 2006 was $1.7 million, $2.1 million and $3.8million, respectively. Prior to moving to the new facility, the Company subletpart of the facility it occupied, and the sublease rental income for the yearended December 31, 2006 was $619,000. Sublease income is recorded as anoffset to the Company’s facilities expense. The Company has also entered intovarious operating lease agreements for office equipment.

 

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The estimated annual future minimum rental paymentsunder the Company’s operating leases in effect at December 31, 2008, whichexpire through 2017, for the years ending December 31 are as follows (inthousands):

 
| ** **                   | ** ** | **Operating  Leases** | ** ** |
|------------------------------|------------|-----------------------|------------|
| 2009                         |       | $                     | 2,564      |   |
| 2010                         |       | 2,625                 |       |
| 2011                         |       | 2,688                 |       |
| 2012                         |       | 2,759                 |       |
| 2013                         |       | 2,837                 |       |
| Thereafter                   |       | 9,542                 |       |
|                         |       |                  |       |
| Total minimum lease payments |       | $                     | 23,015     |   |

 

In connection with a certain license agreement, theCompany’s annual future minimum obligation payments are $15,000 for the yearending December 31, 2009.

 

**6. Stockholders’ Equity**

 

***Convertible Preferred Stock***

 

The Company’s certificate of incorporation, as amendedand restated, authorizes the Company to issue up to 7,500,000 shares ofpreferred stock, with a par value of $0.001, in one or more series. The Boardof Directors may authorize the issuance of convertible preferred stock withvoting or conversion rights that could adversely affect the voting power orother rights of the holders of the common stock. The issuance of convertiblepreferred stock, while providing flexibility in connection with possibleacquisitions and other corporate purposes, could, among other things, have theeffect of delaying, deferring or preventing a change in control of the Companyand may adversely affect the market price of the common stock and the votingand other rights of the holders of common stock.  No shares of convertible preferred stock wereoutstanding as of December 31, 2008 or 2007.

 

***Equity Incentive Plan***

 

During 1999, the Company adopted the 1999 EquityIncentive Plan, which was amended and restated by the 2004 Equity IncentivePlan in connection with the Company’s initial public offering (the “Plan”),which provides for the grant of incentive and non-statutory stock options andrestricted stock purchase rights to employees, directors and consultants of theCompany. The Plan, as amended, authorizes the Company to issue up to10,746,534 shares of common stock. At December 31, 2008, the Company has repurchased a total of131,153 shares and 3,623,961 shares remain available for grant underthe Plan.  The Company issues new sharesupon the exercise of stock options.

 

The Plan allows the Company to grant restricted stockpurchase rights at no less than 85% of the fair value of the Company’s commonstock as determined by the Board of Directors at the date of the grant. Allrestricted stock purchase rights vest in accordance with a vestingschedule determined by the Board of Directors, typically over a four-yearperiod.  Since the Plan’s inception,under the Plan, 457,069 restricted stock purchase rights have been granted atexercise prices ranging from $0.35 to $0.94 per share, all of which have beenexercised as of December 31, 2008, of which no shares are subject torepurchase.  No restricted stock purchaserights were granted during the years ended December 31, 2008, 2007 or2006.

 

Options granted under the Plan generally expire nolater than 10 years from the date of grant (five years for a 10% stockholder).Options generally vest and become fully exercisable over a period of fouryears.  In certain cases, grants toofficers, directors and consultants can be made fully exercisable at the dateof grant. The exercise price of incentive stock options must be equal to atleast the fair value of the Company’s common stock on the date of grant, andthe exercise price of non-statutory stock options may be no less than 85% ofthe fair value of the Company’s common stock on the date of grant. The exercise

 

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priceof any option granted to a 10% stockholder may be no less than 110% of the fairvalue of the Company’s common stock on the date of grant.  The Company has an option to repurchase allunvested shares, at the original purchase price, upon the voluntary orinvoluntary termination of employment with, or consulting services provided to,the Company for any reason.  At December 31,2008, no shares of common stock were unvested and subject to repurchase.

 

The following is a further breakdown of the optionsoutstanding as of December 31, 2008:

 
| ** **                          | ** **  | ** **                  | ** ** | **Options Outstanding**                        | ** ** | **Options Vested and Exercisable** | ** ** |
|-------------------------------------|-------------|-----------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **Range of  Exercise  Prices** | ** **  | **Number of  Options** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price**            | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                                |        |                        |       |                                                |       |                                              |       |   |   |   |   |
| $                                   | 0.74-2.61   |                        | 413,186    |                                                | 4.27       |                                              | $          | 0.92 |   | 411,986 |   | $ | 0.92 |   |
| $                                   | 2.61-6.02   |                        | 833,800    |                                                | 6.22       |                                              | $          | 5.84 |   | 727,050 |   | $ | 5.98 |   |
| $                                   | 6.02-7.49   |                        | 1,000,223  |                                                | 9.05       |                                              | $          | 7.36 |   | 16,133 |   | $ | 6.30 |   |
| $                                   | 8.00-12.91  |                        | 1,466,439  |                                                | 7.39       |                                              | $          | 11.39 |   | 962,836 |   | $ | 10.80 |   |
| $                                   | 13.10-16.25 |                        | 1,285,090  |                                                | 7.35       |                                              | $          | 15.35 |   | 893,318 |   | $ | 15.34 |   |
| $                                   | 16.45-18.99 |                        | 36,446     |                                                | 6.70       |                                              | $          | 18.14 |   | 29,899 |   | $ | 18.13 |   |
|                                |        |                        |       |                                                |       |                                              |       |   |   |   |   |
|                                |        | 5,035,184                   |       |                                                |       | $                                                 | 9.87       |   | 3,041,222 |   | $ | 9.69 |   |

 

As of December 31, 2008, the total intrinsicvalue of options outstanding and exercisable was $730,000.  At December 31, 2008, the weighted averageremaining contractual term for options vested and exercisable was 6.4 years.

 

The following is a summary of stock option and stockaward activity under the Plan through December 31, 2008:

 
| ** **                            | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|---------------------------------------|------------|----------------------------|------------|---------------------------------------|------------|
|                                  |       |                       |       |                                  |       |
| Outstanding at January 1, 2006   |       | 2,483,417                  |       | $                                     | 6.15       |   |
| Granted                               |       | 1,355,290                  |       | $                                     | 15.50      |   |
| Exercised                             |       | (337,514                   | )          | $                                     | 5.16       |   |
| Cancelled                             |       | (11,319                    | )          | $                                     | 10.26      |   |
|                                  |       |                       |       |                                  |       |
| Outstanding at December 31, 2006 |       | 3,489,874                  |       | $                                     | 9.86       |   |
| Granted                               |       | 1,214,691                  |       | $                                     | 12.86      |   |
| Exercised                             |       | (230,492                   | )          | $                                     | 5.61       |   |
| Cancelled                             |       | (353,988                   | )          | $                                     | 12.70      |   |
|                                  |       |                       |       |                                  |       |
| Outstanding at December 31, 2007 |       | 4,120,085                  |       | $                                     | 10.74      |   |
| Granted                               |       | 1,184,490                  |       | $                                     | 7.08       |   |
| Exercised                             |       | (31,269                    | )          | $                                     | 5.91       |   |
| Cancelled                             |       | (238,122                   | )          | $                                     | 11.53      |   |
|                                  |       |                       |       |                                  |       |
| Outstanding at December 31, 2008 |       | 5,035,184                  |       | $                                     | 9.87       |   |

 

Thetotal intrinsic value of stock option exercises during the years ended December 31,2008, 2007 and 2006 was $18,000, $1.5 million and $3.1 million, respectively.

 

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***Employee Stock Purchase Plan***

 

During 2004, the Companyadopted the 2004 Employee Stock Purchase Plan (the “Purchase Plan”), whichallows all eligible employees to purchase shares of the Company’s common stockat the lower of: (i) 85% of the fair market value on the first day of atwo-year offering period; or (ii) 85% of the fair market value on the lastdate of each six-month purchase period within the two-year offeringperiod.  Employees may authorize theCompany to withhold up to 15% of their compensation during any purchase period,subject to certain limitations.  ThePurchase Plan authorizes up to 1,233,096 shares to be granted.  At December 31, 2008, 515,718 shares ofcommon stock have been issued under the Purchase Plan at an average price of$6.00 per share.

 

***Shares Reserved for Future Issuance***

 

The following shares ofcommon stock are reserved for future issuance:

 
| ** **                                              | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|
| Common stock options granted and  outstanding           |       | 5,035,184                   |       |
| Common stock options reserved for future  grant         |       | 3,623,961                   |       |
| Common stock reserved under Purchase Plan               |       | 717,378                     |       |
| Total common stock shares reserved for  future issuance |       | 9,376,523                   |       |

 

***Shareholders’ Rights Plan***

 

In February 2005,the Company entered into a Share Purchase Rights Plan (the “Rights Plan”).  Terms of the Rights Plan provide for adividend distribution of one preferred share purchase right (a “Right”) foreach outstanding share of common stock, par value $0.001 per share (the “Common Shares”),of the Company.  The dividend was payable on February 21, 2005 to thestockholders of record on that date.  Each Right entitles the registeredholder to purchase from the Company one one-hundredth of a share of Series AJunior Participating Preferred Stock, par value $0.001 per share (the “Preferred Shares”),at a price of $100.00 per one one-hundredth of a Preferred Share, subject toadjustment.  Each one one-hundredth of a share of Preferred Shares hasdesignations and powers, preferences and rights, and the qualifications,limitations and restrictions which make its value approximately equal to thevalue of a Common Share.  The description and terms of the Rights are setforth in a Rights Agreement, dated as of February 14, 2005 entered intobetween the Company and Mellon Investor Services LLC, as rights agent.

 

**7.Income Taxes**

 

On July 13, 2006, theFASB issued Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes — An Interpretation of FASB Statement No. 109*(“FIN48”), which clarifies the accounting for uncertainty in income taxes recognizedin an entity’s financial statements in accordance with SFAS No. 109, *Accounting for Income Taxes*, and prescribes a recognitionthreshold and measurement attributes for financial statement disclosure of taxpositions taken or expected to be taken on a tax return.  Under FIN 48, the impact of an uncertainincome tax position on the income tax return must be recognized at the largest amountthat is more-likely—than-not to be sustained upon audit by the relevant taxingauthority.  An uncertain income taxposition will not be recognized if it has less than a 50% likelihood of beingsustained.  Additionally, FIN 48 providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15,2006.

 

The Company adopted theprovisions of FIN 48 on January 1, 2007, and commenced analyzing filingpositions in all of the federal and state jurisdictions where it is required tofile income tax returns, as well as all open tax years in thesejurisdictions.  As a result of adoption,the Company recorded no additional tax liability.  The total amount of unrecognized tax benefitsas of January 1, 2008 was zero.  Asof December 31, 2008, the Company has completed its analysis of whetherthe deferred tax assets for net operating losses of $105.8 million and researchand development credits of $2.6 million generated in years prior to 2008 wouldbe subject to an annual limitation as a result of an ownership change.  The Company’s analysis 

 

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concluded that the Company’s deferred taxassets for net operating losses and research and development credits will besubject to an annual limitation.  Assuch, $3.1 million of net operating losses will expire and $760,000 of researchand development credits will expire as a result of the multiple ownershipchanges which occurred.  The Company hasdetermined that it will reserve a portion of the available research anddevelopment credit carryforward as required by FIN 48.  As a result of the completion of theanalysis, the Company has included the net operating loss and research anddevelopment credit carryforward net of the amount to be expired as a deferredtax asset.  However, the Company hasdetermined that sufficient future taxable income may not be available torealize the deferred tax assets for net operating loss and research anddevelopment credit carryforwards. Therefore, the Company has recognized a full valuation allowance forthese deferred tax assets.

 

The completion of theCompany’s Section 382 and 383 analyses for years prior to 2008 does notprevent further limitations to the Company’s net operating loss and researchand development credit carryforwards. Additional limitations may arise if the Company experiences an ownershipchange in subsequent years.

 

Arollforward of changes in the Company’s unrecognized tax benefits is shownbelow (in thousands).

 
| Balance at January 1, 2008                               |   | $      | — |   |
|---------------------------------------------------------------|--------|--------|--------|--------|
| Additions based on tax positions related to  the current year |   | 190    |   |
| Additions for tax positions of prior years                    |   | 906    |   |
| Reductions for tax positions of prior years                   |   | — |   |
| Settlements                                                   |   | $      | — |   |
| Balance at December 31, 2008                             |   | 1,096  |   |

 

Due to theexistence of the valuation allowance, future changes in unrecognized taxbenefits will not impact the Company’s effective tax rate.

 

The Company is subject totaxation in the U.S. and state jurisdictions. The Company’s tax years for 2005 and forward are subject to examinationby the IRS and tax years 2004 and forward are subject to examination byCalifornia tax authorities.  Due to thecarryforward of unutilized net operating losses and research and developmentcredits, the IRS and the California tax authorities may go back to the taxableyears in which the net operating losses and research and development creditsbecame available to recompute such amounts, but not redetermine the taxliability for such years.  The Company iscurrently not under examination by any taxing authorities.

 

The Company’s practice is torecognize interest and/or penalties related to income tax matters in income taxexpense.  During the twelve months ended December 31,2008, the Company did not recognize any interest or penalties.  Upon adoption of FIN 48 on January 1,2007, the Company did not record any interest or penalties.

 

The adoptionof FIN 48 did not impact the Company’s financial condition, results ofoperations or cash flows.  At December 31,2008, the Company had net deferred tax assets of $61.4 million.  These deferred tax assets are primarilycomposed of capitalized research and development costs, deferred revenue andstock compensation expense.  Because theCompany concluded its Section 382 and 383 analyses, this amount alsoincludes the Company’s net operating loss and research and development creditcarryforwards after taking into account such amounts the Company has determinedwill expire as a result of ownership changes that occurred in previousyears.  Due to uncertainties surroundingthe Company’s ability to generate future taxable income to realize theseassets, a full valuation has been established to offset the net deferred taxasset.

 

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Significant components ofthe Company’s net deferred tax assets at December 31, 2008 and 2007 areshown below (in thousands). A valuation allowance of $61.4 million and $12.1million has been established to offset the net deferred tax assets as of December 31,2008 and 2007, respectively, as realization of such assets is uncertain.

 
| ** **                                  | ** ** | **Years ended  December 31,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                | ** ** | **2007** | ** ** |
|                                        |       |                                    |       |   |   |
| Deferred tax assets:                        |       |                                    |       |   |   |
| Net operating loss carryforwards            |       | $                                       | 45,518     |   | $ | — |   |
| Capitalized research and development        |       | 5,473                                   |       | 4,777 |   |
| Research and development credits            |       | 3,292                                   |       | — |   |
| Deferred revenue                            |       | 931                                     |       | 2,738 |   |
| Stock compensation                          |       | 4,278                                   |       | 2,889 |   |
| Other, net                                  |       | 1,899                                   |       | 1,695 |   |
|                                        |       |                                    |       |   |   |
| Total deferred tax assets                   |       | 61,391                                  |       | 12,099 |   |
|                                        |       |                                    |       |   |   |
| Total deferred tax liabilities              |       | —                                  |       | — |   |
|                                        |       |                                    |       |   |   |
| Net deferred tax assets                     |       | 61,391                                  |       | 12,099 |   |
| Valuation allowance for deferred tax assets |       | (61,391                                 | )          | (12,099 | ) |
|                                        |       |                                    |       |   |   |
| Net deferred tax assets                     |       | $                                       | —     |   | $ | — |   |

 

Theprovision for income taxes on earnings subject to income taxes differs from thestatutory federal rate at December 31, 2008, 2007 and 2006, due to thefollowing (in thousands):

 
| ** **                                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal income taxes at 35%                        |       | $        | (9,427     | )        | $          | (7,640   | )          | $ | (8,070 | ) |
| State income tax, net of federal benefit           |       | (1,548   | )          | (1,254   | )          | (1,324   | )          |
| Tax effect on non-deductible expenses and  credits |       | 3,570    |       | 374      |       | 890      |       |
| Increase in valuation allowance (1)                |       | 7,405    |       | 8,520    |       | 8,504    |       |
|                                               |       | $        | —     |     | $          | —   |       | $ | — |   |
|                                                    |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

----

(1) The replacementof the valuation allowance related to the net operating losses and research anddevelopment credits is not included in the increase in the valuationallowance.  See above for explanation.

 

As a result of theadoption of SFAS 123R the Company recognizes windfall tax benefits associatedwith the exercise of stock options directly to Stockholders’ equity only whenrealized.  Accordingly, deferred taxassets are not recognized for net operating loss carryforwards resulting fromwindfall tax benefits occurring from January 1, 2006 onward.  At December 31, 2008 deferred tax assetsdo not include excess tax benefits from stock-based compensation ofapproximately $1.1 million.

 

At December 31,2008, the Company had federal and California tax net operating losscarryforwards of approximately $130.5 million and $35.8 million,respectively.  The federal and Californiatax loss carryforwards will begin to expire in 2019 and 2009, respectively,unless previously utilized.

 

The Company also hadfederal and California research and development tax credit carryforwards ofapproximately $2.7 million and $2.6 million, respectively. The federalcredit carryforward will begin to expire in 2019 unless previously utilized andthe California credit will carry forward indefinitely until utilized.

 

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**8.Summary of Quarterly Financial Data (unaudited)**

 

The following is asummary of the unaudited quarterly results of operations for the years ended December 31,2008 and 2007 (in thousands, except per share amounts):

 
| ** **                                  | ** ** | **Year Ended December 31, 2008** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **First  Quarter**                                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| **Selected Quarterly Financial Data:**      |       |                                                 |       |   |   |   |   |   |   |
| Revenues                                    |       | $                                                    | 6,069      |   | $ | 3,566 |   | $ | 4,035 |   | $ | 3,496 |   |
| Total operating expenses                    |       | 11,452                                               |       | 11,552 |   | 10,762 |   | 11,589 |   |
| Net loss                                    |       | (4,823                                               | )          | (7,677 | ) | (6,479 | ) | (7,955 | ) |
| Basic and diluted net loss per common share |       | $                                                    | (0.16      | ) | $ | (0.25 | ) | $ | (0.21 | ) | $ | (0.26 | ) |

 
| ** **                                  | ** ** | **Year Ended December 31, 2007** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                  | ** ** | **First  Quarter**                                   | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| **Selected Quarterly Financial Data:**      |       |                                                 |       |   |   |   |   |   |   |
| Revenues                                    |       | $                                                    | 3,067      |   | $ | 3,737 |   | $ | 5,053 |   | $ | 6,363 |   |
| Total operating expenses                    |       | 10,563                                               |       | 10,427 |   | 10,667 |   | 11,789 |   |
| Net loss                                    |       | (6,596                                               | )          | (5,835 | ) | (4,762 | ) | (4,638 | ) |
| Basic and diluted net loss per common share |       | $                                                    | (0.22      | ) | $ | (0.19 | ) | $ | (0.16 | ) | $ | (0.15 | ) |

 

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**Item 9.    *Changes in and Disagreements with Accountants onAccounting and Financial Disclosure***

 

There were no changes in or disagreements with Ernst & YoungLLP on accounting and financial disclosure required to be reported under thisItem 9.

 

**Item 9A.    *Controls and Procedures***

 

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

 

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended, or the Exchange Act.Based on this evaluation, our principal executive officer and our principalfinancial officer concluded that our disclosure controls and procedures were effectiveas of the end of the period covered by this annual report.

 

**Management’sReport on Internal Control Over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rule 13a-15(f).Under the supervision and with the participation of our management, includingour President and Chief Executive Officer and our Senior Vice President andChief Financial and Business Officer, we conducted an evaluation of theeffectiveness of our internal control over financial reporting based on theframework in *Internal Control - IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on our evaluation under the framework in *Internal Control — Integrated Framework*,our management concluded that our internal control over financial reporting waseffective as of December 31, 2008.

 

**Changes inInternal Control Over Financial Reporting**

 

There was no change in ourinternal control over financial reporting during our most recent fiscal quarterthat has materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting.

 

**Report of Independent Registered Public AccountingFirm**

** **

The Board of Directors and Stockholders ofSenomyx, Inc.

** **

We have audited Senomyx Inc.’s internal control overfinancial reporting as of December 31, 2008, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Senomyx Inc.’smanagement is responsible for maintaining effective internal control overfinancial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’sReport on Internal Control Over Financial Reporting. Our responsibility is toexpress an opinion on the company’s internal control over financial reportingbased on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness ofinternal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

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Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.

 

In our opinion, Senomyx Inc. maintained, inall material respects, effective internal control over financial reporting asof December 31, 2008, based on****the COSO criteria**.**

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), thebalance sheets as of December 31, 2008 and 2007, and the relatedstatements of operations, stockholders’ equity and cash flows for each of thethree years in the period ended December 31, 2008 of Senomyx, Inc.and our report dated February 10, 2009 expressed an unqualified opinionthereon.

 

 
|                   | /s/  Ernst & Young LLP |
|------------------------|---------------------------------|
|                   |                            |
|                   |                            |
| San Diego, California  |                            |
| February 10, 2009 |                            |

 

**Item 9B.    *Other Information***

 

None.

 

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**PART III**

 

Certain information requiredby Part III of this Form 10-K is omitted from this report becauseregistrant will file a definitive Proxy Statement within 120 days after the endof its fiscal year pursuant to Regulation 14A for its 2009 Annual Meeting ofShareholders to be held on June 4, 2009, referred to as the ProxyStatement, and the information included therein is incorporated herein byreference.

 

**Item 10.    *Directors, Executive Officers and CorporateGovernance***

 

The information with respectto executive officers required by this item is set forth in Part I of thisreport.

 

We have adopted a Code ofBusiness Conduct and Ethics Policy that applies to our directors and employees(including our principal executive officer, principal financial officer,principal accounting officer and controller), and have posted the text of thepolicy on our website (www.senomyx.com) in connection with “Investor Relations”materials. In addition, we intend to promptly disclose (i) the nature ofany amendment to the policy that applies to our principal executive officer,principal financial officer, principal accounting officer or controller, orpersons performing similar functions and (ii) the nature of any waiver,including an implicit waiver, from a provision of the policy that is granted toone of these specified individuals, the name of such person who is granted thewaiver and the date of the waiver on our website in the future.

 

The other informationrequired by this item is incorporated by reference to the Proxy Statement underthe sections entitled “Election of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance.”

 

**Item 11.    *Executive Compensation***

 

The information required bythis item is incorporated herein by reference to the information from the ProxyStatement under the sections entitled “Executive Compensation,” “CompensationCommittee Report” and “Compensation Committee Interlocks and InsiderParticipation.”

 

**Item 12.    *Security Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters***

 

The information required bythis item is incorporated herein by reference to the information from the ProxyStatement under the sections entitled “Security Ownership of CertainBeneficial Owners and Management” and “Securities Authorized for Issuance underEquity Compensation Plans.”

 

**Item 13.    *Certain Relationships and Related Transactions, andDirector Independence***

 

The information required bythis item is incorporated herein by reference to the information from the ProxyStatement under the sections entitled “Election of Directors” and “CertainRelationships and Related Transactions.”

 

**Item 14.    *Principal Accountant Fees and Services***

 

The information required bythis item is incorporated herein by reference to the information from the ProxyStatement under the section entitled “Principal Accountant Fees andServices.”

 

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**PART IV**

 

**Item 15.    *Exhibits and Financial Statement Schedules***

 

**(a)**                                  1. ***Financial Statements***

 

See Index to FinancialStatements in Item 8 of this annual report on Form 10-K, which isincorporated herein by reference.

 

2.***Financial StatementSchedules***

 

All schedules have beenomitted because they are not applicable or required, or the informationrequired to be set forth therein is included in the Financial Statements ornotes thereto included in Item 8 of this annual report on Form 10-K.

 

3.***Exhibits***

** **
| **Exhibit  Footnote** | ** ** | **Exhibit Number** | ** ** | **Description of Document**                                                                                                                                                                                 |
|-----------------------|------------|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)                   |       | 3.1                     |       | Amended and Restated Certificate of Incorporation as currently in  effect.                                                                                                                                  |
| (2)                   |       | 3.2                     |       | Amended and Restated Bylaws as currently in effect.                                                                                                                                                         |
| (3)                   |       | 3.3                     |       | Certificate of Designation of Series A Junior Participating  Preferred Stock, as filed with the Secretary of State of Delaware on  February 14, 2005.                                             |
| (1)                   |       | 4.1                     |       | Form of Common Stock Certificate.                                                                                                                                                                      |
| (1)                   |       | 4.2                     |       | Fourth Amended and Restated Investor Rights Agreement dated  November 14, 2001, as amended February 27, 2002, between the  Registrant and certain of its stockholders.                            |
| (3)                   |       | 4.3                     |       | Form of Rights Certificate.                                                                                                                                                                            |
| (3)                   |       | 4.4                     |       | Rights Agreement, dated February 14, 2005 by and between the  Registrant and Mellon Investor Services LLP.                                                                                             |
| (1)                   |       | 10.1+                   |       | Form of Indemnity Agreement.                                                                                                                                                                           |
| (1)                   |       | 10.2+                   |       | Amended and Restated 2004 Equity Incentive Plan and Form of  Stock Option Agreement thereunder.                                                                                                        |
| (1)                   |       | 10.3+                   |       | 2004 Employee Stock Purchase Plan and Form of Offering Document  thereunder.                                                                                                                           |
| (1)                   |       | 10.4+                   |       | Employment letter agreement dated February 21, 2000 between the  Registrant and Mark Zoller, Ph.D.                                                                                                     |
| (1)                   |       | 10.5+                   |       | Employment letter agreement dated June 2, 2003 between the  Registrant and Kent Snyder.                                                                                                                |
| (1)                   |       | 10.6+                   |       | Employment letter agreement dated September 8, 2003 between the  Registrant and John Poyhonen.                                                                                                         |
| (1)                   |       | 10.7*                   |       | Exclusive License and Bailment Agreement dated March 10, 2000  between the Registrant and the Regents of the University of California.                                                                 |
| (1)                   |       | 10.8*                   |       | Collaborative Research and License Agreement dated November 1,  2000, as amended April 16, 2002, between the Registrant and Aurora  Biosciences Corporation.                                      |
| (1)                   |       | 10.9*                   |       | Collaborative Research and License Agreement dated March 28,  2001, as amended July 26, 2002, November 5, 2002 and  February 19, 2004 between the Registrant and Campbell Soup Company. |
| (1)                   |       | 10.10*                  |       | Collaborative Research and License Agreement dated April 18,  2002, as amended October 23, 2003, between the Registrant and Nestec,  Ltd.                                                         |
| (1)                   |       | 10.11*                  |       | Collaborative Research, Development, Commercialization and License  Agreement dated April 22, 2002 between the Registrant and the Coca-Cola  Company.                                                  |
| (1)                   |       | 10.12+                  |       | 1999 Equity Incentive Plan and Form of Stock Option Agreement  thereunder.                                                                                                                             |
| (3)                   |       | 10.13*                  |       | Collaborative Research and License Agreement, dated October 26,  2004, between the Registrant and Nestec Ltd.                                                                                          |
| (4)                   |       | 10.14*                  |       | Second Amendment to the Collaborative Research and License Agreement                                                                                                                                        |

 

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|   |   |   |   | dated April 18, 2002, as amended October 23, 2003, between  the Registrant and Nestec, Ltd.                                                                                                                                                        |
|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5)    |   | 10.15+ |   | Summary Description of Senomyx, Inc. Incentive Cash Bonus Program.                                                                                                                                                                                      |
| (6)    |   | 10.16* |   | Lease Agreement between ARE-NEXUS CENTRE II, LLC and Registrant.                                                                                                                                                                                             |
| (7)    |   | 10.17* |   | Fourth Amendment to the Collaborative Research and License Agreement  dated March 28, 2001, as amended July 26, 2002, November 5,  2002, February 19, 2004 and February 24, 2006 between the  Registrant and Campbell Soup Company. |
| (7)    |   | 10.18* |   | Third Amendment to the Collaborative Research and License Agreement  dated April 18, 2002, as amended October 23, 2003, April 17,  2005 and March 22, 2006 between the Registrant and Nestec, Ltd.                                       |
| (7)    |   | 10.19* |   | Collaborative Research, Development, Commercialization and License  Agreement dated March 23, 2006 between the Registrant and Ajinomoto  Co., Inc.                                                                                                 |
| (8)    |   | 10.20  |   | Statement dated June 9, 2006 re: extension of Collaborative Research  and License Agreement dated October 26, 2004 between the Registrant and  Nestec, Ltd.                                                                                        |
| (9)    |   | 10.21  |   | Description of director compensation provided to Jay Short.                                                                                                                                                                                                  |
| (10)   |   | 10.22+ |   | Change in Control Agreement dated October 10, 2006 by and  between the Registrant and Kent Snyder.                                                                                                                                                      |
| (10)   |   | 10.23+ |   | Change in Control Agreement dated October 10, 2006 by and  between the Registrant and Mark J. Zoller, Ph.D.                                                                                                                                             |
| (10)   |   | 10.24+ |   | Change in Control Agreement dated October 10, 2006 by and  between the Registrant and John Poyhonen.                                                                                                                                                    |
| (11)   |   | 10.25* |   | First Amendment to the Collaborative Research, Development,  Commercialization and License Agreement dated March 23, 2006 between the  Registrant and Ajinomoto Co., Inc.                                                                          |
| (11)   |   | 10.26* |   | Collaborative Research, Commercialization and License Agreement dated  October 6, 2006 between the Registrant and Ajinomoto Co., Inc.                                                                                                              |
| (11)   |   | 10.27* |   | License Agreement between the Registrant and The Regents of the  University of California dated October 11, 2006.                                                                                                                                       |
| (11)   |   | 10.28* |   | Letter Agreement between the Registrant and The Regents of the  University of California dated October 11, 2006.                                                                                                                                        |
| (11)   |   | 10.29+ |   | Employment letter agreement dated March 14, 2006 between the  Registrant and Sharon Wicker.                                                                                                                                                             |
| (11)   |   | 10.30+ |   | Change in Control Agreement dated October 10, 2006 by and between  the Registrant and Sharon Wicker.                                                                                                                                                    |
| (11)   |   | 10.31  |   | Statement dated January 9, 2007 re: extension of Collaborative  Research and License Agreement dated October 26, 2004 between the  Registrant and Nestec, Ltd.                                                                                     |
| (12)   |   | 10.32+ |   | Amended and Restated 2004 Equity Incentive Plan and Form of  Stock Option Agreement thereunder.                                                                                                                                                         |
| (12)   |   | 10.33* |   | First Amendment dated February 7, 2007 to the License Agreement  between Senomyx, Inc. and The Regents of the University of California  dated October 11, 2006.                                                                               |
| (12)   |   | 10.34  |   | Statement dated April 12, 2007 re: extension of Collaborative  Research and License Agreement dated October 26, 2004 between  Senomyx, Inc. and Nestec, Ltd.                                                                                  |
| (13)   |   | 10.35* |   | Collaborative Research, Development, Commercialization and License  Agreement between Senomyx, Inc. and Solae, LLC dated April 23,  2007.                                                                                                          |
| (13)   |   | 10.36* |   | Second Amendment dated April 24, 2007 to the Collaborative  Research, Development, Commercialization and License Agreement dated  March 23, 2006 between Senomyx, Inc. and Ajinomoto Co., Inc.                                           |
| (14)   |   | 10.37* |   | Third Amendment dated August 1, 2007 to the Collaborative  Research, Development, Commercialization and License Agreement dated  March 23, 2006 between Senomyx, Inc. and Ajinomoto Co., Inc.                                            |
| (15)   |   | 10.38* |   | Fourth Amendment to the Collaborative Research and License Agreement  dated April 18, 2002, as amended October 23, 2003, April 17,  2005, March                                                                                               |

 

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|   |   |   |   | 22, 2006 and April 14, 2008 between the Registrant and Nestec,  Ltd.                                                                                                                                                                                                                |
|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (15)   |   | 10.39* |   | Second Amendment to the Collaborative Research, Development,  Commercialization and License Agreement dated April 22, 2002, as amended  April 7, 2004 and April 8, 2008, between the Registrant and the  Coca-Cola Company.                                               |
| (15)   |   | 10.40  |   | Statement dated May 7, 2008 re: extension of Collaborative  Research and License Agreement dated October 26, 2004 between  Senomyx, Inc. and Nestec, Ltd.                                                                                                                 |
| (16)   |   | 10.41+ |   | Description of non-employee director compensation policy                                                                                                                                                                                                                                 |
| (17)   |   | 10.42* |   | First Addendum to the Collaborative Research, Development,  Commercialization and License Agreement dated April 23, 2007, as amended  September 1, 2008, between Senomyx, Inc. and Solae, LLC.                                                                            |
| (17)   |   | 10.43* |   | Fifth Amendment to the Collaborative Research and License Agreement  dated April 18, 2002, as amended October 23, 2003, April 17,  2005, March 22, 2006, April 14, 2008 and September 15, 2008  between the Registrant and Nestec, Ltd.                    |
| (18)   |   | 10.44+ |   | Form of Amended and Restated Change in Control Agreement.                                                                                                                                                                                                                           |
| (18)   |   | 10.45+ |   | First Amendment to Employment Agreement dated June 2, 2003, as  amended effective December 31, 2008, between the Registrant and Kent  Snyder.                                                                                                                                  |
| (18)   |   | 10.46+ |   | First Amendment to Employment Agreement dated March 14, 2006, as  amended effective December 31, 2008, between the Registrant and Sharon  Wicker.                                                                                                                              |
|   |   | 23.1   |   | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                |
|   |   | 24.1   |   | Power of Attorney. Reference is made to the signature page.                                                                                                                                                                                                                              |
|   |   | 31.1   |   | Certification of Kent Snyder, Chief Executive Officer, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                  |
|   |   | 31.2   |   | Certification of John Poyhonen, Chief Financial and Business Officer,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   |
|   |   | 32.1   |   | Certification of Kent Snyder, President, Chief Executive Officer and  Director, and John Poyhonen, Senior Vice President and Chief Financial and  Business Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

----

**+****                                        **Indicates management contract or compensatoryplan.

 

*                                         Confidential treatment has been granted orrequested with respect to certain portions of this exhibit. Omitted portionshave been filed separately with the Securities and Exchange Commission.

 

(1)                                  Filed as an exhibit to Registration StatementFile No. 333-113998 and incorporated herein by reference.

 

(2)                                  Filed as an exhibit to our Current Report on Form 8-Kfiled with the Securities and Exchange Commission on December 20, 2007 andincorporated herein by reference.

 

(3)                                  Filed as an exhibit to our Quarterly Reporton Form 10-Q for the quarter ended September 30, 2004 andincorporated herein by reference.

 

(4)                                  Filed as an exhibit to our Quarterly Reporton Form 10-Q for the quarter ended March 31, 2005 and incorporatedherein by reference.

 

(5)                                  Filed as an exhibit to our Current Report on Form 8-Kfiled with the Securities and Exchange Commission on June 5, 2007 andincorporated herein by reference.

 

(6)                                  Filed as an exhibit to our Annual Report on Form 10-Kfor the year ended December 31, 2005 and incorporated herein by reference.

 

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(7)                                  Filed as an exhibit to our Quarterly Reporton Form 10-Q for the quarter ended March 31, 2006 and incorporatedherein by reference.

 

(8)                                  Filed as an exhibit to our Quarterly Reporton Form 10-Q for the quarter ended June 30, 2006 and incorporatedherein by reference.

 

(9)                                  Filed as our Current Report on Form 8-Kfiled with the Securities and Exchange Commission on July 13, 2006 andincorporated herein by reference.

 

(10)                            Filed as an exhibit to our Current Report on Form 8-K filed withthe Securities and Exchange Commission on October 13, 2006 andincorporated herein by reference.

 

(11)                            Filed as an exhibit to our Annual Report on Form 10-K for the yearended December 31, 2006 and incorporated herein by reference.

 

(12)                            Filed as an exhibit to our Quarterly Report on Form 10-Q for thequarter ended March 31, 2007 and incorporated herein by reference.

 

(13)                            Filed as an exhibit to our Quarterly Report on Form 10-Q for thequarter ended June 30, 2007 and incorporated herein by reference.

 

(14)                            Filed as an exhibit to our Quarterly Report on Form 10-Q for thequarter ended September 30, 2007 and incorporated herein by reference.

 

(15)                            Filed as an exhibit to our Quarterly Report on Form 10-Q for thequarter ended June 30, 2008 and incorporated herein by reference.

 

(16)                            Filed as an exhibit to our Current Report on Form 8-K filed withthe Securities and Exchange Commission on August 15, 2008 and incorporatedherein by reference.

 

(17)                            Filed as an exhibit to our Quarterly Report on Form 10-Q for thequarter ended September 30, 2008 and incorporated herein by reference.

 

(18)                            Filed as an exhibit to our Current Report on Form 8-K filed withthe Securities and Exchange Commission on December 23, 2008 andincorporated herein by reference.

 

**(b) Exhibits**

 

See Item 15(a) above.

 

**(c) FinancialStatement Schedules**

 

See Item 15(a) above.

 

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**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                          | Senomyx, Inc. |
|-------------------------------|--------------------|
|                          | By:                | /S/ KENT SNYDER |
|                          |               | Kent Snyder |
|                          |               | President and Chief Executive Officer |
|                          |               |
|                          |               |
| Dated: February 12, 2009 |               |

 

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**POWEROF ATTORNEY**

 

KNOW ALL PERSONS BY THESEPRESENTS, that each person whose signature appears below constitutes andappoints Kent Snyder and John Poyhonen, and each of them, as his or her trueand lawful attorneys-in-fact and agents, with full power of substitution andresubstitution, for him or her and in his or her name, place, and stead, in anyand all capacities, to sign any and all amendments to this report, and to filethe same, with all exhibits thereto, and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorneys-in-fact and agents, and each of them, full power and authority to doand perform each and every act and thing requisite and necessary to be done inconnection therewith, as fully to all intents and purposes as he or she mightor could do in person, hereby ratifying and confirming that all saidattorneys-in-fact and agents, or any of them or their or his substitute orsubstituted, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, this report has been signed below bythe following persons on behalf of the Registrant and in the capacities and onthe dates indicated.

 

 
| **Signature**               | ** ** | **Title**                                       | ** ** | **Date**               |
|-----------------------------|------------|-------------------------------------------------|------------|------------------------|
|                        |       |                                            |       |                   |
| /S/ KENT SNYDER             |       | President, Chief Executive Officer and Chairman |       | February 12, 2009 |
| Kent Snyder                 |       | of the Board of Directors                       |       |                   |
|                        |       |                                            |       |                   |
|                        |       |                                            |       |                   |
| /S/ JOHN POYHONEN           |       | Senior Vice President and Chief Financial and   |       | February 12, 2009 |
| John Poyhonen               |       | Business Officer                                |       |                   |
|                        |       |                                            |       |                   |
|                        |       |                                            |       |                   |
| /S/ ROGER D. BILLINGSLEY    |       | Director                                        |       | February 12, 2009 |
| Roger D. Billingsley, Ph.D. |       |                                            |       |                   |
|                        |       |                                            |       |                   |
|                        |       |                                            |       |                   |
| /S/ STEPHEN A. BLOCK        |       | Director                                        |       | February 12, 2009 |
| Stephen A. Block, Esq. |       |                                            |       |                   |
|                        |       |                                            |       |                   |
|                        |       |                                            |       |                   |
| /S/ MICHAEL E. HERMAN       |       | Director                                        |       | February 12, 2009      |
| Michael E. Herman           |       |                                            |       |                   |
|                        |       |                                            |       |                   |
|                        |       |                                            |       |                   |
| /S/ DENNIS F. O’BRIEN  |       | Director                                        |       | February 12, 2009 |
| Dennis F. O’Brien      |       |                                            |       |                   |
|                        |       |                                            |       |                   |
|                        |       |                                            |       |                   |
| /S/ JAY M. SHORT            |       | Director                                        |       | February 12, 2009 |
| Jay M. Short, Ph.D.    |       |                                            |       |                   |
|                        |       |                                            |       |                   |
|                        |       |                                            |       |                   |
| /S/ CHRISTOPHER TWOMEY      |       | Director                                        |       | February 12, 2009 |
| Christopher Twomey          |       |                                            |       |                   |

 

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**EXHIBITINDEX**

 
| **Exhibit  Footnote** | ** ** | **Exhibit Number** | ** ** | **Description of Document**                                                                                                                                                                                                                                  |
|-----------------------|------------|-------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)                   |       | 3.1                     |       | Amended and Restated Certificate of Incorporation as currently in  effect.                                                                                                                                                                                   |
| (2)                   |       | 3.2                     |       | Amended and Restated Bylaws as currently in effect.                                                                                                                                                                                                          |
| (3)                   |       | 3.3                     |       | Certificate of Designation of Series A Junior Participating  Preferred Stock, as filed with the Secretary of State of Delaware on  February 14, 2005.                                                                                              |
| (1)                   |       | 4.1                     |       | Form of Common Stock Certificate.                                                                                                                                                                                                                       |
| (1)                   |       | 4.2                     |       | Fourth Amended and Restated Investor Rights Agreement dated  November 14, 2001, as amended February 27, 2002, between the  Registrant and certain of its stockholders.                                                                             |
| (3)                   |       | 4.3                     |       | Form of Rights Certificate.                                                                                                                                                                                                                             |
| (3)                   |       | 4.4                     |       | Rights Agreement, dated February 14, 2005 by and between the  Registrant and Mellon Investor Services LLP.                                                                                                                                              |
| (1)                   |       | 10.1+                   |       | Form of Indemnity Agreement.                                                                                                                                                                                                                            |
| (1)                   |       | 10.2+                   |       | Amended and Restated 2004 Equity Incentive Plan and Form of  Stock Option Agreement thereunder.                                                                                                                                                         |
| (1)                   |       | 10.3+                   |       | 2004 Employee Stock Purchase Plan and Form of Offering Document  thereunder.                                                                                                                                                                            |
| (1)                   |       | 10.4+                   |       | Employment letter agreement dated February 21, 2000 between the  Registrant and Mark Zoller, Ph.D.                                                                                                                                                      |
| (1)                   |       | 10.5+                   |       | Employment letter agreement dated June 2, 2003 between the  Registrant and Kent Snyder.                                                                                                                                                                 |
| (1)                   |       | 10.6+                   |       | Employment letter agreement dated September 8, 2003 between the  Registrant and John Poyhonen.                                                                                                                                                          |
| (1)                   |       | 10.7*                   |       | Exclusive License and Bailment Agreement dated March 10, 2000  between the Registrant and the Regents of the University of California.                                                                                                                  |
| (1)                   |       | 10.8*                   |       | Collaborative Research and License Agreement dated November 1,  2000, as amended April 16, 2002, between the Registrant and Aurora  Biosciences Corporation.                                                                                       |
| (1)                   |       | 10.9*                   |       | Collaborative Research and License Agreement dated March 28,  2001, as amended July 26, 2002, November 5, 2002 and  February 19, 2004 between the Registrant and Campbell Soup Company.                                                  |
| (1)                   |       | 10.10*                  |       | Collaborative Research and License Agreement dated April 18,  2002, as amended October 23, 2003, between the Registrant and Nestec,  Ltd.                                                                                                          |
| (1)                   |       | 10.11*                  |       | Collaborative Research, Development, Commercialization and License  Agreement dated April 22, 2002 between the Registrant and the Coca-Cola  Company.                                                                                                   |
| (1)                   |       | 10.12+                  |       | 1999 Equity Incentive Plan and Form of Stock Option Agreement  thereunder.                                                                                                                                                                              |
| (3)                   |       | 10.13*                  |       | Collaborative Research and License Agreement, dated October 26,  2004, between the Registrant and Nestec Ltd.                                                                                                                                           |
| (4)                   |       | 10.14*                  |       | Second Amendment to the Collaborative Research and License Agreement  dated April 18, 2002, as amended October 23, 2003, between the  Registrant and Nestec, Ltd.                                                                                  |
| (5)                   |       | 10.15+                  |       | Summary Description of Senomyx, Inc. Incentive Cash Bonus  Program.                                                                                                                                                                                     |
| (6)                   |       | 10.16*                  |       | Lease Agreement between ARE-NEXUS CENTRE II, LLC and Registrant.                                                                                                                                                                                             |
| (7)                   |       | 10.17*                  |       | Fourth Amendment to the Collaborative Research and License Agreement  dated March 28, 2001, as amended July 26, 2002, November 5,  2002, February 19, 2004 and February 24, 2006 between the  Registrant and Campbell Soup Company. |
| (7)                   |       | 10.18*                  |       | Third Amendment to the Collaborative Research and License Agreement  dated April 18, 2002, as amended October 23, 2003, April 17,  2005 and March 22, 2006 between the Registrant and Nestec, Ltd.                                       |
| (7)                   |       | 10.19*                  |       | Collaborative Research, Development, Commercialization and License  Agreement dated March 23, 2006 between the Registrant and Ajinomoto  Co., Inc.                                                                                                 |
| (8)                   |       | 10.20                   |       | Statement dated June 9, 2006 re: extension of Collaborative  Research and                                                                                                                                                                               |

 

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|   |   |   |   | License Agreement dated October 26, 2004 between the Registrant  and Nestec, Ltd.                                                                                                                             |
|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (9)    |   | 10.21  |   | Description of director compensation provided to Jay Short.                                                                                                                                                        |
| (10)   |   | 10.22+ |   | Change in Control Agreement dated October 10, 2006 by and  between the Registrant and Kent Snyder.                                                                                                            |
| (10)   |   | 10.23+ |   | Change in Control Agreement dated October 10, 2006 by and  between the Registrant and Mark J. Zoller, Ph.D.                                                                                                   |
| (10)   |   | 10.24+ |   | Change in Control Agreement dated October 10, 2006 by and  between the Registrant and John Poyhonen.                                                                                                          |
| (11)   |   | 10.25* |   | First Amendment to the Collaborative Research, Development,  Commercialization and License Agreement dated March 23, 2006 between the  Registrant and Ajinomoto Co., Inc.                                |
| (11)   |   | 10.26* |   | Collaborative Research, Commercialization and License Agreement dated  October 6, 2006 between the Registrant and Ajinomoto Co., Inc.                                                                    |
| (11)   |   | 10.27* |   | License Agreement between the Registrant and The Regents of the  University of California dated October 11, 2006.                                                                                             |
| (11)   |   | 10.28* |   | Letter Agreement between the Registrant and The Regents of the  University of California dated October 11, 2006.                                                                                              |
| (11)   |   | 10.29+ |   | Employment letter agreement dated March 14, 2006 between the  Registrant and Sharon Wicker.                                                                                                                   |
| (11)   |   | 10.30+ |   | Change in Control Agreement dated October 10, 2006 by and  between the Registrant and Sharon Wicker.                                                                                                          |
| (11)   |   | 10.31  |   | Statement dated January 9, 2007 re: extension of Collaborative  Research and License Agreement dated October 26, 2004 between the  Registrant and Nestec, Ltd.                                           |
| (12)   |   | 10.32+ |   | Amended and Restated 2004 Equity Incentive Plan and Form of  Stock Option Agreement thereunder.                                                                                                               |
| (12)   |   | 10.33* |   | First Amendment dated February 7, 2007 to the License Agreement  between Senomyx, Inc. and The Regents of the University of California  dated October 11, 2006.                                     |
| (12)   |   | 10.34  |   | Statement dated April 12, 2007 re: extension of Collaborative  Research and License Agreement dated October 26, 2004 between  Senomyx, Inc. and Nestec, Ltd.                                        |
| (13)   |   | 10.35* |   | Collaborative Research, Development, Commercialization and License  Agreement between Senomyx, Inc. and Solae, LLC dated April 23,  2007.                                                                |
| (13)   |   | 10.36* |   | Second Amendment dated April 24, 2007 to the Collaborative  Research, Development, Commercialization and License Agreement dated  March 23, 2006 between Senomyx, Inc. and Ajinomoto Co., Inc. |
| (14)   |   | 10.37* |   | Third Amendment dated August 1, 2007 to the Collaborative  Research, Development, Commercialization and License Agreement dated  March 23, 2006 between Senomyx, Inc. and Ajinomoto Co., Inc.  |
| (15)   |   | 10.38* |   | Fourth Amendment dated April 14, 2008 to the Collaborative  Research and License Agreement dated April 18, 2002 between the  Registrant and Nestec, Ltd.                                                 |
| (15)   |   | 10.39* |   | Second Amendment dated April 8, 2008 to the Collaborative  Research, Development, Commercialization and License Agreement dated  April 22, 2002 between the Registrant and the Coca-Cola Company.        |
| (15)   |   | 10.40  |   | Statement dated May 7, 2008 re: extension of Collaborative  Research and License Agreement dated October 26, 2004 between  Senomyx, Inc. and Nestec, Ltd.                                           |
| (16)   |   | 10.41+ |   | Description of non-employee director compensation policy                                                                                                                                                           |
| (17)   |   | 10.42* |   | First Addendum dated September 1, 2008 to the Collaborative  Research, Development, Commercialization and License Agreement dated  April 23, 2007 between Senomyx, Inc. and Solae, LLC.             |
| (17)   |   | 10.43* |   | Fifth Amendment dated September 15, 2008 to the Collaborative  Research and License Agreement dated April 18, 2002 between the  Registrant and Nestec, Ltd.                                              |
| (18)   |   | 10.44+ |   | Form of Amended and Restated Change in Control Agreement                                                                                                                                                      |

 

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| (18)   |   | 10.45+ |   | First Amendment to Employment Agreement dated June 2, 2003, as  amended effective December 31, 2008, between the Registrant and Kent  Snyder.                                                                                                                                  |
|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (18)   |   | 10.46+ |   | First Amendment to Employment Agreement dated March 14, 2006, as  amended effective December 31, 2008, between the Registrant and Sharon  Wicker.                                                                                                                              |
|   |   | 23.1   |   | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                |
|   |   | 24.1   |   | Power of Attorney. Reference is made to the signature page.                                                                                                                                                                                                                              |
|   |   | 31.1   |   | Certification of Kent Snyder, Chief Executive Officer, pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                  |
|   |   | 31.2   |   | Certification of John Poyhonen, Chief Financial and Business Officer,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   |
|   |   | 32.1   |   | Certification of Kent Snyder, President, Chief Executive Officer and  Director, and John Poyhonen, Senior Vice President and Chief Financial and  Business Officer, pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**+****                                        **Indicates management contract or compensatoryplan.

 

*                                         Confidential treatment has been granted orrequested with respect to certain portions of this exhibit. Omitted portionshave been filed separately with the Securities and Exchange Commission.

 

(1)                                  Filed as an exhibit to Registration StatementFile No. 333-113998 and incorporated herein by reference.

 

(2)                                  Filed as an exhibit to our Current Report on Form 8-Kfiled with the Securities and Exchange Commission on December 20, 2007 andincorporated herein by reference.

 

(3)                                  Filed as an exhibit to our Quarterly Reporton Form 10-Q for the quarter ended September 30, 2004 andincorporated herein by reference.

 

(4)                                  Filed as an exhibit to our Quarterly Reporton Form 10-Q for the quarter ended March 31, 2005 and incorporatedherein by reference.

 

(5)                                  Filed as an exhibit to our Current Report on Form 8-Kfiled with the Securities and Exchange Commission on June 5, 2007 andincorporated herein by reference.

 

(6)                                  Filed as an exhibit to our Annual Report on Form 10-Kfor the year ended December 31, 2005 and incorporated herein by reference.

 

(7)                                  Filed as an exhibit to our Quarterly Reporton Form 10-Q for the quarter ended March 31, 2006 and incorporatedherein by reference.

 

(8)                                  Filed as an exhibit to our Quarterly Reporton Form 10-Q for the quarter ended June 30, 2006 and incorporatedherein by reference.

 

(9)                                  Filed as our Current Report on Form 8-Kfiled with the Securities and Exchange Commission on July 13, 2006 andincorporated herein by reference.

 

(10)                            Filed as an exhibit to our Current Report on Form 8-K filed withthe Securities and Exchange Commission on October 13, 2006 andincorporated herein by reference.

 

(11)                            Filed as an exhibit to our Annual Report on Form 10-K for the yearended December 31, 2006 and incorporated herein by reference.

 

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(12)                            Filed as an exhibit to our Quarterly Report on Form 10-Q for thequarter ended March 31, 2007 and incorporated herein by reference.

 

(13)                            Filed as an exhibit to our Quarterly Report on Form 10-Q for thequarter ended June 30, 2007 and incorporated herein by reference.

 

(14)                            Filed as an exhibit to our Quarterly Report on Form 10-Q for thequarter ended September 30, 2007 and incorporated herein by reference.

 

(15)                            Filed as an exhibit to our Quarterly Reporton Form 10-Q for the quarter ended June 30, 2008 and incorporatedherein by reference.

 

(16)                            Filed as an exhibit to our Current Report on Form 8-Kfiled with the Securities and Exchange Commission on August 15, 2008 andincorporated herein by reference.

 

(17)                            Filed as an exhibit to our Quarterly Reporton Form 10-Q for the quarter ended September 30, 2008 andincorporated herein by reference.

 

(18)                            Filed as an exhibit to our Current Report on Form 8-Kfiled with the Securities and Exchange Commission on December 23, 2008 andincorporated herein by reference.

 

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