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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2010

or

For the transition period from                 to       

Commission File Number 000-50791

SENOMYX, INC.

(Exact name of registrant as specified in its charter)

(858) 646-8300

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 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 information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

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

As of June 30, 2010, the aggregate market value of the voting stock held by non—affiliates of the registrant, computed by reference to the last sale price of such stock as of such date on the NASDAQ Stock Market LLC, was approximately $110,891,000. Excludes an aggregate of 9,354,028 shares of common stock held by officers and directors and by each person known by the registrant to own 5% or more of the outstanding common stock as of June 30, 2010. Exclusion of shares held by any of these persons should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant.

As of February 28, 2011, there were 39,554,802 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2011 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference in Part III, Items 10-14 of this Form 10-K.

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SENOMYX, INC.

Annual Report on Form 10-K

For the Fiscal Year Ended December 31, 2010

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included or incorporated by reference in this annual report on Form 10-K other than statements of historical fact, are forward-looking statements. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to such statements.

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

PART I

Item 1.    Business

Overview

We are a leading company focused on using proprietary taste receptor-based assays and screening technologies to discover and develop novel flavor ingredients for the packaged food, beverage and ingredient supply industries.  We consider flavor ingredients to include flavors, such as savory flavors and cooling flavors, and flavor modulators, such as sweet and salt enhancers and bitter blockers.  We have also initiated a program to discover and develop natural high intensity sweeteners.  We believe our flavor ingredients will enable packaged food, beverage and ingredient supply companies to improve the nutritional profile of their products while maintaining or enhancing taste and, in certain cases, generating cost of goods savings. We license our flavor ingredients to our collaborators on an exclusive or co-exclusive basis, which we believe will provide these companies with a competitive advantage. We currently have product discovery and development agreements with several of the world’s leading packaged food, beverage and ingredient companies, including Ajinomoto Co., Inc., or Ajinomoto, Campbell Soup Company, or Campbell, Firmenich SA, or Firmenich, Kraft Foods, Inc., or Kraft, Nestlé SA, or Nestlé, PepsiCo, Inc., or PepsiCo, and Solae LLC, or Solae.  We anticipate that we will derive all of our revenues from existing and future product discovery and development agreements. Depending upon the collaboration, our collaboration agreements generally provide for upfront fees, research and development funding, reimbursement of certain costs, milestone payments based upon our achievement of research or development goals and, in the event of commercialization, commercial milestones, minimum periodic royalties and royalties on sales of products incorporating our flavor ingredients.

Individuals experience the sensation of taste when flavor ingredients in food and beverage products interact with taste receptors in the mouth. A taste receptor functions either by physically binding to a flavor ingredient in a process analogous to the way a key fits into a lock or by acting as a channel to allow ions to flow directly into a taste cell. As a result of these interactions, signals are sent to the brain where a specific taste sensation is registered. There are currently five recognized primary senses of taste: umami, which is the savory taste of glutamate, sweet, salt, bitter and sour. In addition, there are secondary taste sensations, such as cool, hot and fat.

We are currently pursuing the discovery and development of flavor ingredients through five programs focused on savory, sweet, salt, bitter and cooling taste areas.  The goals of our Savory Flavor Program are to enhance the taste of naturally occurring glutamate and enable the reduction or replacement of added monosodium glutamate, or MSG, and to provide new savory tastes to foods by combining Senomyx’s savory flavors with other ingredients to create unique new flavors. The goals of our Sweet Taste Program

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are to discover and develop novel enhancers of the taste of natural and artificial sweeteners which would enable a significant reduction in added sweeteners and no- or low-calorie natural high intensity sweeteners. The goals of our Salt Taste Program are to enhance the taste of salt and enable a significant reduction in added salt. The goals of our Bitter Blocker Program are to reduce or block bitter taste and to improve the overall taste characteristics of packaged foods, beverages, over the counter, or OTC, health care products and pharmaceutical products. The goal of our Cooling Flavor Program is to discover novel cooling compounds that have advantages over currently available agents for a variety of applications.

Our internet address is www.senomyx.com. We post links on our website to the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission, 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 or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. All such filings are available through our website free of charge. Our filings may also be read and copied at the SEC’s Public Reference Room at 100 F Street, NE Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.

Industry Background

Flavor Industry Overview

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

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

Traditionally, companies have discovered new flavor ingredients primarily using inefficient, non-automated and labor-intensive trial and error processes involving a limited number of trained taste testers. Using this approach, taste testers must physically taste each potential flavor ingredient to assess the taste characteristics of the compound. Taste testers can assess only a limited number of potential flavor ingredients at one time due to the sensory fatigue that results from repeated tasting. As a result, only a small fraction of the available universe of ingredients can be tested economically.

Flavor ingredients are regulated in the United States under provisions of the Food, Drug and Cosmetic Act, or FD&C Act, administered by the Food and Drug Administration, or FDA.  Flavor ingredients sold in countries and regions outside the United States are also subject to regulations 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 ingredients, please see the “Regulatory” section below.

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Packaged Food and Beverage Industry

Packaged food and beverage products include carbonated and non-carbonated beverages, frozen foods, snack foods, ice cream, pasta, canned soup, pet food and numerous other products. According to recent data from Euromonitor International, an independent research organization, worldwide sales of packaged food and beverage products in 2009 were approximately $1.8 trillion, of which approximately $306 billion was generated in the United States. These figures represent annual growth rates of approximately 5% and 3%, respectively, over 2004 amounts.  Based on these estimates, of the worldwide total, sales of packaged foods were approximately $1.4 trillion and sales of non-alcoholic beverages were approximately $405 billion.

Flavor Ingredients as a Source of Competitive Advantage

The packaged food, beverage and ingredient industries are comprised of a number of large and highly competitive market segments. Small market share gains in specific large market segments can translate into significant additional revenue for packaged food, beverage and ingredient companies. For example, according to recent Euromonitor data, estimated 2009 worldwide sales of non-alcoholic beverages were approximately $405 billion. Thus, an increase of a tenth of a percentage point in overall worldwide market share would result in additional revenue of approximately $405 million.

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

·                     Taste.  Product taste is a critical competitive factor for packaged food, beverage and ingredient companies. These companies seek to use flavor ingredients to improve or maintain taste while improving the nutritional profile of packaged food, beverage and ingredient products or reducing ingredient costs.

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

·                  Flavor Ingredient Exclusivity.  Failure of packaged food, beverage and ingredient companies to differentiate their brands from their competition, including private label products, may result in significant loss of market share, price pressure and erosion of profit margins. Packaged food, beverage and ingredient companies spend millions of dollars creating brands and brand images to compete with other products. Many of these competitive products contain the same or similar flavor ingredients. The limited availability of proprietary flavor ingredients makes it difficult for manufacturers to differentiate their products based on flavor ingredients.

·                  Cost of Goods Savings.  The packaged food, beverage and ingredient industries purchase enormous quantities of raw materials to produce their products.  According to the Food and Agriculture Division of the United Nations and LMC International, an economic and business consultancy providing economic research and consultancy services, estimated worldwide sugar consumption was approximately 151 million metric tons.  Using spot prices in January 2011, the market value of processed sugar produced worldwide is therefore in excess of $98 billion on an annual basis.  Similarly, according to Ajinomoto’s FY2009 Market and Other Information report and Pearson Sales Company, worldwide demand for MSG was approximately 2.2 million metric tons in 2009, which would have had a cost of $5.0 billion using January 2011 spot prices. According to LMC International, worldwide demand for high-fructose corn syrup for 2009 was approximately 12.5 million metric tons, which would have had a cost of approximately $6.3 billion using January 2010 spot prices.  Flavor ingredients can potentially facilitate a reduction in

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the quantity of these ingredients used in packaged food, beverage and ingredient products, which could result in significant decreases in costs and associated increases in profit margins.

Our Solution

We use our proprietary taste receptor-based assays and screening technologies to discover and develop novel flavor ingredients. We have developed proprietary taste receptor-based assays that incorporate human taste receptors. We use these assays in our high-throughput screening systems to rapidly and efficiently screen our compound libraries and identify large numbers of novel potential flavor ingredients. We believe our approach improves the likelihood that ingredients with the desired characteristics can be discovered and then optimized into novel flavor ingredients.

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

·                  Maintaining and Improving Taste.  We are developing flavor ingredients to enable our current and future collaborators to improve or maintain taste while improving the nutritional profile of packaged food, beverage and ingredient products or reducing ingredient costs.

·                  Reducing Sugar, Artificial Sweeteners, Salt and MSG in Packaged Food and Beverage Products.  We are developing flavor ingredients to enable our current and future collaborators to significantly reduce the levels of sugar, artificial sweeteners, salt and MSG in packaged food and beverage products while maintaining or improving taste. We believe reducing the levels of such ingredients will improve the nutritional profile and/or taste of packaged food and beverage products.

·                  Blocking Undesirable Tastes.  We are discovering flavor ingredients that we believe will be useful in blocking bitter and other unwanted tastes associated with certain packaged food and beverage products.  Our technology may also be useful to improve the taste of products outside of food and beverages, such as OTC health care products and pharmaceutical products.

·                  Overcoming Deficiencies in Certain Flavor Ingredients. We are discovering flavor ingredients with lower costs and improved properties over existing ingredients, including flavor and physical properties.

·                  Identifying Natural Ingredients.  We have the technology to screen libraries of natural samples isolated from plants and other natural sources to discover new natural ingredients.

·                  Obtaining Exclusive or Co-Exclusive Use of Proprietary Flavor Ingredients.  We are able to offer our current and future collaborators exclusive or co-exclusive use of our proprietary flavor ingredients in defined packaged food, beverage and ingredient product categories. We believe this approach will assist our collaborators in differentiating their products from those of their competitors.

·                  Reducing Cost of Goods.  We believe our proprietary flavor ingredients will enable our current and future collaborators to reduce overall raw material ingredient costs in certain cases, particularly for those products containing high levels of natural and artificial sweeteners and MSG.

Our Strategy

Our goal is to become the leader in discovering, developing and commercializing new and improved flavor ingredients for our five key programs. Key elements of our strategy include:

·                  Collaborating With Leading Packaged Food, Beverage and Ingredient Companies.  We are collaborating with leading packaged food, beverage and ingredient companies to develop and commercialize our product candidates. Our collaborators are responsible for marketing, selling and distributing their products incorporating our flavor ingredients. In addition, our collaborators

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are responsible for all manufacturing costs of our flavor ingredients.  As a result, we expect to commercialize our flavor ingredients without incurring significant sales, marketing, manufacturing and distribution costs. We currently have collaboration agreements with Ajinomoto, Campbell, Firmenich, Kraft, Nestlé, PepsiCo and Solae.

·                  Developing Flavor Ingredients that are Eligible for Flavor and Extract Manufacturers Association, or FEMA, GRAS Determination.  Our primary focus is on the development of flavor ingredients that will qualify for a FEMA GRAS determination.  Eight ingredients developed as part of our savory, sweet and bitter programs have received FEMA GRAS determination.  Upon the GRAS determination, our collaborators can begin to test market and commercialize products incorporating our flavor ingredients in many key markets. In the event that a particular flavor ingredient is not eligible for FEMA GRAS determination, we may dedicate our development efforts to alternative flavor ingredients.

·                  Pursuing Additional Collaborations and Market Opportunities.  We seek to establish additional collaborations with leading packaged food, beverage and ingredient companies to use flavor ingredients developed through our existing programs for exclusive or co-exclusive use within new packaged food, beverage and ingredient product fields. We intend to receive from future collaborators up-front fees, research and development funding, cost reimbursements, milestone payments, minimum periodic royalties and royalties on future sales of products incorporating these flavor ingredients. In addition, we plan to target fields in which our collaborators can incorporate more than one of our flavor ingredients into a particular product or flavor system.

·                  Maintaining and Expanding Our Technology Position.  We believe our proprietary taste receptor-based technologies, including our receptor discovery, assay development and high-throughput screening technologies and natural and artificial compound libraries provide us and our collaborators with significant competitive advantages. We intend to continue to develop and acquire proprietary technologies and related intellectual property rights to expand and enhance our ability to discover and develop new proprietary flavor ingredients.

Our Discovery and Development Process

The following diagram summarizes our discovery and development process.

The key elements of our Discovery and Development process are:

·                  Identification of Relevant Human Taste Receptors and Proprietary Taste Receptor-Based Assay Development.  The first steps in our discovery and development process are to identify the relevant human taste receptors and to develop proprietary assays based on the identified receptors. Our assays are tests that measure interactions between the taste receptors and potential flavor ingredients. To date, we have developed assays to test for compounds that interact with receptors associated with savory, sweet, bitter and cooling tastes.

·                  High-Throughput Screening and Identification of Potential Ingredients.  The next step in our discovery and development process is to use our proprietary taste receptor-based assays to identify ingredients that bind to human taste receptors, known as hits. We use automated high-throughput screening to evaluate rapidly our libraries of diverse artificial and natural samples.  A panel of taste testers then evaluates the taste effect of the most potent hits. Based on this evaluation, we designate hits that exhibit a positive taste effect as proof-of-concept compounds. We then select the most promising of those proof-of-concept compounds, which we call lead compounds, for

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optimization.

·                  Optimization of Lead Compounds and Selection of Product Candidates.  The next step in our discovery and development process is to chemically enhance, or optimize, our lead compounds to allow lower amounts of the compound to be used in the finished product or improve the enhancement effect to meet the taste attribute goals of our collaborators. Optimization may also be required to enhance the safety profile or to improve the physical properties of a compound so that it is stable under manufacturing, storage and food preparation conditions. We refer to optimized compounds that provide desirable taste attributes in packaged food, beverage and ingredient product prototypes as product candidates.  When screening natural libraries, optimization involves selecting the appropriate source and developing the most efficient process to obtain the active compound.

·                  Safety Studies and Regulatory Approval of Product Candidates.  The next step in our discovery and development process is to select one or more product candidates for commercialization. We then evaluate the selected product candidate for safety, including preliminary in-vitro evaluation and additional in-vivo studies to confirm an acceptable safety profile. Following this evaluation, we submit the safety data along with the physical and chemical properties of the product candidate and a description of manufacturing and conditions of intended use to FEMA for review.  The FEMA review is conducted by an Expert Panel identified and convened by FEMA.  If the Expert Panel determines the product candidate to be GRAS, the conclusions of the Expert Panel are provided directly to the FDA and published in the journal Food Technology.  The FEMA GRAS status allows the ingredients to be commercialized in the United States and several other countries and regions.  FEMA GRAS status also facilitates regulatory determinations in a number of additional countries.

Eight ingredients developed as part of our savory, sweet and bitter programs have received FEMA GRAS determination.  The process from selection for development until receipt of that determination has ranged from 12 to 18 months.  Costs associated with the FEMA GRAS process, including contract safety studies and preparation of the application, were less than $1 million per flavor ingredient.  We expect that most of the flavor ingredients we develop in the future will require a similar amount of time and cost.  However, the length of time and cost may vary depending on the properties of the flavor or flavor ingredient.  In addition, regulatory approval of the flavor ingredients in other jurisdictions may require that we conduct additional studies or incur additional expenses.  Furthermore, the regulatory approval of natural high intensity sweeteners will likely require submission through the Food Additive Petition process.  For further discussion of the Food Additive Petition process, please see the “Regulatory” section below.

·                  Commercial Development and Sales by Partners.  Following regulatory approval in a given country, foods and beverages containing our proprietary flavor ingredients can be commercialized immediately.  Our collaborators have ultimate responsibility for commercialization of Senomyx flavor ingredients in their end product offerings.  Prior to commercialization collaborators complete extensive product formulation work on targeted products.  Our collaborators may validate final formulations for these products through in-house sensory evaluation as well as external in-market taste tests by consumers. Upon confirming consumer acceptance of these products, the collaborators complete activities such as production of the Senomyx flavor ingredients and the development of packaging and sales samples and materials, enabling the actual market launches of the products.

Our Discovery and Development Programs

We are currently pursuing the discovery and development of flavor ingredients through five programs focused on savory, sweet, salt, bitter and cooling taste areas.

Each of our programs focuses on developing flavor ingredients that address large, potentially overlapping markets.  Our Savory Flavor Program is aimed at developing flavor ingredients that could be used in product categories such as ready meals, sauces, spreads, frozen foods, beverages, meal replacements, soups, pastas, dried foods, snack foods, processed meats, processed cheeses and cracker

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products.  Our Sweet Taste Program is aimed at developing flavor ingredients or discovering natural high intensity sweeteners that could be used in product categories such as confectionaries, cereal, ice cream, beverages, yogurt, dessert, spreads and bakery products.  Our Salt Taste Program is aimed at developing flavor ingredients that could be used in product categories such as ready meals, sauces, spreads, frozen foods, beverages, meal replacements, soups, pastas, dried foods, snack foods, processed meats, processed cheeses, cracker products, canned foods and bakery products.  Our Bitter Blocker Program is focused on developing flavor ingredients that could be used in product categories such as products that contain bitter tastants, including confectionaries, beverages, ice cream, ready meals, canned foods and soups, and products which utilize certain artificial sweeteners.  Our Cooling Flavor Program is aimed at developing flavor ingredients that could be used in products that incorporate cooling flavors, such as cough medicines, confectionaries and over the counter (or OTC) oral hygiene products.

The following table sets forth our key programs for which we have at least one collaboration agreement in place where any potential royalty payable to us is calculated as a percentage of the net sales price of a manufacturer’s finished products or is based on the volume of a manufacturer’s finished product that it sells.  We refer to these types of collaborative agreements as retail-based agreements.  The table provides the product categories licensed as part of the agreement and provides our estimates of the worldwide sales for food and beverage products of our existing collaborators in their exclusive or co-exclusive product fields.  The table does not include our collaboration with Campbell, which we expect will expire in March 2011.

(1)          Based on recent data from Euromonitor and reports from our collaborators.  Includes all revenues for licensed product categories, some of which may not be appropriate for Senomyx ingredients within the category.

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The following table sets forth our key programs for which we have at least one collaboration agreement in place where any potential royalty payable to us is calculated as a percentage of the sales price of either the Senomyx ingredient itself or the mix (or flavor system) in which the Senomyx ingredient is contained or is based on the volume of the ingredient itself used by a manufacturer in a finished product.  We refer to these types of agreement as ingredient supply-based agreements.  The table provides the product categories licensed as part of the applicable collaboration agreement and provides our estimates of the market potential for the relevant ingredient licensed to our existing collaborators in their exclusive or co-exclusive product fields.

(1)          Based on data from FAO Food Outlook, LMC International, USDA Sweetener Pricing, Milling and Baking News, Leatherhead Research, Pearson Sales Company, Hill Consulting Group and reports from collaborators. Includes all ingredient costs for licensed product categories including ingredients which may not be

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appropriate for certain products within the category or licensed in the retail model.

(2)          According to Hill Consulting Group’s 2006 “Cooling Agents” report, annual sales of current cooling compounds are in the range of $400 million, and we estimate the opportunity for flavor systems incorporating improved cooling agents may be three to four times that size.

The following table sets forth our key programs in which significant product categories remain available for future license.

1)              Beginning in April 2011.

Savory Flavor Program

The goals of our Savory Flavor Program are to enhance the taste of naturally occurring glutamate and enable the reduction or elimination of added MSG and a related food additive, inosine monophosphate, or IMP, and to provide new savory tastes to foods by combining Senomyx’s savory flavors with other ingredients to create unique new flavors. We identified two product candidates, S336 and S807, that enhance the savory taste of glutamate.  S336 is approximately three times more potent than S807 in taste tests and exhibits greater water solubility compared to S807, which is more fat soluble. Other characteristics, such as heat stability and ease of manufacturing by a simple synthesis process, are similar for the two ingredients. We completed the safety assessment studies for S336 and S807 and submitted applications for GRAS determination to FEMA in December 2004.  In March 2005, the FEMA Expert Panel determined that S336 and S807 were GRAS.  In addition, two other savory flavors, S263 and S976, which are related to S336, were also determined by FEMA to be GRAS.  A more detailed description of the FEMA GRAS process is provided in Item 1, Business — Regulatory Process.  During 2007, the Chinese Ministry of Health granted official regulatory approval in China for our savory flavors.  Also in 2007, our savory flavors received a positive review by the Joint FAO/WHO Expert Committee on Food Additives, or JECFA.  The JECFA determination facilitates the acceptance or approval of flavors for use in food in many

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countries throughout the world.  In 2010, the European Food Safety Authority, or EFSA, provided a “favorable opinion” for S336 and S807, which means that no further evaluation is needed.  Final regulatory approval and commercialization in the European Union is contingent upon the ingredients being included in the EFSA Union List of Flavouring Substances.  EFSA had previously targeted publication of the Union List by the end of 2010; however, the list is not yet published and there has been no official update. We continue to evaluate and develop potential new savory flavors.

Sweet Taste Program

Our Sweet Taste Program has two main components.  We are looking to develop natural and artificial sweet enhancers, and we are also seeking to discover natural high intensity sweeteners.

Sweet Enhancers

The goals of the Sweet Enhancer component of our Sweet Taste Program are to enhance the taste of natural and artificial 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 enabled up to a 75% reduction of sucralose in product prototypes such as beverages, yogurt and baked goods, yet maintained the same sweet intensity without any off-tastes.  In November 2008 we announced receipt of FEMA GRAS status for S2383.

The sucrose enhancer S6973 allowed an approximately 50% reduction of sucrose in taste tests with baked goods, cereals, gum, condiments and relishes, confectioneries and frostings, frozen dairy offerings, fruit ices, gelatins and puddings, hard and soft candy, jams and jellies, milk products, and sauces.  In addition to this significant degree of enhancement, S6973 has key beneficial taste characteristics that allowed the taste of sucrose to be unaffected in these tests.  In October 2009 we announced receipt of FEMA GRAS status for S6973.  Senomyx has also identified potential new enhancers that demonstrated activity in our screening assays.  We are currently in the process of further evaluating these new sucrose enhancers for potential development with our collaborators.

Senomyx is also working to identify new flavor ingredients that amplify the sweet taste of fructose, a key component of high fructose corn syrup.  Recent efforts include evaluation of a new sample library leading to the identification of additional samples that showed activity in the Company’s proprietary screening assays.  Senomyx is currently optimizing and conducting taste tests with several samples to identify fructose enhancers.

Natural High Intensity Sweeteners

The goal of the Natural High Intensity Sweetener component of our Sweet Taste Program is to discover and develop novel no- or low-calorie natural high intensity sweeteners.  We have been expanding our natural products library with numerous additional samples, most recently from a variety of plant species.  We have validated our natural screening and purification processes by demonstrating that our methodologies can be used to identify and isolate a known natural sweetener from a complex plant extract.  Recently we increased our efforts on screening our natural products library and through these efforts we have identified multiple natural sample extracts that were active in the sweet receptor screening assay.  These samples, which typically contain mixtures of three to ten or more components, are being purified in preparation for evaluation in taste tests.

Salt Taste Program

The goal of the Salt Taste Program is to identify flavor ingredients that allow a significant reduction of sodium in foods and beverages yet maintain the salty taste desirable to consumers.  This high-priority, longer-term effort involves chemistry and biology approaches, including assessing components of

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Senomyx’s proprietary database of proteins found in taste buds.  We are exploring the role of a number of these proteins that may function as receptors or co-factors responsible for salt taste perception.  We believe that discovery of the protein or proteins that function as the salt taste receptor could lead to identifying a salt taste enhancer.

Bitter Blocker Program

The primary goals of this program are to reduce or block bitter taste and to improve the overall taste characteristics of foods, beverages, and ingredients.  We have received GRAS regulatory status for S6821, which has demonstrated activity against bitter tasting foods and beverages that include soy and whey proteins, menthol, caffeine, cocoa, and Rebaudioside A (stevia).  S7958, a related bitter blocker with similar functionality, has alternative desirable physical properties that may be useful for these or other product applications.  S6821 is currently under evaluation by Senomyx collaborators for potential future commercialization.  We continue to evaluate and develop potential new bitter blockers.

Cooling Flavor Program

The goal of the Cooling Flavor Program is to identify novel cooling flavors that have advantages over currently available agents (i.e. menthol and WS-3).  We have discovered several classes of new cooling flavors that demonstrate a taste proof-of-concept and display cooling properties that exceed those of commonly used agents.  We and our partner for this program, Firmenich, are evaluating lead cooling flavors in product prototypes for use in specific applications.

Commercialization

Initial market launch by Nestlé of products including our savory flavors occurred in June 2007.  Nestlé’s marketing strategy is focused on countries where regulatory approval is in place, and targets products that contain high levels of MSG.  Nestlé’s commercialization efforts were expanded in 2010 to reformulated established products that contain these ingredients.  Ongoing activities include launches of new and reformulated products that incorporate Senomyx’s savory flavors in countries in Asia, Latin America, Africa, and the Middle East.

Ajinomoto has been introducing products that contain a Senomyx flavor in China and elsewhere.  Ajinomoto increased the number of products launched during 2010 and reported its first sales in North America in the first quarter of 2011.

Firmenich has exclusive worldwide rights to market S2383, Senomyx’s enhancer of sucralose, as either a stand-alone ingredient or as part of a flavor system in all food and beverage product categories.  During the fourth quarter, Firmenich received initial orders and more recently processed additional orders for commercial quantities of S2383. Firmenich is currently engaged in marketing activities with other major clients for the use of S2383 in beverages, cereal, dairy products, baked goods and confectionary products.

Firmenich also has exclusive worldwide rights to commercialize the Company’s S6973 sucrose enhancer for virtually all food and specified beverage categories.  S6973 enables up to 50% reduction of sugar in certain foods and beverages while maintaining the sweet taste of natural sugar.  Firmenich has been conducting pre-commercialization activities with major clients for its first product launches with the sucrose enhancer during 2011.

Product Discovery and Development Collaborations

We pursue collaborations with leaders in the packaged food, beverage and ingredient supply markets. Under each of our current product discovery and development collaboration agreements, we have agreed to conduct research and develop flavor ingredients in one or more specified taste areas, such as savory, sweet, salt, bitter or cool. These collaborations are generally focused on one or more specific product fields, such as non-alcoholic beverages, gum confectionaries or frozen foods. We currently have product discovery and

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development collaboration agreements with Ajinomoto, Campbell, Firmenich, Kraft, Nestlé, PepsiCo and Solae.  We also have an additional commercialization and license agreement with Firmenich regarding our S2383 sucralose enhancer.

All of our current collaboration agreements provide for royalty payments in the event the collaborator commercializes a product incorporating our flavor ingredients.  The specific type of royalty and method for calculating royalty payments varies by agreement.  We have retail-based royalty agreements, where any potential royalty payable to us is calculated as a percentage of the net sales price of a manufacturer’s finished products or is based on the volume of a manufacturer’s finished product that it sells.  Our retail-based royalty agreements provide for an effective royalty of up to 4%.  Our agreement with Ajinomoto, our agreement with Campbell, our agreement with Kraft, our coffee and coffee whitener agreement with Nestlé and our agreement with PepsiCo are either exclusively or partially retail-based royalty agreements.  We have ingredient supply-based agreements, where any potential royalty payable to us is calculated as a percentage of the sales price of either the Senomyx ingredient itself or the mix (or flavor system) in which the Senomyx ingredient is contained or is based on the volume of the ingredient itself used by a manufacturer in a finished product.  Our ingredient supply royalty agreements specify royalty rates that are typically greater than the rates specified by our retail-based agreements.  Our agreement with Ajinomoto, our agreement with Firmenich, our 2002 agreement with Nestlé, our agreement with PepsiCo and our agreement with Solae are either exclusively or partially ingredient supply-based royalty agreements.

Most of our current collaboration agreements provide for research and development funding, milestone payments upon achievement of pre-defined research or development targets and cost reimbursement.  Certain of our current collaboration agreements also provide for upfront fees and minimum periodic royalties.  The research and development funding under each of these agreements is typically paid according to a fixed payment schedule, but may vary from period to period upon mutual agreement of the parties. Each of these collaborations provides us with a portion of the funding we require to pursue the discovery and development of flavor ingredients for the applicable program. Under each of these agreements, we are primarily responsible for the discovery and development phases and any associated expenses, while our collaborator is primarily responsible for selecting the consumer products that may incorporate our flavor ingredients. Our collaborator is also responsible for manufacturing, marketing, selling and distributing any of these consumer products, and any associated expenses. Under most of our agreements, we are primarily responsible for the regulatory approval phase and a portion of the associated expenses.

We believe our collaborations will allow us to benefit from our collaborators’ well-established brand recognition, global market presence, established sales and distribution channels and other industry-specific expertise. Each of our collaborations is governed by a joint steering committee, consisting of an equal number of representatives of the collaborator and us. The steering committees provide strategic direction and establish performance criteria for the research, development and commercialization of our flavor ingredients. In most instances, decisions of the steering committees must be unanimous.

Our product discovery and development collaboration agreements provide that we will conduct research and development on flavor ingredients for use within clearly defined packaged food, beverage and ingredient product fields on an exclusive or co-exclusive basis for the collaborator during the collaborative period specified in each of the agreements.  Our current product discovery and development collaborators are not prohibited from entering into research and development collaboration agreements with third parties in any product field. Under the terms of each agreement, we will retain rights to flavor ingredients that we discover during the collaboration for use with the collaborator, or for our use or with other collaborators outside of the defined product field. We will also generally retain rights to any flavor ingredients that we discover after the respective collaborative period, although in some instances we have agreed to limited periods where we would not launch competing products or collaborate with a collaborator’s competitor. In addition to the product discovery and development agreements, we have a commercialization and license agreement with Firmenich regarding our S2383 sucralose enhancer, which has already received GRAS status.  In the case of certain of our agreements, if the collaborator terminates the agreement or fails after a reasonable time following regulatory approval or GRAS determination to incorporate one or more of our flavor ingredients into a product, it will no longer be entitled to use, and we will have the right to license

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the flavor ingredients to other packaged food, beverage and ingredient companies for use in any product field covered in the agreement.

Each of our agreements terminates when we are no longer entitled to royalty payments under the agreement.  In addition, each agreement may be terminated earlier by mutual agreement or by either party in the event of a breach by the other party of its obligations under the agreement.  Furthermore, following the collaborative research period under a given agreement, our collaborators may elect to discontinue the commercialization of one of our flavor ingredients and unilaterally terminate the agreement.

Ajinomoto

In March 2006, we entered into a collaborative research, development, commercialization and license agreement with Ajinomoto for the discovery and commercialization of novel flavor ingredients on an exclusive basis in the soup, sauce and culinary aids, and noodle product categories, and on a co-exclusive basis in the bouillon product 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 development funding for up to three years.  In addition, we are eligible to receive milestone payments upon achievement of specific product discovery and development goals and reimbursement for certain patent costs.  In April 2007, we amended the agreement to 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 to receive an additional milestone payment upon achievement of a specific goal.  In August 2007, we further amended the agreement to expand Ajinomoto’s rights into additional product categories 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, 2010, we have received $18.1 million in upfront fees, research and development funding and cost reimbursement payments, as well as three milestones of $500,000 each.  If all milestones are achieved, and including the $19.6 million in upfront fees, research and development funding, milestone and cost reimbursements paid through December 31, 2010, we may be entitled to up to $19.9 million in upfront fees, research and development funding and milestone payments.  In addition to the upfront fees, research and development funding and milestone payment, we have received minimum periodic royalty payments from Ajinomoto.  These minimum periodic royalty payments are non-refundable.  Under the terms of the contract, Ajinomoto will provide us a sales report and we will record any additional calculated royalties as royalties from product sales.  There is no guarantee that we will receive any further milestone payments or royalties under this collaboration.

Firmenich

In July 2009, we entered into a collaboration agreement with Firmenich to work for a minimum two-year collaborative period to discover novel flavor ingredients intended to provide a sweet enhancement taste effect for sucrose, fructose, or various forms of rebaudioside.  The agreement includes three consecutive options of one year each that could further extend the collaborative research funding period.  Under the agreement, Firmenich agreed to pay a license fee in three installments, research and development fees, cost reimbursements and specified payments upon the achievement of milestones.  In January 2010, Firmenich elected to proceed with commercial development of S6973.  In conjunction with the decision, we received the final license fee installment payment in the amount of $8.0 million from Firmenich during the first quarter of 2010.  In October 2010, we amended the agreement with Firmenich to include commercial development of S6973, Senomyx’s novel enhancer of sucrose, for specific beverage applications, in exchange for an incremental license fee, additional milestones and minimum annual royalties, in addition to royalties on sales of products containing S6973.  In February 2011, Firmenich elected to exercise their first one-year option to extend the collaborative research funding period through July 2012. Through December 31, 2010, we have received $23.9 million in license fees and research and development funding, one milestone of $250,000 and one milestone of $1.0 million.  If all milestones are achieved and all extension options are exercised, and including the $25.1 million in license fees, research and development funding, milestones and cost reimbursements paid through December 31, 2010, we may be entitled to up to $47.6 million.  Upon commercialization, we will be entitled to royalties.  There is no guarantee that we will receive any further milestone payments or royalties under this collaboration.

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Nestlé SA

In October 2004, we entered into a product discovery and development collaboration agreement with Nestlé focused on the discovery and commercialization of specified novel flavor ingredients in the coffee and coffee whiteners field.  Under the terms of the agreement, Nestlé paid certain research and development funding through July 2010.  We remain eligible to receive milestone payments upon achievement of specific product discovery and development goals.  Under this agreement, through December 31, 2010, we have received $10.6 million in research and development funding, one milestone of $225,000, one milestone of $350,000 and one milestone of $500,000. If all milestones are achieved, and including the $11.6 million in research and development funding and milestones, we may be entitled to up to $12.1 million.  In addition, in the event of commercialization, we are entitled to receive royalties on future net sales of products containing a discovered flavor ingredient from the date of introduction of each product in each country until the expiration of relevant patents. We cannot assure you that we will receive any additional milestone payments or royalties under this collaboration.

PepsiCo

In August 2010, we entered into a collaboration agreement with PepsiCo.  The agreement relates to a four-year research program to discover and develop (1) novel natural and artificial flavor ingredients intended to provide a sweet enhancement taste effect for sucrose and fructose, including high fructose corn syrup, and (2) natural high intensity sweeteners, in each case for use in non-alcoholic beverage product categories on a worldwide basis.   Under the agreement, we received an upfront payment of $30.0 million from PepsiCo, $7.5 million of which was paid in the second quarter of 2010 in connection with the signing of a letter agreement between the parties and $22.5 million of which was paid in the third quarter of 2010.  We are entitled to $32.0 million in committed research and development payments, payable in equal quarterly installments over the four-year research period.  We are also entitled to milestone payments and reimbursement of certain out-of-pocket expenses.  Upon commercialization, we are entitled to minimum annual royalties and royalty payments on products that incorporate selected flavor ingredients and/or natural high intensity sweeteners.  Royalties on products sold by PepsiCo or its affiliates that incorporate a selected sweetness enhancer will be equal to a base amount plus a portion of the cost savings, if any, derived from the use of the flavor ingredient in the applicable product. Royalties on products sold by PepsiCo or its affiliates that incorporate a selected natural high intensity sweetener will be equal to a portion of the cost of the sweetener.  PepsiCo has the option to extend one or more of the research programs for two additional years, which would result in additional research funding commitments and payments during the extension of the research program.  PepsiCo has the unilateral right to terminate the agreement in the event that a direct competitor of PepsiCo acquires more than 30% of our outstanding voting securities.

With respect to the sweetness enhancers and natural high intensity sweeteners that PepsiCo selects for commercial development, generally PepsiCo will have (i) exclusive rights to use the selected enhancer or natural high intensity sweetener, as the case may be, for all forms of non-alcoholic beverages other than powdered beverages for so long as PepsiCo continues to pay the applicable minimum annual royalty, and (ii) co-exclusive rights to use the selected enhancer or natural high intensity sweetener, as the case may be, for all powdered non-alcoholic beverages. However, PepsiCo has agreed to sublicense its rights to any sweetness enhancers that they select for development to one or more third party ingredient suppliers that will be authorized to supply the sweetness enhancer, either alone or in combination with other flavors, to any third party manufacturer of non-alcoholic beverages for use in the categories of: functional beverages, including meal replacement drinks and energy drinks, coffee based drinks, milk and soy based beverages and sour-milk beverages. We will receive royalties based on a percentage of the net sales price of products that are sold by a sublicensee ingredient supplier and that incorporate a selected sweetness enhancer.  PepsiCo was not granted a right to sublicense its rights to selected sweetness enhancers for use in the categories of non-alcoholic carbonated beverages, fruit drinks, teas, waters and sports drinks. Also, PepsiCo was not granted a right to sublicense its rights to natural high intensity sweeteners for use in any non-alcoholic beverages. Accordingly, we anticipate that PepsiCo will use sweetness enhancers and natural sweetness enhancers in those categories on an exclusive basis unless PepsiCo and Senomyx mutually agree to other arrangements at some time in the future.

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Under this agreement, through December 31, 2010, we have received $35.0 million in upfront fees and research and development funding. If all milestones are achieved and all extension options are exercised, and including the $35.0 million in upfront fees and research and development funding, we may be entitled to up to $94.6 million. There is no guarantee that we will receive any milestone payments or royalties under this collaboration.

Other Agreements

Campbell Soup Company

In March 2001, we entered into a collaboration agreement with Campbell, a global manufacturer and marketer of consumer food products, to discover salt enhancers for use in soups, including frozen soups. We later amended the agreement to add the product field of specified savory beverages in consideration for additional research and development payments and potential milestone and royalty payments.  In February 2006, we extended the collaborative period until the earlier of March 2009 or submission for a GRAS determination, subject to earlier termination under specified circumstances.  In March 2009, we extended the collaborative period again for an additional year until March 2010, with three annual options of one year each that could further extend the collaboration.  In March 2010, Campbell exercised their first option to extend the collaborative period for an additional year until March 2011.  We expect the agreement to end at that time.

Firmenich

In December 2007, we entered into a collaboration agreement with Firmenich, a global leader in providing food ingredients and flavor systems to major consumer companies for use in their brands, to work for a three-year collaborative period to discover and develop novel flavors that may be used by Firmenich on an exclusive basis worldwide as ingredients that impart a cool taste in flavor systems.  In November 2010, we amended the agreement to extend the collaborative period until December 2012.  Under the agreement, Firmenich has agreed to pay research fees and specified payments upon the achievement of milestones.  Upon commercialization, we will be entitled to royalties.  In addition, in the event of regulatory approval of a discovered compound, we are entitled to minimum periodic royalties and in the event of commercialization, we are entitled to receive royalties on future sales of products containing a discovered flavor or flavor enhancer until the expiration of relevant patents. We cannot assure you that we will agree with Firmenich to extend the collaborative period under this agreement beyond December 2012 or that we will receive any future milestone payments or royalties under this collaboration.

In November 2008, we entered into a second collaboration agreement with Firmenich for S2383, our novel enhancer of the high-intensity sweetener sucralose.  Under the agreement, Firmenich has agreed to pay to us royalty payments based on sales of S2383 when it is sold on either a stand-alone basis or within a flavor system.

Kraft

In January 2011, we announced that we had entered into a collaboration agreement with Cadbury Adams LLC, a unit of Kraft Foods, or Kraft, regarding the development and worldwide commercialization of certain novel flavor ingredients for potential use in the gum and medicated confectionery product categories.  Under the terms of the agreement, Kraft has agreed to pay Senomyx development funding, cost reimbursement and specified payments upon the achievement of milestones during the collaborative period. Kraft may evaluate and select flavor ingredients for commercialization, after which Senomyx will receive royalty payments based on sales of products using the new flavor ingredients.

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Nestlé SA

In April 2002, we entered into an initial collaboration agreement with Nestlé, the world’s largest food company, to discover specified flavor ingredients in the food and beverage product fields of dehydrated and culinary food, frozen food and wet soup.  In April 2005, we amended the agreement to provide for an extension of the collaborative research phase.  In March 2006, we further amended the agreement to include commercialization of novel flavor ingredients in the pet food category on a worldwide, co-exclusive basis.  In addition to the expansion, under the amendment we reacquired rights to certain of our 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 categories within the dehydrated and culinary food, frozen food, and/or wet soup product categories, as well as worldwide rights for the pet food category.  In April 2008, we further amended the agreement to extend the collaborative period through April 2010.  In September 2008, we further amended the agreement to provide for a specified escalating payment arrangement in lieu of a sales-based royalty for a limited period of time. In July 2010, we again amended the agreement to provide for an alternative methodology for calculating payments to us in lieu of a sales-based royalty.

Under this alternative methodology, Nestlé has agreed to pay us a pre-determined dollar amount, referred to as the Base Payment Amount, for Nestlé’s use of up to a specified volume (represented in kilograms) of S336, our savory flavor ingredient, over a calendar year, referred to as the Base Use Level. The Base Payment Amount will escalate over time beginning in 2013 and each year thereafter, but the Base Use Level will remain fixed for the duration of the Collaboration Agreement.  If during any calendar year Nestlé uses quantities of S336 in excess of the specified Base Use Level, Senomyx will receive incremental payments based on the volume (in kilograms) of S336 that are used in excess of the Base Use Level. The amount that Senomyx will receive per kilogram of incremental usage of S336 above the Base Use Level has been fixed through the end of 2013, but will increase automatically on an annual basis beginning in 2014 and each year thereafter based on an agreed formula.  This amendment, among other things, also grants Nestlé with additional non-exclusive rights to commercialize certain retail products containing S336 in additional countries in Asia.

We received research and development funding through April 2010.  In addition, we have received milestone payments, cost reimbursements, royalty payments and minimum periodic royalty payments from Nestlé.

Solae, LLC

In April 2007, we entered into a collaboration agreement with Solae, the leading supplier of soy protein for food-based products, for the discovery and exclusive worldwide commercialization of novel flavor ingredients for soy proteins.  Under the terms of the agreement, Solae agreed to pay us research fees through April 2010.  In March 2010, we and Solae amended our agreement pursuant to which we agreed with Solae to conclude the research phase of the collaboration and to provide Solae with additional time to select flavor ingredients developed under the agreement for future development. As a result of this most recent amendment, Solae’s right to select a flavor ingredient for future development was limited to specified flavor ingredients and the level of research support during 2010 was reduced to reflect a reduction in our internal research and development resources dedicated to the collaboration.  We are also eligible to receive milestone payments upon achievement of specific product discovery and development goals.  In addition, in the event of commercialization, we are entitled to receive royalty payments based on sales of products containing flavor ingredients developed under the agreement.  We received research and development funding and a milestone payment under this collaboration.  We cannot assure you that we will receive any further milestone payments or royalties under this collaboration.

Our Technology

We have discovered or in-licensed many of the key receptors that mediate taste in mammals. Having isolated human taste receptors, we have created proprietary taste receptor-based assay systems that provide a biochemical or electronic readout when a test compound affects the receptor. To enable faster compound discovery, we integrated our proprietary taste receptor-based screening assays into a robot-controlled

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automated system that uses plates containing an array of individual wells, each of which can screen a different compound. Our receptor-based discovery and development process has enabled us to improve our ability to find novel flavor ingredients over the traditional use of simple taste tests.

Receptor Discovery and Assay Development Technology

There are currently five recognized primary senses of taste: umami (which is the savory taste of glutamate), sweet, salt, bitter and sour. In addition, there are secondary taste sensations such as cool, hot and fat.  Scientists generally believe that each of these taste sensations is recognized by a distinct taste receptor or family of taste receptors in the mouth or on the tongue. A taste receptor functions either by physically binding to a tastant in a process analogous to the way a key fits into a lock or by acting as a channel to allow ions to flow directly into a taste cell. The brain recognizes tastes by determining which of the numerous receptors in the mouth have been contacted by a given tastant. Savory, sweet and bitter flavor ingredients bind to taste receptors specific to each taste on the surface of taste bud cells. In contrast, the taste of salt and the sour taste are thought to be recognized by taste channels that allow the passage of particular ions into the taste bud cells.  The tastes of cooling and heating are mediated by receptors found in certain nerves.

The current status in the development of proprietary taste receptor-based assay systems for human taste receptors is as follows:

·                  Savory Receptor.  Glutamate is a natural component of foods, including tomatoes, mushrooms, parmesan cheese, and meats. It is often added to foods in the form of MSG to provide a savory flavor. The human savory receptor is composed of two proteins called hT1R1 and hT1R3. 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 created a proprietary high-throughput savory taste receptor-based assay system and demonstrated that it responded to MSG and inosine monophosphate, or IMP. Using this technology, we identified a number of savory flavor ingredients, including S807, S336, S263 and S976, which were determined to be GRAS in March 2005.  In addition, we have identified additional savory flavors that are being evaluated for additional product applications.

·                  Sweet Receptor.  The human sweet receptor is composed of two proteins called hT1R2 and hT1R3. The hT1R3 protein is shared in common with the savory receptor. Like the savory receptor, the sweet receptor is also a member of the GPCR family and is expressed on the surface of certain taste bud cells. We created a proprietary high-throughput sweet taste receptor-based assay system and demonstrated that it responded to many different sweet-tasting compounds including carbohydrate sweeteners and artificial sweeteners.  We have screened over 500,000 compounds and identified novel compounds that enhance the sweet taste of sucralose and sucrose. Our sucralose enhancer, S2383, was determined to be GRAS in November 2008. Our sucrose enhancer, S6973, was determined to be GRAS in October 2009.  In addition, we have an ongoing research program to identify additional enhancers of sucrose, fructose and other sweeteners.  We have also initiated screening efforts to discover natural high intensity sweeteners.

·                  Bitter Receptors. There are 25 bitter receptors in humans.  These are also members of the GPCR protein family.  Work from model systems showed that the 25 bitter receptors are likely present together in the same taste cell.  The bitter receptors are believed to have evolved as a defense mechanism to warn of and prevent the ingestion of poisonous substances.  It is thought that each bitter receptor recognizes a different set of bitter-tasting compounds.  We believe that 22 of these receptors are the primary means by which we sense bitter tastes.  Using our receptor-based assays and optimization processes, we have identified blockers for 18 different bitter receptors.  During 2008 we identified S6821 and other bitter blockers that met the criteria for reducing the bitterness of several variations of one collaborator’s product, as well as additional product prototypes.  During 2010, we received GRAS regulatory determination for S6821 and S7958.  Also, we have identified additional compounds that are currently being evaluated for potential development.

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·      Salt Receptor.  The primary receptor or receptors responsible for salt taste perception in humans have not been definitively identified in the scientific literature.  We are currently exploring the role of candidate proteins that may function as receptors or co-factors responsible for salt taste perception.  This effort involves chemistry and biology approaches, including assessing components of Senomyx’s proprietary database of proteins found in taste buds.

·      Cool Receptor.  The protein TRPM8 is an ion channel that is activated by both cool temperature and cooling agents such as menthol and WS-3. We developed a high-throughput screening assay using the human TRPM8 protein, and we validated the assay using a set of known cooling agents.  We have identified cooling flavors from more than ten different chemical classes that have demonstrated a taste proof-of-concept.  We and our collaborator are currently evaluating promising candidate cooling flavors in product prototypes for use in specific applications.

Screening Technologies and Compound Libraries

We have developed or acquired access to expansive libraries of potential flavor ingredients currently comprised of approximately 800,000 natural and artificial compounds. We intend to continue to acquire or develop additional compounds and natural samples to add to our libraries.  We have designed and selected our libraries to comprise compounds that we believe are likely to lead to safe and economical for use in packaged food and beverage products. We are using our assay systems to screen the compounds in our libraries for their effects on specific taste receptors. These systems use many of the same technologies that pharmaceutical companies use to discover medicines. Our assay systems are much more sensitive than the human tongue, and can therefore be used to discover novel flavor ingredients that could not be identified using taste tests.  We also use these systems to assist us in optimizing our lead compounds by rapidly and iteratively testing the potency of the flavor ingredients generated in the optimization process as the lead compound progresses to become a product candidate.

Regulatory Process

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

Regulation of Flavor Ingredients in the United States

In the United States, flavor ingredients are regulated by the FDA as approved food additives, or as GRAS ingredients under the FD&C Act. The Food Additive Amendments of 1958 prompted the flavor industry to establish in 1960 the FEMA Expert Panel.  FEMA has administered the GRAS program for flavors on behalf of the industry for over 50 years.  Several countries outside of the United States, including Canada, Brazil, Argentina and the Philippines, allow flavor use in food based on FEMA GRAS recognition.  Several other countries either add new FEMA GRAS compounds to their positive lists of approved flavoring agents or add the new FEMA GRAS lists to their flavor regulations by specific reference.  Other possible routes to approval of a flavor-modifying compound are a GRAS self-determination (independent of FEMA) with or without FDA notification, or a food additive petition to the FDA. Our goal is that the flavor ingredients we may discover will be subject to one of the regulatory review processes described below.

GRAS Review Process.    Flavor ingredients that qualify for the GRAS review process are generally intended to be consumed in small quantities and have data supporting their safety under conditions of intended use. An Expert Panel, convened to undertake a GRAS review, determines whether an ingredient is generally recognized as safe under the conditions of its intended use. These experts are qualified by scientific training and experience to evaluate the safety of certain new ingredients used in food and may declare them as having been adequately shown through scientific procedures to be generally recognized as

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

The most common types of GRAS review are:

·      FEMA Expert Panel.  The FEMA Expert Panel is an independent panel of experts for which FEMA provides administrative assistance.  The FEMA Expert Panel, which may be used by FEMA members and certain other parties, meets up to three times per year. The conclusions of the Expert Panel regarding a flavor ingredient are provided directly to the FDA and published in the journal Food Technology. To our knowledge, the FDA has not challenged the FEMA Expert Panel’s conclusion that the use of a flavoring substance is GRAS. Eight of our flavor ingredients have been determined to be GRAS by the FEMA Expert Panel.

·      Specifically Convened Independent Panel.  An independent, qualified panel of experts in pertinent scientific disciplines may be formed by the manufacturer to evaluate the safety of a specific compound for GRAS status. This process is known as a “self determination of GRAS status.”  The basis for the GRAS self determination is not required to be submitted to the FDA.  However, the FDA may request information on ingredients that have been self determined to be GRAS, or the information may be provided voluntarily.

Regulation of Flavor Ingredients outside of the United States.    Outside of the United States, flavor approvals vary by country.  There is, however, some commonality in approach in many countries.  As explained above, several countries either accept FEMA GRAS recognition as the basis for approval or GRAS recognition facilitates country approval.  Many countries, particularly developing countries in Latin America and Africa, accept favorable review by the WHO/FAO Joint Expert Committee on Food Additives, or JECFA, as the basis for approval or to facilitate approval.  FEMA automatically submits new GRAS ingredients to the Codex Alimentarius through the FDA for JECFA review.   Most other countries have their own unique approval processes.  The European Union, or EU, has established EU-wide regulations for flavor ingredient use based on safety evaluations by the European Food Safety Authority, or EFSA, and risk management (i.e. regulation development) by the Directorate General for Health.  A number of countries in eastern Europe or in Africa accept EU approval as the basis for approved use.  China, Japan and Russia also have independent regulatory review processes for flavors.

Food Additive Petition Process.    Food ingredients for which the GRAS process is not available, such as high intensity sweeteners, may be evaluated as food additives. Food additives require FDA approval prior to use in foods. An ingredient may be ineligible for GRAS determination, and may be considered a food additive, because there is insufficient general knowledge or for a variety of other reasons, including conditions of intended use resulting in high dietary exposure or the ingredient’s safety profile. If the ingredient is considered a food additive, a food additive petition must be filed and approved by the FDA. Food additive petitions contain information on the chemical nature of the ingredient, the manufacturing process, information on use in food, estimates of human exposure from use of the compound in food and all known information related to the safety of the ingredient.  The FDA reviews the petition content, requests additional information if necessary, publishes a proposed rule for use in food, reviews comments on the proposed rule and publishes a final rule, if the use is determined to be acceptable.  The safety data requirements for food additives are the same as for GRAS substances.  We estimate that a food additive petition could cost up to $7 million and may take up to four years to complete.  Furthermore, additional studies adding cost and time to approval may be required depending on the results of the initial safety studies.  Examples of ingredients that have gone through a food additive petition process include the artificial sweeteners aspartame, acesulfame K and sucralose. It may be necessary for any high intensity sweeteners that we discover or develop to follow this regulatory route.

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License Arrangements

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

University of California

In March 2000, we entered into a license agreement with the University of California under which we obtained exclusive rights to certain technologies held by the University of California that are involved in the biology of taste, including specified receptors in two taste receptor families, T1Rs and T2Rs. The license may be converted to a non-exclusive license, or terminated, by the University of California if we fail to meet specified milestones relating to the discovery of specified products and the sale of specified products and services. Our exclusive rights are also subject to rights granted by the University of California to the United States Government and a private medical foundation. In October 2006, we entered into an amended and restated agreement with the University of California to include certain additional related technologies.  In November 2009 we further amended this agreement to add additional technologies that were previously the subject of an exclusive letter of intent.  The agreement, as originally drafted and as amended and restated, required a license issue fee, payable in installments through 2005, and calls for annual maintenance fees commencing in 2006 or royalties or service revenues on sales of any products developed using technologies licensed under the agreement. Royalties will accrue in each country for as long as there exists a valid patent claim covering a product developed under the agreement.  The agreement will remain in effect until the expiration of the last to expire patent licensed under the agreement. We may terminate the agreement at any time, without cause, upon notice to the University of California. The University of California may terminate the agreement upon a breach of our obligations under the agreement.

Competition

Our goal is to be the leader in discovering novel flavor ingredients for use in a wide range of packaged food, beverage and ingredient products. Other companies are possibly pursuing similar technologies and the commercialization of products and services relevant to flavor ingredients. Although we are not aware of any other companies that have the scope of proprietary technologies and processes that we have developed in our field, there are a number of competitors who possess capabilities relevant to the flavor ingredient field.

In particular, we face substantial competition from companies pursuing the commercialization of products and services relevant to taste using more traditional methods for the discovery of flavor ingredients, or for the reduction of salt, sugar, MSG or bitter taste. These competitors include leading flavor companies, such as Firmenich, Givaudan SA, International Flavors & Fragrances Inc., Symrise and Takasago. These companies provide flavors and other products, such as oils, extracts and distillates, to consumer products companies for use in a wide variety of products including foods, beverages, confectionaries, dairy products and pharmaceuticals.  Competitors currently developing or marketing menthol or cooling agents include Jindal Drugs, Mentha & Allied, Sharp Menthol, Symrise, Takasago and Millennium Specialty Chemicals.  We currently compete and will continue to compete in the future with these companies in collaborating with and selling flavor ingredients and technologies to manufacturers of packaged food, beverage and ingredient products. Many of these companies have substantially greater capital resources, research and development resources and experience, manufacturing capabilities, regulatory expertise, sales and marketing resources, established relationships with consumer products companies and production facilities.

We may in the future face competition from life sciences and other technology companies and other commercial enterprises. These entities engage as we do in biotechnology, biology or chemistry and could apply this technology to the discovery and development of flavor ingredients. We are aware of two other companies, Redpoint Bio and Chromocell, Inc., that are involved in research on sweet enhancers.  Products developed as a result of our competitors’ existing or future collaborations may compete with our flavor ingredients.

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Universities and public and private research institutions are also potential competitors. While these organizations primarily have educational objectives, they may develop proprietary technologies related to the sense of taste or secure patent protection that we may need for the development of our technologies and products. We may attempt to license these proprietary technologies, but these licenses may not be available to us on acceptable terms, if at all.

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

Patents and Proprietary Rights

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary rights are described by valid and enforceable patents or are effectively maintained as trade secrets. Accordingly, we are pursuing and will continue to pursue patent protection for our proprietary technologies. As of December 31, 2010 we are the owner or the exclusive licensee of 119 issued United States patents, 92 pending United States patent applications, 111 issued foreign patents and 207 pending foreign applications covering various aspects of our proprietary technology. Our issued patents have terms that expire in 2014 through 2029.

Our policy is to file patent applications and to protect technologies, inventions and improvements to inventions that are commercially important to the development of our business. For example, we may seek patent protection for receptors and nucleic acid sequences encoding receptors that are involved in taste and the use of such receptors to identify ingredients that modulate taste. We also rely on trademarks to protect our proprietary technology. Generally, United States patents have a term of 17 years from the date of issue or 20 years from the earliest claimed priority date, whichever is later, for patents issued from applications filed with the United States Patent and Trademark Office prior to June 8, 1995 or 20 years from the application filing date or earlier claimed priority date in the case of patents issued from applications filed on or after June 8, 1995. Patents in most other countries have a term of 20 years from the date of filing the patent application. Our success depends significantly upon our ability to develop ingredients and technologies that are protected by our intellectual property and that do not infringe any competitor patents. We intend to continue to file patent applications as we discover and develop new flavor ingredients and technologies.

Seeking and obtaining patents may provide some degree of protection for our intellectual property. However, our patent positions are highly uncertain and may involve complex legal and factual questions. No consistent standard regarding the allowability and enforceability of claims in many of the pending patent applications has emerged to date. As a result, we cannot predict the breadth of claims that will ultimately be allowed in our patent applications, if any, including those we in-licensed or how we may be able to enforce our patent claims against our competitors. In addition, we may not have been the first to file patent applications for or to invent inventions relating to the technologies upon which we rely, which would preclude us from obtaining issued patents on the relevant inventions. We are aware of other companies and academic institutions which have been performing research and have applied for patents in the area of mammalian taste. In particular, other companies and academic institutions and inventor applicants have announced that they have identified taste receptors, published data on taste receptor sequence information or have filed patent applications on receptors and their use, including Ajinomoto, the California Institute of

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Technology, Dendreon, Duke University, the German Institute of Human Nutrition, Givaudan SA, Monell Chemical Senses, Mount Sinai School of Medicine, Novartis, Pfizer, Redpoint Bio, The Scripps Research Institute, Sloan Kettering, the University of California, Virginia Commonwealth University and Wiessenbach. If any of these companies or academic institutions or inventor applicants are successful in obtaining broad patent claims, such patents could potentially block our ability to use various aspects of our discovery and development process and might prevent us from developing or commercializing newly discovered flavor ingredients or otherwise conducting our business.

We also rely in part on trade secret protection for our confidential and proprietary information and process. Our policy is to execute confidentiality agreements with our employees and consultants upon the commencement of an employment or consulting relationship. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of their employment shall be our exclusive property. However, there can be no assurance that we will be able to effectively enforce these agreements or that the subject proprietary information will not be disclosed.

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

Sales and Marketing

While we do not currently intend to establish internal sales and marketing capabilities, we are developing the capability to enable us to work closely with our collaborators and their suppliers in the incorporation of our flavor ingredients into their products.  Under our current collaboration agreements, our collaborators are responsible for sales, marketing, and distribution of any packaged food or beverage product incorporating our flavor ingredients. As a result, we expect to commercialize our flavor ingredients without incurring significant sales, marketing and distribution costs. Our current collaborators, Ajinomoto, Campbell, Firmenich, Kraft, Nestlé, PepsiCo and Solae, are recognized leaders in the sales, marketing and distribution of packaged food, beverage and ingredient products.

Manufacturing

We intend to utilize third parties to manufacture our flavor ingredients. Under the majority of our existing product discovery and development collaborations, our collaborator may, in its sole discretion, manufacture itself or through a third party manufacturer the flavor ingredients it licenses from us. The remaining collaborations require the collaborator to identify with us a mutually agreed upon third party to manufacture the flavor ingredients it licenses from us.  In some of these agreements, we maintain either the first right of negotiation or an option to manufacture based on provisions within the agreement.

There are a number of reliable third party contract manufacturers available to produce our flavor ingredients.  We do not anticipate any capacity issues because of our low volume requirements and the number of reliable and available manufacturers.

Employees

As of December 31, 2010, we had 113 full-time employees, including 30 with Ph.D. degrees. Of our full-time workforce, 86 employees are engaged in research and development and 27 are engaged in business development, finance and administration. We also retain outside consultants. None of our employees are covered by collective bargaining arrangements, and our management considers its relationships with our employees to be good.

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Item 1A.  Risk Factors

You should consider carefully the following information about the risks described below, together with the other information contained in this annual report on Form 10-K and in our other public filings, in evaluating our business. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected.  In these circumstances, the market price of our common stock would likely decline.

Risks Related To Our Business

We are dependent on our current and any future product discovery and development collaborators for our research and development funding.

A key element of our strategy is to commercialize our flavor ingredients through product discovery and development collaborations. To date, substantially all of our research and development funding has been derived solely from research and development payments, upfront fees, milestone payments and cost reimbursement payments received under our collaborations. Substantially all of our research and development funding in the foreseeable future will result from these types of payments from these collaborations until such time, if ever, that we earn material royalties on future sales of consumer products incorporating our flavor ingredients.

Our current collaborators may amend or not renew their agreements with us or, if they do, they may not be on terms that are as favorable to us as our current agreements.  For example, our coffee and coffee whiteners agreement with Nestlé was amended in May 2009 to reduce the remaining collaborative period by one year and to reduce Nestlé’s funding obligations over the remaining collaborative period to reflect a commensurate reduction in our internal research and development resources dedicated to the Nestlé collaboration.

If any or all of our current material agreements with our collaborators expire or are terminated, or if we are unable to enter into new product discovery and development collaborations, our research and development funding could significantly decline or be substantially eliminated, which would have a material adverse effect on our business, financial condition and results of operations.

We are dependent on our current and any future product discovery and development collaborators to develop and commercialize any flavor ingredients we may discover.

We are dependent on our current and any other possible future collaborators to commercialize any flavor ingredients that we successfully develop and to provide the sales, marketing and distribution capabilities required for the success of our business. We have limited or no control over the amount and timing of resources that our current or any future collaborators may devote to our programs or potential products. Our collaborators may decide not to devote the necessary resources to the commercialization of our flavor ingredients, may choose not to incorporate our flavor ingredients into any or all of their products within their exclusive or co-exclusive product fields on a timely basis or at all, or may pursue a competitor’s product if our flavor ingredients do not have the characteristics desired by the collaborator. These characteristics include, among other things, enhancement properties, stability under various manufacturing and use conditions, solubility, taste, cost and an adequate safety profile.  If these collaborators fail to conduct their commercialization, sales and marketing or distribution activities successfully and in a timely manner, or if our existing collaborators terminate their collaboration agreements with us prior to the expiration of the agreements, we will earn little or no royalty revenues from our flavor ingredients and we will not be able to achieve our objectives or build a sustainable or profitable business.

Our business and operating results may be adversely affected by unfavorable economic and market conditions.

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Our business depends on our ability to maintain and enter into new collaborative research, development and commercialization agreements with leading food, beverage and ingredient companies. Our arrangements typically require our collaborators to make a significant commitment of capital and other resources. In most instances these investments are discretionary on the part of our collaborators. The current weak global economic conditions may reduce the amount of discretionary investment that our current and prospective collaborators may be willing to make in our programs. In some instances the result may be that companies elect to defer or delay entering into a collaborative agreement with us, or existing collaborators may amend, terminate or not renew an existing program when it expires. Therefore, weak economic conditions, or a reduction in research and development funding, even if economic conditions improve, would likely adversely impact our business, operating results and financial condition in a number of ways, including longer business development cycles, unfavorable financial or other commercial terms, and longer development timelines.

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

We may not be able to enter into additional product discovery and development collaborations due to the exclusive nature of our current product discovery and development collaborations. Each of our current collaboration agreements provides for the use of flavor ingredients within one or more defined food, beverage and ingredient product fields on an exclusive or co-exclusive basis for the respective collaborator during the collaborative period specified in the agreement. In the case of exclusive agreements, or co-exclusive agreements where all fields and geographies are granted, we will not be able to enter into additional collaborations with any other food, beverage and ingredient company covering the same product field during the applicable collaborative period. In addition, our collaborators’ competitors may not wish to do business with us at all due to our relationship with our collaborators. Consolidation in our target markets may also limit the number of potential collaborators.  Further, if we do not achieve our research and development objectives under our existing collaboration agreements prior to the expiration of the collaborative period, our collaborators may elect not to renew these agreements on terms that are acceptable to us.  If we are unable to enter into additional product discovery and development collaborations on satisfactory terms, our ability to sustain or expand our business will be significantly diminished.

Disagreements or disputes with a collaborator could adversely impact our business operations and prospects.

Because we depend on our collaborators to fund our research and development programs and commercialize our flavor ingredients, any disputes or disagreements with our collaborators could disrupt our business operations and adversely impact our ability to maintain existing collaborations or secure new collaborations. If we become involved in a dispute or litigation with any collaborator, we might have to spend significant amounts of money, time and effort to defend our position and we may not be successful. Even if we are successful, any dispute could divert management attention and resources from other strategic and research priorities.

We may not be successful in developing flavor ingredients useful for formulation into products.

In order to develop flavor ingredients, we must have first identified the correct human taste receptor for the taste of interest and develop high-throughput assays to test for compounds that affect the taste of interest. If we are not able to identify the correct human taste receptor for the taste of interest, our assays may not successfully identify compounds that affect the taste of interest. For example, if we are not able to identify the protein or proteins that function as the salt taste receptor, we may not be able to develop an effective salt taste enhancer.   In addition, we may not be successful in the development of a high-throughput assay to each human taste receptor of interest to us. Even if we succeed in the identification of a human taste receptor of interest to us and develop an appropriate high-throughput assay, we may not succeed in developing flavor ingredients with the appropriate attributes required for use in successful commercial products. Successful flavor ingredients require, among other things, appropriate biological activity, including the correct taste property for the product application, an acceptable safety profile,

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including lack of toxicity or allergenicity, and appropriate physical or chemical properties, including relative levels of solubility, stability, volatility and resistance to heat. Our development programs are intended to evaluate these characteristics of novel flavor ingredients. Therefore, until we complete our development of a given novel flavor ingredient we will not be able to determine whether that flavor ingredient will possess all of the appropriate attributes necessary for commercialization. Successful flavor ingredients must also be cost-efficient for our collaborators, which includes, among other things, the cost to manufacture a flavor ingredient at commercial scale as well as other costs associated with the reformulation of products that include our flavor ingredients. We have only limited experience in evaluating these costs and we may not be able to accurately predict whether our flavor ingredients will be cost-efficient for our current collaborators or potential future collaborators. We may not be able to develop flavor ingredients that meet all of these criteria and possess the appropriate attributes necessary for commercialization.  It is possible that flavor ingredients that initially appear to meet these criteria are later found to fail these criteria or other criteria that we later deem important.  In that case, we may not commercialize such an ingredient when anticipated, or at all, or the potential commercial utility for such an ingredient may be more limited than we expected.

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

In March 2005, we obtained a FEMA GRAS determination for four of our savory flavor ingredients.  In November 2008, we obtained a FEMA GRAS determination for one of our sucralose enhancers.  In October 2009, we obtained a FEMA GRAS determination for our lead sucrose enhancer.  In October 2010, we obtained a FEMA GRAS determination for two of our bitter blockers.  Apart from these flavor ingredients, we do not have GRAS determination or other regulatory approval for any other flavor ingredient at this time. In the United States, the development, sale and incorporation of our flavor ingredients into products are subject to regulation by the Food and Drug Administration, or FDA, and in some instances other government bodies. Obtaining and maintaining a GRAS determination or other regulatory approval can be costly and take many years.

Depending on the amount or intended use of a particular flavor ingredient added to a product and the number of product categories in which the flavor ingredient will be incorporated, specific safety assessment protocols and regulatory processes must be satisfied before we or our collaborators can commercially market and sell products containing any flavor ingredients that we may discover. A key element of our strategy is to develop flavor ingredients that may be subject to review under the FEMA GRAS process.  In our experiences with the savory, sweet and bitter programs, safety studies, preparation and FEMA GRAS review has ranged from 12 to 18 months and cost less than $1 million per flavor ingredient.  This experience may not be representative of the timing and cost for current and future programs.  This approach is less expensive than the alternative of filing a food additive petition with the FDA, approval of which can take up to four years. The FEMA GRAS process may take longer than 12 to 18 months and cost more than $1 million depending on the properties of the flavor ingredient, and if we elect to perform additional safety studies or if additional safety studies are requested by the FEMA Expert Panel or one of our collaborators or are necessary to explain unexpected safety study findings. There is a risk that one or more of our product candidates for which we seek FEMA GRAS determination may not qualify for a FEMA GRAS determination for specific categories or at all. This may occur for a variety of reasons, including the flavor ingredient’s intended use, the amount of the flavor ingredient intended to be added to foods and beverages, the number of product categories in which the flavor ingredient will be incorporated, whether the flavor ingredient imparts sweetness, the safety profile of the flavor ingredient and the FEMA Expert Panel’s interpretation of the safety data. For example, we do not believe that any natural high intensity sweetener that we discover would qualify for a FEMA GRAS determination for its use as a sweetener.  Even if we obtain a GRAS determination with respect to a flavor ingredient, the FDA has the ability to challenge such determination or one or more of our collaborators may insist on additional studies, which could materially adversely affect our ability to market products on schedule or at all. In the event that a particular flavor ingredient does not qualify for FEMA GRAS determination or if one or more of our collaborators requires additional studies, we could be required to pursue a lengthy FDA approval process or dedicate our

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development efforts to alternative ingredients, which would further delay commercialization. In addition, laws, regulations or FDA practice governing the regulatory approval process, the availability of the GRAS determination process or the manufacture or labeling of such products, may change in a manner that could adversely affect our ability to commercialize products on schedule or at all.

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

We and our collaborators may not be successful in overcoming these regulatory hurdles, which could result in product launch delays, unanticipated expenses, termination of collaborations and flavor ingredients not being approved for incorporation into consumer products. In addition, even after regulatory approval of our flavor ingredients, we may become aware of new information that suggests our flavor ingredients are unsuitable for consumer use, in which case our regulatory approvals may be revoked or we may elect to voluntarily cease the commercialization of those ingredients.  These consequences would have a material adverse effect on our business financial condition and results of operations.

Even if we or our collaborators receive regulatory approval and incorporate our flavor ingredients into products, those products may never be commercially successful.

Even if we discover and develop flavor ingredients that obtain the necessary GRAS determination or other regulatory approval, our success depends to a significant degree upon the commercial success of food, beverage and ingredient products incorporating those flavor ingredients. If these products fail to achieve or subsequently maintain market acceptance or commercial viability, our business would be significantly harmed because our royalty revenue is dependent upon consumer sales of these products. In addition, we could be unable to maintain our existing collaborations or attract new product discovery and development collaborators. Many factors may affect our collaborators’ willingness to launch new or reformulated products incorporating our flavor ingredients and the market acceptance and commercial success of any potential products incorporating flavor ingredients, including:

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

·      the timing of market entry as compared to competitive products;

·      whether our collaborators devote sufficient financial and other resources to promote our flavor ingredients;

·      the pricing of products that contain our flavor ingredients relative to other competing products;

·      the costs and market risks of reformulating existing products;

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

·      any product labeling that may be required by the FDA or other United States or foreign regulatory agencies for products incorporating our flavor ingredients.

We have a history of operating losses and we may not achieve or maintain profitability.

We have not been profitable and have generated substantial operating losses since we were incorporated in September 1998. We incurred net losses of approximately $10.7 million for the year ended

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December 31, 2010. As of December 31, 2010, we had an accumulated deficit of approximately $212.9 million. We expect to incur additional losses for at least the next two years. The extent of our future losses will depend, in part, on the 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 and development collaborations as well as from other sources that may become available to us in the future and on the level of our expenses. To date, substantially all of our revenue has come from research and development funding, upfront fees, cost reimbursement and milestone payments under our product discovery and development collaborations. In order for us to generate further royalty revenue and become profitable, we must successfully retain our existing product discovery and development collaborations and our collaborators must further commercialize products incorporating one or more of our flavor ingredients, from which we can derive additional royalty revenues. Our ability to generate royalty revenue is uncertain and will depend upon our ability to meet particular research, development and commercialization objectives.

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

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

·                  termination, expiration or amendment of any of our product discovery and development collaboration agreements;

·                  our ability to discover and develop flavor ingredients or the ability of our product discovery and development collaborators to incorporate them into food, beverage and ingredient products;

·                  our receipt of milestone payments in any particular period;

·                  the ability and willingness of collaborators to commercialize products incorporating our flavor ingredients on expected timelines, or at all;

·                  our ability to enter into new product discovery and development collaborations and technology collaborations or to extend the terms of our existing collaboration agreements and our payment obligations, expected revenue and other terms of any of our agreements;

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

·                  the demand for our collaborators’ products containing our flavor ingredients; and

·                  general and industry specific economic conditions, including the current economic and credit crisis, which may affect our collaborators’ research and development expenditures and commercialization efforts.

We may seek additional capital to fund our operations.

If we are unable to successfully commercialize our flavor ingredients, maintain our existing product discovery and development collaborations or enter into new collaborations, we will likely need to obtain additional capital, reduce our ongoing expenses or change our strategy to continue our operations. In addition, our business and operations may change in a manner that would consume available resources at a greater rate than anticipated, or we may decide that for other reasons it is in our best interests to seek additional capital. In such an event, we may need to raise substantial additional capital to, among other things:

·                  fund research, discovery or development programs;

·                  advance product candidates into and through the safety evaluation and regulatory approval

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process;

·                  acquire rights to products or product candidates, technologies or businesses; and

·                  prosecute, maintain and enforce our intellectual property rights.

If we pursue additional capital to continue our operations, we cannot assure you that additional financing will be available on terms acceptable to us, or at all.  If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of opportunities, identify and develop flavor ingredients, develop technologies or otherwise respond to competitive pressures could be significantly limited. In addition, if financing is not available, we may need to alter our strategy, reduce our ongoing expenses or cease operations. In addition, issuances of debt or additional equity could impact the rights of the holders of our common stock, may dilute our stockholders’ ownership and may impose restrictions on our operations. These restrictions could include limitations on additional borrowing, specific restrictions on the use of our assets as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments.

If we elect to modify our business operations in order to reduce our expenses, our research, discovery and development programs could be negatively impacted.

If we modify our business operations to meaningfully reduce our expenses we may not be able to fund our current research, discovery and development programs at the levels we require in order to achieve our corporate goals or we may need to suspend or discontinue one or more programs altogether. A reduction in funding in the near term may be accomplished through a number of measures, including reduction in variable internal or external costs or by deferring certain expenses until a later date. Any meaningful funding reduction scenario will likely result in a delay in any affected programs, and may also negatively impact our existing collaborations and harm our ability to attract new collaborators for those and other programs. In addition, a suspension or discontinuation of a program may result in an indefinite and significant delay of any affected program, and we may incur significant inefficiencies if we later elect to resume any such program.

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

Our success depends to a significant degree upon the continued contributions of our executive officers, management and scientific staff.  We have entered into employment letter agreements with each of our executive officers; however, all of our employees are at-will employees, which means that either we or the employee may terminate their employment at any time. In addition, we currently have no key person insurance.  If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that will adversely affect our ability to meet the demands of our current or any future product discovery and development collaborators in a timely fashion or to support our independent discovery and development programs.  In addition, we may be delayed or unable to develop new product candidates, commercialize our existing product candidates or achieve our other business objectives as a result of any future loss of our other executive officers or key members of our management or scientific staff, which could cause our stock price to decline.  Moreover, the loss of the services of one or more of our executive officers or key members of our management or scientific staff could negatively impact the relationships we have with our collaborators.

We may encounter difficulties managing our growth, which could adversely affect our business.

Our strategy includes entering into and working on simultaneous flavor ingredient discovery and development programs across multiple markets. We may choose to increase headcount in the future in order to meet our strategic objectives. If our growth continues, it will continue to place a strain on us, our management and our resources. Our ability to effectively manage our operations, growth and various projects requires us to continue to improve our operational, financial and management controls, reporting systems and procedures and to attract and retain sufficient numbers of talented employees. We may not be able to successfully implement these tasks on a larger scale and, accordingly, we may not achieve our research, development and commercialization goals.  If we fail to improve our operational, financial and

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management information systems, or fail to effectively monitor or manage our new and future employees or our growth, our business would suffer significantly. In addition, no assurance can be made that we will be able to maintain adequate facilities to house our staff, conduct our research or achieve our business objectives.

We rely on third parties to manufacture our flavor ingredients on a commercial scale.

We do not have experience in manufacturing, nor do we have the resources or facilities to manufacture, flavor ingredients on a commercial scale. Therefore, the commercialization of our flavor ingredients depends in part on our or our collaborators’ ability to manufacture, or to contract with third-party manufacturers of our flavor ingredients, on a large scale, at a competitive cost, with the specified quality and in accordance with relevant food, beverage and ingredient regulatory requirements. Any such collaborators or third-party manufacturers may encounter manufacturing difficulties at any time that could result in delays in the commercialization of potential flavor ingredients. Our inability to find capable manufacturing capacity or to enter into agreements on acceptable terms with third-party manufacturers could delay commercialization of any products we may develop and may harm our relationships with our existing and any future product discovery and development collaborators and our customers. Moreover, if our collaborators are required to change from one third-party manufacturer to another for any reason, the commercialization of our products may be delayed further. In addition, if any manufacturer of our flavor ingredients fail to comply with the FDA’s good manufacturing practice regulations or similar regulations in other countries, then we may be subject to adverse regulatory action including product recalls, warning letters and withdrawal of our products, or our collaborators’ or customers’ products, from the market.

Further, because our flavor ingredients are regulated as food products under the Food, Drug and Cosmetic, or FD&C, Act, we and the third parties with which we collaborate or contract to manufacture, process, pack, import or otherwise handle our products or our product ingredients, may be required to comply with certain registration, prior notice submission, recordkeeping and other regulatory requirements. Failure of any party in the chain of distribution to comply with any applicable requirements under the FD&C Act or the FDA’s implementing regulations, or similar regulations in other countries, may adversely affect the manufacture and/or distribution of our products in commerce.

If we acquire products, technologies or other businesses, we will incur a variety of costs, may have integration difficulties and may experience numerous other risks that could adversely affect our business.

If appropriate opportunities become available, we may consider acquiring businesses, technologies or products that we believe are a strategic fit with our business. We currently have no commitments or agreements with respect to, and are not actively seeking, any material acquisitions. 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 a significant expenditure of operating, financial and management resources, if at all. In addition, future acquisitions might be funded by issuances of additional debt or equity, which could impact your rights as a holder of our common stock and may dilute your ownership percentage. Any of the foregoing could have a significant adverse effect on our business, financial condition and results of operations.

Risks Related To Our Industry

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

Our success depends in part on our ability to obtain and maintain intellectual property that protects our technologies and flavor ingredients. Patent positions may be highly uncertain and may involve complex legal and factual questions, including the ability to establish patentability of sequences relating to taste receptors, proteins, chemical synthesis techniques, compounds and methods for using them to modulate taste for which we seek patent protection. No consistent standard regarding the allowability or

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enforceability of claims in many of our pending patent applications has emerged to date. As a result, we cannot predict the breadth of claims that will ultimately be allowed in our patent applications, if any, including those we have in-licensed or the extent to which we may enforce these claims against our competitors. The degree of future protection for our proprietary rights is therefore highly uncertain and we cannot assure you that:

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

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

·                  others did not publicly disclose our claimed technology before we conceived the subject matter included in any of our patent applications;

·                  any of our patent applications will result in issued patents;

·                  any of our patent applications will not result in interferences or disputes with third parties regarding priority of invention or the validity of any issued patent;

·                  any patents that have issued or may be issued to us, our collaborators or our licensors will provide a basis for commercially viable products or will provide us with any competitive advantages or will not be challenged by third parties;

·                  we will develop additional proprietary technologies that are patentable;

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

·                  new proprietary technologies from third parties, including existing licensors, will be available for licensing to us on reasonable commercial terms, if at all.

In addition, patent law outside the United States is uncertain and in many countries intellectual property laws are undergoing review and revision. The laws of some countries do not protect intellectual property rights to the same extent as domestic laws. It may be necessary or useful for us to participate in opposition proceedings to determine the validity of our competitors’ patents, litigation to enforce our or our licensed intellectual property against others or to defend the validity of any of our or our licensors’ future patents, which could result in substantial costs and would divert our efforts and attention from other aspects of our business.  We cannot be certain of the outcome of any such proceedings or litigation.

Technologies licensed to us by others, or in-licensed technologies, are important to our business. In particular, we depend on high-throughput screening technologies that we licensed from Aurora Biosciences, technology related to certain taste receptor sequences that we license from the University of California and others and technology related to compound libraries that we license from third parties. In addition, we may in the future acquire rights to additional technologies by licensing such rights from existing licensors or from third parties. Such in-licenses may be costly. Also, we generally do not control the patent prosecution, maintenance or enforcement of in-licensed technologies. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we do over our internally developed technologies. Moreover, some of our academic institution licensors, collaborators and scientific advisors have rights to publish data and information to which we have rights. If we cannot maintain the confidentiality of our technologies and other confidential information in connection with our collaborations, our ability to protect our proprietary information or obtain patent protection in the future may be impaired, which could have a significant adverse effect on our business, financial condition and results of operations.

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

Many of the patent applications filed by us and our licensors were filed recently with the United States Patent and Trademark Office and most have not been substantively examined and may not result in patents being issued. Some of these patent applications claim sequences that were identified from different publicly available sequence information sources such as the High-Throughput Genomic Sequences division of GenBank. It is difficult to predict whether any of our or our licensors’ applications will ultimately be found to be patentable or, if so, to predict the scope of any allowed claims. In addition, the disclosure in our or our

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licensors’ patent applications, particularly in respect of the utility of our claimed inventions, may not be sufficient to meet the statutory requirements for patentability in all cases. Furthermore, recent changes in rules promulgated by the European Patent Office may adversely affect the patentability of inventions claimed in some of our and our licensors’ patent applications.  As a result, 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 allowed claims or the enforceability of the patents. Even if enforceable, others may be able to design around any patents or develop similar technologies that are not within the scope of such patents. Our and our licensors’ patent applications may not issue as patents that will provide us with any protection or competitive advantage.

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

Our commercial success, if any, will be significantly harmed if we infringe the patent rights of third parties or if we breach any license or other agreements that we have entered into with regard to our technology or business.  Our success will also depend, in part, on our ability to prevent others from infringing our patent rights.

We are aware of other companies and academic institutions that have been performing research in the areas of taste modulation and flavor ingredients. In particular, other companies, academic institutions and inventor applicants have announced that they have conducted taste-receptor or ion channel research and have published data on taste receptor sequence information and taste receptors or filed patent applications or obtained patent protection on taste modulation or taste receptors and their uses, including Ajinomoto, California Institute of Technology, Cargill, Chromocell, Colorado State University, Columbia University, Dendreon, Duke University, the German Institute of Human Nutrition, Givaudan SA, International Flavors & Fragrances Inc., Johannes Gutenberg University, Kyushu University, Monell Chemical Senses Corp., Mount Sinai School of Medicine, the National Institutes of Health, Nestlé, Novartis, NutraSweet, Nutrinova GMBH, Pfizer, Inc., Redpoint Bio, Sloan Kettering, Symrise, Tate & Lyle, The Scripps Research Institute, Unilever, the University of California, the University of Miami, the University of Tokyo, the University of Wisconsin, Virginia Commonwealth University and Wiessenbach. To the extent any of these companies, academic institutions or inventor applicants currently have, or obtain in the future, broad patent claims, such patents could block our ability to use various aspects of our discovery and development process and might prevent us from developing or commercializing newly discovered flavor ingredients or otherwise conducting our business. The University of California, for example, claims certain patent rights relating to the coexpression of T1R receptors that may not have been licensed to us. While our technology is focused on the use of human T1R receptors, we cannot assure you that it does not infringe such patent rights.  In such event, if we are not able to amend our license with the University of California to include such patent rights and our technology is found to interfere with or infringe such patent rights, our business, financial condition and results of operations could suffer a significant adverse effect.  In addition, it is possible that some of the flavor ingredients that are discovered using our technology may not be patentable or may be covered by intellectual property of third parties.

We are not currently a party to any litigation, interference, opposition, protest, reexamination, reissue or any other potentially adverse governmental, ex parte or inter-party proceeding with regard to our patent or trademark positions.  However, the life sciences and other technology industries are characterized by extensive litigation regarding patents and other intellectual property rights. Many life sciences and other technology companies have employed intellectual property litigation as a way to gain a competitive advantage. We may become involved in litigation, interference proceedings, oppositions, reexamination, protest or other potentially adverse intellectual property proceedings as a result of alleged infringement by us of the rights of others or as a result of priority of invention disputes with third parties.  Third parties may also challenge the validity of any of our issued patents.  Similarly, we may initiate proceedings to enforce our patent rights and prevent others from infringing our or our licensed intellectual property rights.  In any of these circumstances, we might have to spend significant amounts of money, time and effort defending our position and we may not be successful. In addition, any claims relating to the infringement of third-party proprietary rights or proprietary determinations, even if not meritorious, could result in costly

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litigation, lengthy governmental proceedings, divert management’s attention and resources, or require us to enter into royalty or license agreements that are not advantageous to us.

Should any person have filed patent applications or obtained patents that claim inventions also claimed by us, we may have to participate in an interference proceeding declared by the relevant patent regulatory agency to determine priority of invention and, thus, the right to a patent for these inventions in the United States. Such a proceeding could result in substantial cost to us even if the outcome is favorable. Even if successful on priority grounds, an interference action may result in loss of claims based on patentability grounds raised in the interference action. Litigation, interference proceedings or other proceedings could divert management’s time and efforts. Even unsuccessful claims could result in significant legal fees and other expenses, diversion of management’s time and disruption in our business. Uncertainties resulting from initiation and continuation of any patent proceeding or related litigation could harm our ability 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 intellectual property dispute, including an adverse decision as to the priority of our inventions or invalidity of our patents, could undercut or invalidate our intellectual property position. An adverse ruling could also subject us to significant liability for damages, including possible treble damages, prevent us from using technologies or developing products, or require us to negotiate licenses to disputed rights from third parties. Although patent and intellectual property disputes in the technology area are often settled through licensing or similar arrangements, costs associated with these arrangements may be substantial and could include license fees and ongoing royalties. Furthermore, necessary licenses may not be available to us on satisfactory terms, if at all. Failure to obtain a license in 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 proprietary information, we could lose any competitive advantage we may have, which could adversely affect our business.

We rely in part on trade secret protection for our confidential and proprietary information, knowhow and processes. Our policy is to execute proprietary information and invention agreements with our employees and consultants upon the commencement of an employment or consulting relationship. These agreements generally require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not be disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of their employment shall be our exclusive property. Similarly, in the course of our collaborations or in the negotiation of potential collaborations we often disclose confidential and proprietary information under written agreements that obligate those third parties to keep our information confidential and to use our confidential information only for the purposes that we specify. There can be no assurance that we will be able to effectively enforce these agreements or that proprietary information is our exclusive property. There can be no assurance that the subject proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or that we can meaningfully protect our trade secrets. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Many potential competitors, including those who have greater resources and experience than we do, may develop products or technologies that make ours obsolete or noncompetitive.

The life sciences and other technology industries are characterized by rapid technological change, and the area of sensory or taste receptor research is a rapidly evolving field. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Technological developments by others may result in our flavor ingredients and technologies becoming obsolete.

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In particular, we face substantial competition from companies pursuing the commercialization of products and services relevant to taste using more traditional methods for the discovery of flavor ingredients, or for the reduction of salt, sugar, monosodium glutamate, or MSG, or bitter taste. These competitors include leading flavor companies, such as Firmenich, Givaudan SA, International Flavors & Fragrances Inc., Symrise and Takasago. These companies provide flavors and other products, such as oils, extracts and distillates, to consumer products companies for use in a wide variety of products including foods, beverages, confectionaries, dairy products and pharmaceuticals. Competitors currently developing or marketing high intensity sweeteners include Ajinomoto, BRAIN AG, or Biotechnology Research and Information Network AG, Cargill, Natur Research Ingredients, Nutrasweet, Nutrinova GMBH, Symrise and Tate & Lyle. Competitors currently developing or marketing menthol or cooling agents include Jindal Drugs, Mentha & Allied, Sharp Menthol, Symrise, Takasago and Millennium Specialty Chemicals.  We currently compete and will continue to compete in the future with these companies in collaborating with and selling flavor products and technologies to manufacturers of food, beverage and ingredient products. Many of these companies have substantially greater capital resources, research and development resources and experience, manufacturing capabilities, regulatory expertise, sales and marketing resources, established relationships with consumer products companies and production facilities.

Savory flavor ingredients, particularly inosine monophosphate, or IMP, are commercially available, and we will compete with the companies that produce these flavors. IMP is widely available and is a generally accepted food additive by the food, beverage and ingredient industries. As a result, our existing and future collaborators may choose to incorporate IMP or similar savory flavor ingredients into their food, beverage and ingredient products instead of our savory flavor ingredients.  We may compete with bitter masking or bitter blocking compounds, such as adenosine 5’ monophosphate, or AMP.  We may also compete with known methods for reducing sodium, such as the use of potassium chloride in combination with flavors and masking agents.  In addition, we may compete with existing cooling agents, such as menthol and WS-3, that are currently in use.

We may in the future face competition from life sciences and other technology companies and other commercial enterprises. These entities engage as we do in biotechnology, biology or chemistry research and could apply this technology to the discovery and development of flavor ingredients. We are aware of two other companies, Redpoint Bio and Chomocell, that are involved in research for the discovery and development of sweet enhancers and salt substitutes. We cannot guarantee that products developed as a result of our competitors’ existing or future collaborations will not compete with our flavor ingredients.

Universities and public and private research institutions are also potential competitors. While these organizations primarily have educational objectives, they may develop proprietary technologies related to the sense of taste or secure patent protection that we may need for the development of our technologies and products. We may attempt to license these proprietary technologies, but these licenses may not be available to us on acceptable terms, if at all.

Our competitors, either alone or with their collaborative partners, may succeed in developing technologies or discovering flavor ingredients that are more effective, safer, more affordable or more easily commercialized than ours, and our competitors may obtain intellectual property protection or commercialize products sooner than we do. Developments by others may render our product candidates or our technologies obsolete. In addition, our current product discovery and development collaborators are not prohibited from entering into research and development collaboration agreements with third parties in any product field. Our failure to compete effectively would have a significant adverse effect on our business, financial condition and results of operations.

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

Because our business strategy involves the development and sale by our collaborators of commercial products incorporating our flavor ingredients, we may be sued for product liability. Products incorporating our flavor ingredients are also subject to risks such as product contamination or spoilage, product tampering or other adulteration.  From time to time we receive reports of observed effects after individuals

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taste solutions or products that include novel flavor ingredients that we are testing or developing, including reports such as irritation of the mouth, tingling of the tongue, lips or gums, and modulation or loss of taste sensation. Our practice is to track reports of any observed effects and, in particular, to evaluate whether any adverse effect may be related to our novel flavor ingredient or whether another cause is determinable. In some instances, these effects may be observed only at higher levels of use or exposure, in which case we may elect to proceed with development, and subsequent commercialization, of a novel flavor ingredient at use levels that we believe are appropriate for only a subset of all potential applications. Nevertheless, we may be held liable if any flavor ingredient we test, develop or commercialize, or any product our collaborators test, develop or commercialize that incorporates any of our flavor ingredients, causes injury or illness or is found otherwise unsuitable during product testing, manufacturing, marketing, sale or consumer use. In addition, the safety studies we must perform and the regulatory approvals we must obtain prior to incorporating our flavor ingredients into a commercial product will not protect us from any such liability.

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

Our product liability insurance may not fully cover our potential liabilities associated with the sale of commercial products incorporating any of our flavor ingredients. Inability to obtain sufficient insurance coverage to protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us or our product discovery and development collaborators. We may be obligated to indemnify our product discovery and development collaborators for product liability or other losses they incur as a result of our flavor ingredients. Any indemnification we receive from such collaborators for product liability that does not arise from our flavor ingredients may not be sufficient to satisfy our liability to injured parties. If we are sued for any injury caused by our flavor ingredients or products incorporating our flavor ingredients, our liability could 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 our employees to routinely handle hazardous chemical, radioactive and biological materials. Our operations also produce hazardous waste products. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. As a result of the increase in size of our operations, we are now classified as a large quantity generator of hazardous waste. This classification may result in increased scrutiny of our operations by the Environmental Protection Agency. Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental regulations may impair our discovery and development efforts.

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

Risks Related To Our Common Stock

The price of our common stock is volatile.

The market prices for securities of biotechnology companies historically have been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to

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the operating performance of particular companies. Since our initial public offering in June 2004, the price of our common stock has ranged from approximately $1 per share to approximately $23 per share. The market price of our common stock may fluctuate in response to many factors, including:

·                  developments concerning our collaborative agreements;

·                  delays in commercialization of our flavor ingredients;

·                  results of safety evaluation of our flavor ingredients;

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

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

·                  announcements of technological innovations by us or others;

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

·                  an allegation of illness or injury relating to our flavor ingredients, whether meritorious or not, or any product liability judgment;

·                  developments in patent or other proprietary rights;

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

·                  future sales of our common stock by existing stockholders;

·                  comments by securities analysts;

·                  general market conditions;

·                  fluctuations in our operating results;

·                  government regulation;

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

·                  public concern as to the safety of our flavor ingredients.

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

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

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

·                  limit who may call a special meeting of stockholders;

·                  prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

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

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

Our shareholder rights plan may hinder or prevent change of control transactions.

Our shareholder rights plans may discourage transactions involving an actual or potential change in our ownership.  In addition, our board of directors may issue shares of preferred stock without any further action by you.  Such issuances may have the effect of delaying 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 of directors to be removed and replaced, even if you and other stockholders believe such actions are in the best interests of us and our stockholders.

We have never paid cash dividends on our capital stock and we do not anticipate paying dividends in the foreseeable future.

We have paid no cash dividends on any of our classes of capital stock to date, and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt or credit facility may preclude us from paying any dividends. As a result, capital appreciation, if any, of our common stock 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 feet of laboratory and office space at 4767 Nexus Center Drive, San Diego, California, 92121.  Our lease for this facility expires on February 28, 2017. Our current monthly lease obligation for rent is approximately $225,000. We are responsible for expenses associated with the use and maintenance of the building, such as utilities and common area maintenance. These costs will vary each month, and we expect that these costs will be approximately $95,000 per month.

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

Item 3.    Legal Proceedings

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

Item 4.    (Removed and Reserved)

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PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Market Price

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

The last sale price for our common stock as reported by the NASDAQ Stock Market on February 28, 2011 was $7.25 per share.  As of February 28, 2011, there were approximately 65 shareholders of record of our common stock.

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

Information about our equity compensation plans is included in Item 12 of Part III of this annual report on Form 10-K.

Repurchases of Equity Securities

There were no repurchases of equity securities in the fourth quarter of 2010.

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Performance Measurement Comparison (1)

The following graph shows a comparison of the five-year total cumulative returns of an investment of $100 in cash on December 31, 2005 in (i) our common stock, (ii) the Nasdaq Composite Index, U.S. Companies and (iii) the Nasdaq Biotechnology Index.  The comparisons in the graph are required by the SEC and are not intended to forecast or be indicative of the possible future performance of our common stock.  The graph assumes that all dividends have been reinvested.  (To date, we have not declared any dividends.)

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Senomyx, Inc., the NASDAQ Composite Index

and the NASDAQ Biotechnology Index

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

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Item 6.    Selected Financial Data

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

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our Financial Statements and the related Notes to Financial Statements in Item 8, “Financial Statements and Supplementary Data” in this annual report on Form 10-K.

Certain statements contained in this annual report on Form 10-K, including statements regarding the development, growth and expansion of our business, our intent, belief or current expectations, primarily with respect to our future operating performance, and the products we expect to offer and other statements regarding matters that are not historical facts, are “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the “safe harbor” created by these sections. Future filings with the SEC, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may also contain forward-looking statements. Because such statements include risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. Some of the factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements can be found under the caption “Risk Factors” and elsewhere in this annual report on Form 10-K.  Readers are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made.

Overview and Recent Developments

We are a leading company focused on using proprietary taste receptor-based assays and screening technologies to discover and develop novel flavor ingredients for the packaged food, beverage and ingredient supply industries. We consider flavor ingredients to include flavors, such as savory flavors and cooling flavors, and flavor modulators, such as sweet and salt enhancers and bitter blockers.  We have also initiated a program to discover and develop natural high intensity sweeteners. We believe our flavor ingredients will enable packaged food, beverage and ingredient companies to improve the nutritional profile of their products while maintaining or enhancing taste and generating cost of goods savings. We license our flavor ingredients to our collaborators on an exclusive or co-exclusive basis, which we believe will provide these companies with a competitive advantage. We currently have product discovery and development collaborations with several of the world’s leading packaged food, beverage and ingredient companies: Ajinomoto, Campbell, Firmenich, Kraft, Nestlé, PepsiCo and Solae. We anticipate that we will derive all of our revenues from existing and future collaborations. Depending upon the collaboration, our collaboration agreements provide for upfront fees, research and development funding, reimbursement of certain costs, milestone payments based upon our achievement of research or development goals and, in the event of commercialization, commercial milestones, minimum periodic royalties and royalties on sales of products incorporating our flavor ingredients. Senomyx’s principal current programs focus on the development of savory flavors, sweet and salt flavor enhancers, bitter blockers and cooling flavors.

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We have incurred significant losses since our inception in 1998 and, as of December 31, 2010 our accumulated deficit was $212.9 million.  We expect to incur additional losses over at least the next two years as we continue to develop flavor ingredients.  Our results of operations have fluctuated from period to period and likely will continue to fluctuate substantially in the future based upon:

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

·                  our ability to discover and develop flavor ingredients or the ability of our product discovery and development collaborators to incorporate them into packaged food, beverage and ingredient products;

·                  our receipt of milestone payments in any particular period;

·                  the ability and willingness of collaborators to commercialize products incorporating our flavor ingredients on expected timelines, or at all;

·                  our ability to enter into new product discovery and development collaborations and technology collaborations or to extend the terms of our existing collaboration agreements;

·                  our payment obligations, expected revenue and other terms of any other agreements of this type;

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

·                  the demand for our collaborators’ products containing our flavor ingredients; and

·                  general and industry specific economic conditions, including the current economic and credit crisis, which may affect our collaborators’ research and development expenditures and commercialization efforts.

In January 2010 we announced that Firmenich SA decided to proceed with commercial development of S6973, our lead enhancer of sucrose (table sugar).  In conjunction with Firmenich’s decision to select S6973 for commercial development, we received an additional $8 million license fee payment from Firmenich during the first quarter of 2010. We also received additional payments relating to the achievement of one or more milestones and for reimbursement of specified expenses in accordance with the terms of the Collaborative Research and Development Agreement between us and Firmenich dated July 28, 2009, as amended.

In February 2010 we completed a public offering of 7.1 million shares of common stock for proceeds to us of $18.6 million, net of underwriting discounts, commissions and offering expenses.  The offering was made under a shelf registration statement.

In April 2010 we entered into a Term Sheet, or the KO Term Sheet, with The Coca-Cola Company, or Coca-Cola, under which we agreed to use commercially reasonable efforts to negotiate the definitive terms of a collaborative agreement with Coca-Cola through June 22, 2010 for a research program related to the discovery and commercialization of new flavor ingredients resulting from our sweet taste technology.  We and Coca-Cola were unable to reach mutually satisfactory terms for a new collaborative research agreement within the period, and accordingly, the KO Term Sheet expired.

In June 2010 we entered into a letter agreement with PepsiCo which included key commercial and financial terms that the parties agreed to use as the basis for negotiating a potential new multi-year collaborative research program related to the discovery and commercialization of new flavor ingredients resulting from our sweet taste technology, or PepsiCo Letter Agreement. The PepsiCo Letter Agreement contemplated that under the new proposed collaboration agreement PepsiCo’s rights for the use of our flavor ingredients would be exclusive in all non-alcoholic beverage categories, with the exception of powdered non-alcoholic beverages which would be co-exclusive. The PepsiCo Letter Agreement also contemplated that our S6973 sucrose enhancer would not be part of any new collaboration agreement between us and PepsiCo, and that we will have the right to commercialize this novel flavor ingredient for use in non-alcoholic beverages through other channels.

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Under the PepsiCo Letter Agreement, we and PepsiCo agreed to negotiate on an exclusive basis and to use best efforts to negotiate the definitive terms of the new proposed collaboration agreement over a period of 60 days.  In consideration for our commitments, PepsiCo made a payment to us of $7.5 million. The payment was applied as partial payment towards an upfront fee when we and PepsiCo entered into a final definitive agreement.

In August 2010 we entered into a Collaborative Research, Development, Commercialization and License Agreement with PepsiCo, or the PepsiCo Collaboration Agreement.  The PepsiCo Collaboration Agreement relates to a four-year research program to discover and develop (1) novel natural and artificial flavor ingredients intended to provide a sweet enhancement taste effect of sucrose and fructose, including high fructose corn syrup, or the Target Sweeteners, and (2) natural high intensity sweeteners, in each case for use in non-alcoholic beverage product categories on a worldwide basis.

Under the PepsiCo Collaboration Agreement, we received an upfront payment of $30.0 million from PepsiCo, $7.5 million of which was paid in the second quarter of 2010 in connection with the signing of the PepsiCo Letter Agreement, and $22.5 million of which was paid in the third quarter of 2010.  We expect to recognize the upfront payment over the four-year research period of the agreement.  We are also entitled to $32.0 million in committed research and development payments, payable in equal quarterly installments over the four-year research period.  PepsiCo has also agreed to reimburse us for certain specified out-of-pocket expenses that we may incur during the course of the research program.  In addition to the upfront payment and committed research funding, we also will be eligible for (i) milestone payments based on the achievement of predetermined goals for selected sweetness enhancers and natural high intensity sweeteners, and (ii) royalty payments on products that incorporate selected flavor ingredients and/or natural high intensity sweeteners. We will receive minimum annual royalty payments for the different classes of flavor ingredients that PepsiCo may select for development. Royalties on products sold by PepsiCo or its affiliates that incorporate a selected sweetness enhancer will be equal to a base amount plus a portion of the cost savings, if any, derived from the use of the flavor ingredient in the applicable product. Royalties on products sold by PepsiCo or its affiliates that incorporate a selected natural high intensity sweetener will be equal to a portion of the cost of the sweetener.

PepsiCo has the option to extend one or more of the research programs for two additional years, which would result in additional research funding commitments and payments during the extension of the research program.  Both parties have the right to terminate the PepsiCo Collaboration Agreement in the event of the other party’s uncured material breach and PepsiCo also has the unilateral right to terminate the PepsiCo Collaboration Agreement in the event that a direct competitor of PepsiCo acquires more than 30% of our outstanding voting securities.

In October 2010 we entered into an amendment of our Collaborative Research, Development, Commercialization and License Agreement with Firmenich, or the Firmenich Collaboration Agreement.  Under the terms of this most recent amendment, the Firmenich Collaboration Agreement has been expanded to include, among other things, commercial development of S6973, our novel enhancer of sucrose, for specific beverage applications.  Earlier in the year Firmenich made a decision to proceed with commercial development of S6973 for virtually all food product categories and in select powdered beverages.  The amendment of the Firmenich Collaboration Agreement also provides Firmenich with an exclusive worldwide license for commercialization of S6973 for use in (i) instant and ready-to-drink milk, tea and coffee beverages, and (ii) over the counter pharmaceutical products. The amendment also converts Firmenich’s license for use of S6973 in powdered beverages from co-exclusive to exclusive and grants Firmenich an exclusive right to commercialize any compound that they select for development for use in confectionary food products.

In return, under the terms of the amendment we will receive an additional license fee, incremental milestone payments, and minimum annual royalties that, collectively, could reach $3.5 million if all milestones are met.  In addition, the companies agreed upon a higher royalty rate for sales of S6973 for use in (i) instant and ready-to-drink milk, tea, and coffee beverages, and (ii) over the counter pharmaceutical products, compared to the royalty rate in the existing Firmenich Collaboration Agreement for other licensed uses.

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In February 2011, Firmenich elected to exercise their first one-year option to extend the collaborative research funding period of their collaboration agreement through July 2012.  The collaboration agreement is focused on discovering novel flavor ingredients intended to provide a sweet enhancement taste effect of sucrose, fructose or various forms of rebaudioside.

Revenue

We derive revenue from our product discovery and development collaborations. To date, our revenue has come solely from upfront fees, research and development funding, reimbursement of certain patent and regulatory costs, milestone payments and royalty payments under our product discovery and development collaboration agreements. As of December 31, 2010, we have recognized cumulative revenue under our collaborations of $128.8 million. If any of these collaborative agreements were to be terminated, this could have a significant effect on future revenues.

From our inception date to the present, research and development payments represented the primary source of our revenue. Based on current collaborations, we anticipate that the majority of our revenues in the near future will be derived from research and development payments.  We may receive additional milestone payments in the future upon the achievement of certain goals set forth in our collaboration agreements.

In addition, as our collaborators launch products incorporating our flavor ingredients, we receive minimum periodic royalties and royalty payments based upon the sales of those products, which in the future could be significantly larger than research and development funding or milestone payments. In order for us to generate material royalty revenue and become profitable, we must retain our existing or establish new product discovery and development collaborations and our collaborators must commercialize products incorporating one or more of our flavor ingredients. Our ability to generate material royalty revenue is uncertain and will depend upon our ability to meet particular research, development and commercialization objectives.

Research and Development

Our research and development expenses consist primarily of costs associated with our discovery and development efforts in connection with our primary programs focused on the development of savory flavors, sweet and salt enhancers, bitter blockers and cooling flavors. We track research and development costs by the type of cost incurred rather than by project. Research and development costs are comprised of salaries and other personnel-related expenses, facilities and depreciation, research and development supplies, patent and licensing, outside services and non-cash stock-based compensation expenses. We charge research and development expenses to operations as incurred.

The research and development payments we have received from our collaboration agreements historically have not covered all of our research and development expenses.

At this time, due to the risks inherent in the discovery of flavor ingredients, we are unable to estimate with any certainty the costs we will incur in the continued development of our flavor ingredients for commercialization.  We anticipate that we will make determinations regarding the research and development projects to pursue and the funding of each project on an ongoing basis in response to the progress of each discovery and development program, as well as an ongoing assessment of its market potential. We cannot be certain when any material net cash inflow from the commercialization of our flavor ingredients will commence.

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

·                  we are substantially dependent upon our collaborators for research and development funding;

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·                  our collaborators may terminate their respective collaboration programs early;

·                  we may not be able to discover flavor ingredients with the desired taste attributes;

·                  we may not be successful in developing flavor ingredients with attributes required for use in commercial products;

·                  we may be unable to maintain FEMA GRAS determination for our savory flavors, our sucralose and sucrose enhancers and our bitter blockers; and

·                  we may be unable to obtain FEMA GRAS determination or regulatory approval for other candidates in our other programs.

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

General and Administrative

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

Results of Operations

Years Ended December 31, 2010, 2009 and 2008

Revenue Under Collaboration Agreements

We recorded revenue of $28.7 million, $15.5 million and $17.2 million during the years ended December 31, 2010, 2009 and 2008, respectively.  Research and development payments, upfront fees, milestone payments and royalty revenues under collaborations with Ajinomoto, Campbell, The Coca-Cola Company, or Coca-Cola, Firmenich, Nestlé, PepsiCo and Solae accounted for 100% of the total revenue for the year ended December 31, 2010.  The increase of $13.2 million from 2009 to 2010 was primarily due to the recognition of revenue associated with upfront payments, milestones, cost reimbursements and research and development funding associated with sweet enhancer collaboration with Firmenich, which commenced in July 2009, and with PepsiCo, which commenced in August 2010.  Our sweet enhancer collaboration with Firmenich contributed approximately $15.0 million in revenues during the year ended December 31, 2010, as compared to approximately $3.0 million during the year ended December 31, 2009, an increase of approximately $12.0 million.  Our collaboration with PepsiCo contributed approximately $5.2 million in revenues during the year ended December 31, 2010, and did not contribute to revenues during the year ended December 31, 2009, as the agreement commenced in August 2010.  These increases were partially offset by reduced revenues of $4.0 million in the aggregate under four other collaborations where the research and development funding periods reached their conclusions during the year ended December 31, 2010.  The reductions in revenue were entirely the result of reduced research and development funding under these collaborations.  The collaborations that reached the conclusion of their research and development periods were the collaborations with Solae, Coca-Cola, the coffee and coffee whitener collaboration with Nestlé, and Cadbury Adams LLC, or Cadbury.  We remain eligible for future milestone payments and potentially royalties under both the Solae and Nestlé collaborations.

Research and development payments, upfront fees, milestone payments and royalty revenues under collaborations with Ajinomoto, Cadbury, Campbell, Coca-Cola, Firmenich, Nestlé and Solae accounted for 100% of total revenue for the year ended December 31, 2009.  The decrease of $1.7 million from 2008 to 2009 was primarily due to the difference in the revenue recognized in 2008 related to the upfront payment from Ajinomoto as compared to the revenue recognized in 2009 related to the upfront payment from

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Firmenich. Annual revenue in 2008 included $3.6 million of revenue related to an $8.0 million upfront payment associated with the expansion of our collaboration with Ajinomoto in August 2007.  The upfront payment was recognized ratably over the nine month period from August 2007 through April 2008. Annual revenue in 2009 included $2.3 million of revenue related to $12.0 million license fee installment payments related to the collaboration with Firmenich.  Research and development payments, upfront fees, milestone payments and royalty revenues under collaborations with Ajinomoto, Cadbury, Campbell, Coca-Cola, Firmenich, Nestlé and Solae accounted for 100% of total revenue for the year ended December 31, 2008.

For 2011, we expect to see an increase in revenues recognized under our collaborative agreements.

Research and Development Expenses

Our research and development expenses (including stock-based compensation expenses charged to research and development) were $26.6 million, $28.2 million and $31.8 million for the years ended December 31, 2010, 2009 and 2008, respectively.  A comparison of research and development expenses by category is as follows (in thousands):

Salaries and Personnel.  Our expenses for research and development personnel, including consultants, were $11.1 million, $12.0 million and $12.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. The decrease of $899,000 from 2009 to 2010 was primarily due to the full year impact of a reduction in staff in 2009, and a further reduction of staff due to natural attrition during 2010.  Our research and development staff decreased from an average of 90 for the year ended December 31, 2009 to an average of 79 for the year ended December 31, 2010.  The decrease of $826,000 from 2008 to 2009 was primarily due to a reduction in staff to support research and development activities, partially offset by the impact of annual salary adjustments.  Our research and development staff decreased from an average of 97 for the year ended December 31, 2008 to an average of 90 for the year ended December 31, 2009.   For 2011, we expect to see a slight increase in staff and salaries and personnel expenses as compared to 2010.

Facilities and Depreciation.    Our facilities and depreciation expenses were $5.1 million, $5.6 million and $5.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. The decrease of $464,000 from 2009 to 2010 was primarily due to decreased depreciation expense on scientific equipment placed in service in 2007 (which became fully depreciated in 2010).  The decrease of $229,000 from 2008 to 2009 was primarily due to decreased depreciation expense on scientific equipment placed in service in 2006 (which became fully depreciated during 2009).  For 2011, we expect to see a slight increase in facilities and depreciation expenses as compared to 2010.

Research and Development Supplies.  Our expenses for supplies used in research and development were $2.9 million, $3.6 million and $4.4 million for the years ended December 31, 2010, 2009 and 2008, respectively.  The decrease of $710,000 from 2009 to 2010 was primarily due to decreased purchases of compounds and a decrease in expensed supplies used in high-throughput screening.  The decrease of

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$824,000 from 2008 to 2009 was primarily due to a decrease in expensed supplies used in high-throughput screening and other research and development activities due to progress in the scientific programs.  For 2011, we expect to see an increase in research and development supplies as compared to 2010.

Outside Services.  Our outside services expenses were $2.5 million, $2.2 million and $2.5 million for the years ended December 31, 2010, 2009 and 2008, respectively.  The increase of $249,000 from 2009 to 2010 was primarily due to an increase in costs for safety studies, partially offset by a decrease in costs for scale-up activities.  The decrease of $290,000 from 2008 to 2009 was primarily due to the successful completion of outsourced activities in support of regulatory filings for our product candidates.  For 2011, we expect to see an increase in outside services expenses as compared to 2010 due to costs for safety studies related to product candidates advancing into development.

Patent and Licensing.  Our patent and licensing expenses were $2.2 million, $2.2 million and $3.1 million for the years ended December 31, 2010, 2009 and 2008, respectively.  The decrease of $910,000 from 2008 to 2009 was primarily attributable to decreased patent legal expenses associated with timing of patent prosecution of our intellectual property portfolio.  For 2011, we expect to see a slight increase in our patent and licensing expenses as compared to 2010.

Non-cash Stock-based Compensation.  Our non-cash stock-based compensation expenses were $1.8 million, $1.9 million and $2.3 million for the years ended December 31, 2010, 2009 and 2008, respectively.  The decrease of $101,000 from 2009 to 2010 was primarily due to the continuing decrease in the valuation of options granted to employees, which results in less expense incurred.  The decrease of $376,000 from 2008 to 2009 was primarily due to continuing decreases in the valuation of options granted to employees, which results in less expense incurred.  For 2011, we expect non-cash stock-based compensation expense to remain relatively constant in comparison to 2010.

General and Administrative Expenses

Our general and administrative expenses (including non-cash stock-based compensation expenses charged to general and administrative) were $13.1 million, $13.7 million and $13.6 million for the years ended December 31, 2010, 2009 and 2008, respectively.

The $605,000 decrease in expenses from 2009 to 2010 was primarily due to the continuing decrease in the valuation of options granted to employees, which results in less expense incurred.  The decrease in non-cash stock-based compensation expense was partially offset by an increase in payroll and related expenses.

The $127,000 increase in expenses from 2008 to 2009 was primarily due to an increase in salaries and personnel-related expenses, partially offset by a reduction in outside services expense.

For 2011, we expect to see a slight decrease in our general and administrative expenses due to continuing decreases in non-cash stock-based compensation expense.

Other Income

Other income was $339,000, $207,000 and $1.3 million for the years ended December 31, 2010, 2009 and 2008, respectively.  The increase of $132,000 from 2009 to 2010 was primarily due to the receipt of a federal grant in 2010 and to increased interest income due to higher average investable balances in 2010 as compared to 2009.  The decrease of $1.0 million from 2008 to 2009 was primarily due to lower average rates of return on invested balances in 2009 compared to 2008.

Liquidity and Capital Resources

Since our inception, we have financed our business primarily through private and public placements of stock, research and development payments under our product discovery and development collaborations and interest income.  As of December 31, 2010 we had received in excess of $191.6 million in proceeds from the sales of common and preferred stock.  In addition, we had received $162.0 million in non-refundable license fees, research and development payments, cost reimbursements and milestone payments from our collaboration agreements, and $12.2 million in interest income.  Commencing January 1, 2011, over the remaining life of our current collaboration agreements, excluding any payments due upon the

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election of any extension options unexercised as of the date of the publication of these statements, we are entitled to receive an additional $36.4 million in non-refundable research and development payments from our collaborators.  If our collaborators elect to utilize their extension options, over the remaining life of our current collaboration agreements we would be entitled to receive $62.1 million in non-refundable research and development payments.  We may not receive these payments if the collaborations are terminated or amended.  In addition, we may receive payments in the event we achieve research or development milestones and royalty payments in the event our collaborators commercialize products incorporating our flavor ingredients.

During 2010, four of our collaborations reached the conclusions of their research and development periods.  We believe that any reduction in revenues related to these four collaborations will be offset in 2011 by increases in revenues related to our PepsiCo and Firmenich collaborations related to our Sweet Taste Program.

At December 31, 2010, we had $71.6 million in cash, cash equivalents and investments available-for-sale as compared to $31.1 million at December 31, 2009, an increase of $40.5 million.  This overall increase resulted primarily from the receipt of upfront fees from PepsiCo and Firmenich in the amounts of $30.0 million and $8.0 million, respectively, during 2010.  The overall increase was also due to our financing in February 2010, which raised approximately $18.6 million, net of offering costs.  These increases were partially offset by the use of cash to fund our operations.

Operating Activities

Operating activities provided cash of $21.6 million for the year ended December 31, 2010 and used cash of $9.4 million for the year ended December 31, 2009.  Operating cash flow in 2010 compared to the prior year reflects a decrease in our net loss of $15.5 million.  Non-cash expenses decreased $1.4 million to $6.9 million for the year ended December 31, 2010 from $8.3 million for the year ended December 31, 2009.  The decrease in non-cash expenses was primarily due to a decrease of $1.1 million in non-cash stock-based compensation expense for employees, non-employee directors and consultants and due to a decrease of $549,000 in depreciation expense, due to scientific assets becoming fully depreciated during 2009 and 2010.  Increases in other current assets used cash of $2.3 million in 2010, while decreases in other current assets provided cash of $76,000 in 2009.  Increases in operating liabilities provided cash of $27.6 million and $8.4 million in 2010 and 2009, respectively.  The increase in operating liabilities in the year ended December 31, 2010 was primarily due to the receipt of $38.0 million in upfront payments from PepsiCo and Firmenich, the unrecognized portions of which are included in deferred revenue at December 31, 2010.  The upfront payment from PepsiCo is being recognized as revenue through August 2014.  For 2010 and 2009, the upfront payment from Firmenich was recognized over the expected service period, which was scheduled to conclude in July 2011. In February 2011 Firmenich exercised their first option to extend the service period of the agreement through July 2012. The unrecognized balance of the upfront payment at the date of Firmenich’s election will be recognized over the remaining revised service period.

Operating activities used cash of $9.4 million for the year ended December 31, 2009 compared to $22.0 million for the year ended December 31, 2008.  Operating cash flow in 2009 compared to the prior year reflects a decrease in our net loss of $769,000.  Non-cash expenses increased $408,000 to $8.3 million for the year ended December 31, 2009 from $7.9 million for the year ended December 31, 2008.  The increase in non-cash expenses was primarily due to a decrease in the accretion of discount on available for sale securities of $949,000, partially offset by decreases in stock-based compensation for employees and non-employee directors of $361,000 and in depreciation expense of $282,000.  Decreases in other current assets provided cash of $76,000 and $1.1 million in the years ended December 31, 2009 and 2008, respectively.  Net increases in operating liabilities provided cash of $8.4 million in the year ended December 31, 2009, while net decreases in operating liabilities used cash of $4.1 million in the year ended December 31, 2008.  The increase in operating liabilities in the year ended December 31, 2009 was primarily due to the receipt of $12.0 million in upfront payments from Firmenich, which are included in deferred revenue at December 31, 2009.

Investing Activities

Investing activities used cash of $45.8 million for the year ended December 31, 2010.  Cash used in 2010 reflects the purchase of available-for-sale securities of $95.9 million and purchases of capital equipment of $974,000.  These purchases were partially offset by maturities of available-for-sale securities of $51.0 million.

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Investing activities used cash of $241,000 for the year ended December 31, 2009.  Cash used in 2009 reflects the purchase of available-for-sale securities of $25.0 million and purchases of capital equipment of $380,000.  These purchases were partially offset by maturities of available-for-sale securities of $25.1 million.

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

Financing Activities

Financing activities provided cash of $20.4 million, $682,000 and $943,000 for the years ended December 31, 2010, 2009 and 2008, respectively.  Cash provided by financing activities in 2010 reflects proceeds from our February 2010 offering, which raised approximately $18.6 million, net of offering costs.  In addition, cash provided by financing activities in the year ended December 31, 2010 reflects the net proceeds from the issuance or sale of common stock from the employee stock purchase program and the exercise of employee stock options of approximately $1.8 million.  Cash provided by financing activities in 2009 reflects the net proceeds from the sale of common stock of $682,000 from purchases from our employee stock purchase program and the exercise of stock options.  Cash provided by financing activities in 2008 reflects the net proceeds from the sale of common stock of $943,000 from purchases from our employee stock purchase program and the exercise of stock options.

As of December 31, 2010 future minimum payments due under our contractual obligations are as follows (in thousands):

As of December 31, 2010, we had no long-term debt obligations.

As of December 31, 2010, we have net open purchase orders (defined as total open purchase orders at year end less any accruals or invoices charged to or amounts paid against such purchase orders) totaling approximately $500,000.  In the next 12 months, we also plan to spend approximately $3.5 to $4.0 million on capital expenditures.

Our license agreement with the University of California calls for annual maintenance fees, which commenced in 2006, or royalties or service revenues on sales of any products developed using technologies licensed under the agreement.  Royalties are calculated as a percentage of covered sales.  The agreement specifies minimum periodic royalty payments commencing in 2014 and continuing through the expiration of the last to expire patent licensed under the agreement.

Our future capital uses and requirements depend on numerous forward-looking factors.  These factors may include, but are not limited to, the following:

·                  the rate of progress and cost of research and development activities;

·                  our ability to establish and maintain product discovery and development collaborations;

·                  the terms and timing of any collaborative, licensing and other arrangements that we may establish;

·                  the number and scope of our research activities;

·                  the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

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·                  the effect of competing technological and market developments; and

·                  the extent to which we acquire or in-license new products, technologies or businesses.

We believe our available cash, cash equivalents, investments and existing sources of funding will be sufficient to satisfy our anticipated operating and capital requirements through at least the next 12 months.

Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources that were primarily generated from the proceeds of offerings of our equity securities and upfront payments, research and development payments and milestone payments under our product discovery and development collaborations.  From time to time we may also consider raising additional cash from the sale of equity or other securities.  Commencing January 1, 2011, over the remaining life of our current collaboration agreements, excluding any payments due upon the election of any extension options unexercised as of the date of the publication of these statements, we are entitled to receive an additional $36.4 million in research and development payments from our collaborators.  If our collaborators elect to utilize their extension options, over the remaining life of our current collaboration agreements we would be entitled to receive $62.1 million in research and development payments.  Commencing January 1, 2011, assuming all milestones are achieved for all program goals for all collaborations and we receive all research and development funding, including any amounts due upon the election of extension options, we may be entitled to up to $91.6 million.  In the next twelve months (through December 31, 2011), we anticipate receiving $14.1 million in research and development funding. This does not include any additional payments we may receive related to the following events:

·                  the achievement of additional milestones;

·                  the signing of new collaborations or extensions of existing collaborations not currently contemplated under existing extension options;

·                  the earning of any minimum periodic royalty payments;

·                  the earning of royalties from the sale of products containing our flavor ingredients; and

·                  the earning of any cost reimbursements.

We may not receive the payments if the collaborations are terminated, amended or not renewed, or if we do not achieve the milestones set forth in the collaboration agreements.  In addition, the timing of the receipt of milestone payments in particular is uncertain, as we may achieve milestones significantly earlier or later than we currently expect.  We cannot predict at this time the level of our collaborators’ royalty-generating sales, as these sales to date have been based on launches of new products without established sales histories.

We continue to pursue additional collaborations which could result in additional revenue.  We may not recognize revenues for research and development funding, milestones, minimum periodic royalties or royalties if the collaborations are terminated or amended, or if we do not achieve the milestones set forth in the collaboration agreements.  Our expenses will vary based upon (but not limited to) the forward-looking factors listed above.

Off-Balance Sheet Arrangements

As of December 31, 2010 and 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose or structured finance entities, which would have been established for the purposes of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or GAAP.  The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and

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related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate these estimates, including those related to revenue recognition, stock-based compensation, long-lived assets, accrued liabilities, and income taxes.  These estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities.  Actual results may differ from these estimates under different assumptions or conditions.  While our significant accounting policies are described in more detail in Note 1 to our financial statements, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements:

Revenue Recognition

Our revenue recognition policies are in compliance with the Revenue Recognition Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC.  Some of our agreements contain multiple elements, including technological and territorial licenses and research and development services.  In accordance with these agreements, we may be eligible for upfront fees, research and development funding, cost reimbursements, development milestones, commercial milestones, minimum periodic royalty payments and royalty payments.

Development revenues 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 with future performance, are attributed to a specific program or collaboration and recognized over the period of service for that specific program or collaboration.  Amounts received for research funding are recognized as revenues as the services are performed. Revenue is deferred for fees received before earned.  Revenue from development milestones is recognized when earned, as evidenced by written acknowledgment from the collaborator or other persuasive evidence that the milestone has been achieved, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement and (ii) our performance obligations after the milestone achievement will continue to be funded by the collaborator at a level comparable to before the milestone achievement. If either of these criteria is not met, the milestone payment is recognized over the remaining minimum period of our performance obligations under the agreement.  Revenue from cost reimbursement is recognized when earned, as evidenced by written acknowledgment from the collaborator or other persuasive evidence.

Commercial revenues include revenues from commercial milestones, royalties on sales made by our collaborators of products incorporating our flavor ingredients and minimum periodic royalty payments.  Revenue from commercial milestones is recognized when earned, as evidenced by written acknowledgment from the collaborator or other persuasive evidence that the milestone has been achieved, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement and (ii) our performance obligations after the milestone achievement will continue to be funded by the collaborator at a level comparable to before the milestone achievement. Royalties on sales made by our collaborators of products incorporating our flavor ingredients are recognized when the royalty report is received, which is generally one quarter in arrears.  Non-refundable minimum periodic royalty payments are recognized as revenues over related annual royalty periods.  Royalty terms are specific to each collaboration and collaborator and can vary from year to year.  These terms vary based on factors such as the characteristics of the flavor ingredient and the product categories and geographies licensed by the collaborator.  Periodically, as contractually specified, our collaborators are required to provide a report detailing all sales of products containing our flavor ingredients.  To the extent that minimum periodic royalty payments through the end of any applicable period exceed calculated royalties, the collaborators are required to remit to us the difference between royalties calculated and minimum periodic royalty payments made to date.  We recognize this difference as royalties on product sales at the time the report is received.  To the extent that minimum periodic royalty payments made to date exceed calculated royalties, we are not required to refund the difference.  Although we do not currently have any collaborations that include refundable minimum periodic royalty payments, in such a case, revenue would be deferred for refundable minimum periodic royalty payments received before earned.  As applicable, commercial revenues are reported net of royalties payable under our third party licensing agreements.  To date, the majority of our commercial revenues have been related to minimum periodic royalty payments.

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Stock-based Compensation Expense

We grant options to purchase our common stock to our employees and directors under our equity incentive plan. Eligible employees can also purchase shares of our common 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 period within the two-year offering period.  In addition, we grant options to purchase our common stock to non-employees under our equity incentive plan.

Employee and non-employee director stock-based compensation expense was $4.8 million, $5.9 million and $6.3 million for the years ended December 31, 2010, 2009 and 2008, respectively.  At December 31, 2010, total unrecognized estimated compensation expense related to non-vested stock options granted prior to that date was $4.8 million, which is expected to be recognized over a weighted average period of 1.9 years.  Total stock options granted to employees and non-employee directors during the years ended December 31, 2010, 2009 and 2008 represented 3.5%, 7.2% and 3.9% of outstanding shares of the end of each fiscal year.

We estimate the value of stock-based awards on the date of grant using the Black-Scholes option pricing model. The weighted average estimated fair value of stock options granted during the year ended December 31, 2010 was $1.67 per share.  The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, risk-free interest rate and the expected term of the awards.  For purposes of estimating the fair value of stock options granted during 2010 using the Black-Scholes model, we have made a subjective estimate regarding our stock price volatility (weighted average of 66.8%). We used the historical volatility of our stock for the period our stock has been publicly traded, consistent with the guidance in the Compensation — Stock Compensation Topic of the FASB ASC.  If our stock price volatility assumption were increased to 75%, the weighted average estimated fair value of stock options granted during 2010 would increase by $0.14 per share, or 8.2%.

The expected term of options granted is derived from the average midpoint between vesting and the contractual term, as described in the Compensation — Stock Compensation Topic of the FASB ASC.  We used this “simplified” method for determining term as we currently do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time our equity shares have been publicly traded.  For options granted during 2010, we have calculated a weighted average expected term of 6.0 years.  If the expected term of the options granted was increased to 8.0 years, the weighted average estimated fair value of stock options granted during 2010 would increase by $0.19 per share, or 11.6%.

The risk-free interest rate for the expected term of the option is based on the average U.S. Treasury yield curve at the balance sheet date for the expected term (weighted average of 2.7% for 2010) which, if increased to 5.0%, would increase the weighted average estimated fair value of stock options granted during 2010 by $0.08 per share, or 4.6%.

For 2010, 2009 and 2008, we have reduced stock-based compensation expense recognized in the Statement of Operations to reflect for estimated forfeitures.  The Compensation — Stock Compensation Topic of the FASB ASC requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  Pre-vesting forfeitures were estimated to be approximately 7.9% for 2010 and 6.8% for both 2009 and 2008, based on historical experience.  To date, we have not required any material adjustments to our expected forfeitures.

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Income Taxes

We follow the provisions of the Income Taxes Topic of the FASB ASC, that defines a recognition threshold and measurement attributes for financial statement recognition and measurement of a tax provision taken or expected to be taken in a tax return.  The topic also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Under the topic, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority.  An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained.

We have analyzed our filing positions in all of the federal and state jurisdictions where we are required to file income tax returns for all open tax years in these jurisdictions.  Our analysis concluded that, due to past ownership changes, our deferred tax assets for net operating losses and research and development credits will be subject to an annual limitation.  As such, $3.1 million of net operating losses will expire and $760,000 of research and development credits will expire as a result of multiple ownership changes which occurred in prior years.

Adoption of New Accounting Standards

In March 2010, the FASB issued guidance regarding the milestone method of revenue recognition.  The guidance indicates that a company can make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved.  The Company adopted the revised guidance in the fourth quarter of 2010 and has applied the revised guidance retrospectively to January 1, 2010.  As the Company had previously accounted for all milestones in accordance with the milestone method of revenue recognition, the adoption of this guidance did not have a material impact on the Company’s financial statements.

Future Accounting Requirements

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. This new pronouncement is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We will adopt this pronouncement effective January 1, 2011.  We do not believe that adoption of ASU No. 2009-13 will have a material impact on our financial statements.

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of United States interest rates. Due to the nature of our investments, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency or other derivative financial instruments.

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Item 8.    Financial Statements and Supplementary Data

Index to Financial Statements

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Senomyx, Inc.

We have audited the accompanying balance sheets of Senomyx, Inc. as of December 31, 2010 and 2009, and the related statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Senomyx, Inc. at December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Senomyx Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 3, 2011 expressed an unqualified opinion thereon.

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Senomyx, Inc.

Balance Sheets

(In thousands, except share and per share data)

See accompanying notes to financial statements.

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Senomyx, Inc.

Statements of Operations

(In thousands, except share and per share data)

See accompanying notes to financial statements.

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Senomyx, Inc.

Statements of Stockholders’ Equity

(In thousands, except for share data)