By ANJALI CORDEIRO
August 18, 2010

PepsiCo Inc. said it will collaborate with flavor enhancer Senomyx Inc. to develop strong-tasting natural sweeteners and other ingredients that can heighten the sweetness in beverages—with less sugar and fewer calories.

The beverage giant, like other food and drink companies, has undertaken a big push to reach consumers looking for healthier options and ways to cut their sugar intake.

PepsiCo, of Purchase, N.Y., is trying to reduce sugar in key brands by 25% over the next 10 years. Among other things, the sweet enhancers could allow PepsiCo to use less high-fructose corn syrup or sugar in a beverage, a PepsiCo spokesman said.

The four-year deal between the two companies comes after Senomyx's talks with Coca-Cola Co. fell through earlier this year.

Senomyx has been developing technology and ingredients that allow a manufacturer to use less sugar in offerings like beverages while keeping their taste and reducing calories. PepsiCo's pact with the flavor company involves the development and commercialization of artificial and natural sweet enhancers as well as natural sweeteners.

The company is just starting to develop the natural sweet enhancers, which would likely have plant or fruit components, said Gwen Rosenberg, Senomyx's head of investor relations, although it is too soon to say what ingredients will be in the artificial enhancers. The artificial enhancers will be used in small quantities, and the company believes there are consumers who are open to artificial flavors to reduce the amount of sugar they consume, said Ms. Rosenberg.

As a part of the deal, Senomyx will receive an upfront payment of $30 million from PepsiCo, including $7.5 million paid upfront to start the talks. Senomyx is also eligible for an additional $32 million in research-and-development payments, as well as certain milestone payouts.

Tuesday, Senomyx's shares were up 7.6% to $4.10 in afternoon trading on the Nasdaq Stock Market. The developer of flavor enhancers had an earlier deal with Coke that expired in April, and had been in talks with Coke to renew the deal. An agreement, however, never materialized.

The PepsiCo arrangement was "more favorable," said Ms. Rosenberg. A Coke spokesman said the companies weren't able to reach "mutually satisfactory" terms within a specific period.

Besides the enhancers, the two companies will also develop "high potency" natural sweeteners. These sweeteners, which would have natural ingredients, are intended to have a strong taste so that they can be used in much smaller quantities than sugar or other sweeteners. It is unclear what those sweeteners will be made of.

Still, it remains to be seen how widely any new sweetener offerings will be used and accepted by consumers. Tweaking recipes of existing beverages can be difficult, and though the industry has recently developed some natural sweeteners, they aren't yet being used extensively.

Sweeteners have become a hot-button issue in the food and beverage industry as consumers increasingly seek healthier options. Many consumers have been pushing for low-calorie alternatives to sugar, high-fructose corn syrup, and even zero-calorie substitutes like Splenda, an artificial sweetener. That has prompted the big brands to look for low-calorie options they can market as "natural." Several companies have recently launched zero- or low-calorie sweeteners based on the stevia plant.

PepsiCo helped launch a stevia-based sweetener called PureVia with Merisant Co., and is using that sugar substitute in a few offerings, like a version of Tropicana called Trop50. Coca-Cola, which worked with Cargill Inc. on a zero-calorie stevia sweetener called Truvia, is also using it in some drinks like varieties of its Vitaminwater.

Stevia hasn't been more widely used in part because of the difficulties of adjusting existing recipes while maintaining their taste.

Source: wsj.com

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