Evogene Ltd.
Q3 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Evogene's third quarter 2018 results conference call. All participants are at present in a listen-only mode. Following management's formal presentation, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded November 14, 2018. Before we begin, I would like to caution that certain statements made during this earnings conference call by Evogene's management will constitute forward-looking statements that relate to future events, risks and uncertainties regarding business strategy, operations and future performance and results of Evogene. I encourage you to review Evogene's filings with the U.S. Securities and Exchange Commission, and read the note regarding forward-looking statements in their earnings releases, which states that statements made in those earnings releases and in a similar way on this earnings conference call that are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements made herein speak only as of the date of the announcement of results. Many of the factors that impact whether forward-looking statements will come true are beyond the control of Evogene and may cause actual results to differ materially from anticipated results. Evogene is under no obligation to update publicly or alter our forward-looking statements whether as a result of new information, future events or otherwise, except as otherwise required by law. We expressly disclaim any obligations to do so. More detailed information about the risk factors potentially adversely impacting our performance can be found in our reports filed with the U.S. Securities and Exchange Commission. That said, I would now like to turn over the call to Ofer Haviv, Evogene's CEO. Ofer, please go ahead.

[Ofer Haviv:]

Thank you and good day everyone. We appreciate you joining us today for our third quarter 2018 results conference call. With me today as usual is Alex Taskar, our CFO and joining us is Assaf Dotan, CEO of our subsidiary, Evofuel. As I stated in our first quarter results conference call, in each quarterly call in addition to providing highlights from our ongoing activities, we will focus in-depth on one of our subsidiaries or division. During the first quarter we focused on Ag-Chemicals, and during the second quarter we focused on Ag-Biologicals. In today's call, Assaf Dotan, Evofuel’s CEO will talk about Evofuel’s activity, with focus on addressing the growing demand for a stable supply of castor oil for diverse industrial uses. So, in my comments today, I will emphasize once again Evogene’s strategy as outlined in our letter to shareholders issued at the beginning of the year, and how we are implementing the strategy as it is reflected from the highlights from the last quarter. Assaf with then take the floor to provide more insight on Evofuel’s activity and will be followed by Alex, who will discuss our financial results for the third quarter of 2018. We will then open the call for your questions. For those of you who are new to Evogene, I would like to take this opportunity to encourage you to read our letter to the shareholders from the beginning of the year which can be found on our website. As you all know, Evogene’s mission is to develop novel products for life science markets through the use of our unique computational predictive biology CPB platform. Today we are leveraging the CPB platform in the following life science markets; agriculture, in which we currently have activities in the following three fields, Ag-Chemicals, Ag-Biologicals, and seed traits; human health, in which we currently have an activity in the field of microbiome-based human therapeutics; and for industrial applications, where we develop an integrated [ag solutions] for commercial cultivation of castor grain to address the growing demand for castor oil. In accordance with our strategy, we are in the process of implementing a new corporate structure, which is expected to accelerate our commercialization efforts and make product development more efficient. The new structure will be based on stand-alone companies, with each one of them focused on a distinct field, such as Ag-Chemicals, Ag-Biologicals or castor oil with access to the CPB platform providing the main competitive advantage. Each of our current and future subsidiaries with their own management and R&D team has three main objectives. First, to build its product pipeline; second, establish its go-to-market strategy based on collaboration or direct sales; and third, to enhance the creation of its internal value and secure its own financial resources. I'm really proud to state that we are progressing with the overall execution of Evogene’s new strategy and corporate structure. I am happy to share that by year-end we are expected to have completed the establishment of a new subsidiary, which will include Evogene’s Ag-Chemicals activities. This subsidiary will be based on the asset of our Ag-Chemicals division, and will include all of its activities, personnel and collaboration. We expect this stand-alone structure will accelerate our commercialization effort, as well as allow potential investors direct access to this unique activity and product pipeline. I'm looking forward to sharing with you additional information in the coming quarters on this and additional progress with the execution of the new strategy and corporate structure. I will now, I've been out review a few highlights from the third quarter. I will begin with an important announcement made by our Ag-Chemicals division. The announcement we made during this quarter was regarding a milestone we achieved in our next generation herbicide pipeline. We proved the binding of molecule families to two novel target proteins that will present a new mode of action with biological proof demonstrated in lab assays. This next generation herbicide candidate has the potential to overcome the industry’s main hurdle, growing with resistance with improved efficacy. We expect that these molecules will maintain a high standard of safety since they address novel target proteins not presented in humans. Moving now to our Ag-Biologicals division. We are in the process of incorporating this division into a separate company earmarked for early 2019, and in line with our corporate strategy. In our Ag-Seeds division, we are currently in the process of establishing a new strategy, which we expect to be able to present in the first quarter of 2019. Moving now to our subsidiary, Biomica. Biomica recently announced the addition of internationally renowned experts in the field of gastroenterology and the human microbiome to its scientific advisory board. This is an important step in the creation of the required infrastructure for Biomica’s success as a standalone company. We believe the addition to Biomica’s scientific board will support clinical development programs and we look forward to updating you as we make progress. I will now move on to our wholly-owned subsidiary, Evofuel, addressing the global demand for stable castor oil supply with an integrated ag solution. As I mentioned at the beginning of this call, Assaf Dotan, Evofuel’s CEO, will give more information on this subsidiary at the end of my comments. But before he starts, I would like to give some background on this activity. Evofuel was established in 2007 in order to develop next-generation castor grain for biofuel. During these years, Evofuel’s mission was to provide an economic biofuel alternative in light of the high crude oil price environment of $80 to $100 per barrel, and it was estimated that this activity would be profitable in a crude oil price environment of $50 and up further. To enable this, we developed unique seed varieties and proprietary growth protocols and our revenue model was built mainly on direct seed sales to farmers. With the decrease in crude oil price below $50 as we have seen more recently, Evofuel changed its business strategy. The first change was its target market moving from focusing on the biofuel industry to the existing growing castor oil market for industrial uses such as for the automotive, health, packaging industry and many more. The second change was that rather than working in partnership with farmers and generating revenue from direct seed sales, we changed our business model to mainly focus on partnering with castor oil producers on a revenue-sharing basis from and other derivatives sales. This change allows Evofuel to address a critical need, the growing global demand for stable castor oil supply for industrial uses. In the last few years, we learnt that a major bottleneck in executing the new strategy was the lack of modernized harvesting in castor oil cultivation. As we announced during the last quarter, together with Fantini, an agriculture equipment manufacturer from Italy, we believe that we have developed a solution for this challenge. I will let Assaf Dotan elaborate further on this topic. In light of what I have just described, I'm happy to share that Evofuel is currently in the midst of rebranding process, and we hope to shortly reveal its new name, which will better reflect its new strategy. As usual I would like to conclude with a short update on the CPB platform’s latest achievement. I would like to remind that the CPB platform is at the heart of Evogene’s activity and it is what allowed us to tackle various life-science challenges and develop our diverse pipeline. Today, I would like to share some exciting developments. We have recently completed the development of the PRISM platform, which is part of the CPB platform designed and utilized by our human therapeutic subsidiary, Biomica. PRISM allows unprecedented resolution of which microbes are in the human microbiome, and what their functionality is. The last component developed in this platform was the ability to identify the impact of microbe functionality on a specific medical condition, and the ability to attribute it to the specific microbe. I expect this unique capability will directly accelerate Biomica’s research and pipeline. I would now like to turn the call over to Assaf Dotan, CEO of Evofuel. Assaf.

[Assaf Dotan:]

Thank you, Ofer. I'm happy to take part in Evogene’s quarterly conference call for the first time. My name is Assaf Dotan, and I have been leading Evofuel since 2016. As Ofer stated in his opening remarks, Evofuel’s mission is to develop an ag solution to address the growing global demand for stable castor oil supply. The market for castor oil and its derivatives is rapidly growing and according to market publications is expected to reach $2.3 billion by 2024. Today there are many industrial applications for castor oil, such as in the cosmetics, electronics, automotive and aerospace industries. One of the challenges we see in the castor oil market is the unstable supply of castor grains resulting in highly price volatility of castor oil. This is an outcome of the fact that today most of the global castor supply is from India where castor is grown in traditional methods. For example, the harvesting is done manually. This leads to a significant deviation in annual yield of grains, which leads to volatility in the price of castor oil. Evofuel’s approach to solve this challenge is to cultivate castor as a modernized commercial crop in order to stabilize the yield and decrease growing process. In order to achieve this target Evofuel has established a unique integrated ag solution, which includes two main efforts; development of proprietary castor seed varieties and establishment of novel agrotechnical growth protocols. These now allows farmers in South America and other locations to grow castor like any other modern crop. Evofuel’s business model is mainly based on establishing partnerships with industrial oil producers to provide a stable supply of castor grains to the factories. Our revenue model would be based on revenue-sharing with such companies. In essence, in return for the stable supply of castor grains to their factories, we will receive a percentage of the revenues from the oil sales. I'm looking forward to updating you on such agreements in the near future. I would like to add that in parallel, we will continue to generate revenue from direct castor seed sales where applicable. As mentioned, our product offering includes proprietary castor seed varieties and targeted agro-technical growth protocols. These seed varieties and growth protocols are adapted to and targeted at localized characteristics. Evofuel’s product development leverages Evogene’s technological capabilities to accelerate our bidding program in developing these unique seed varieties that have a higher oil content than current castor. Likewise, Evofuel leverages this agro-technical know-how to work closely with partners to create targeted, localized seed growth protocols, one of the challenges we encountered in providing growth protocols for the commercial harvesting of castor grain. So over the last few years, Evofuel has focused on developing a commercial harvesting solution adapted to Evofuel’s seed varieties with partners from the agro-technical machinery industry. As Ofer mentioned earlier, we announced this past month together with Fantini, an Italian agricultural equipment manufacturer, that we reached a breakthrough in the solution of mechanical harvesting for castor bean plant following significant decrease in yield losses in two consecutive year field trials in Israel. The combination of Fantini’s harvester and Evofuel’s proprietary castor varieties and growth protocols, was able to significantly decrease yield losses from up to 50% with the current solution to as low as 5%, very close to that of large-scale commercial crops such as cone and soya bean. We are expecting to hold semi-commercial scale field trials in the coming month with our South American partners, Castor Oil Argentina and [Biofit] in Mexico. I am very pleased by the rapid progress we achieved this past year, which is a direct result of the know-how and business relationship we have cultivated over the years. With that, I would now like to turn the call over to Alex for his review of the financial results. Alex?

[Alex Taskar:]

Thank you, Assaf. Let me begin with reviewing our balance sheet. Evogene continues to maintain a strong financial position with approximately $58.2 million in cash, cash related accounts and bank deposits as of September 30, 2018, which represents cash usage of approximately $13.5 million during the first nine months of 2018 and approximately $4 million during the third quarter of 2018. Our current projection for Evogene’s cash burn rate for 2018 is expected to increase to the range of $16 million to $17 million from $14 million to $16 million assuming the companies continue to operate according to the current growth of business and assuming no significant change in the dollar shekel exchange rate. This increase is mainly due to a significant reduction of approximately $1 million in the company’s focus for its financing income for the year. I will go into further detail later. Let's now turn to the statement of operations. As we discussed in prior calls, Evogene's revenues to-date have consisted primarily of research and development revenues, reflecting R&D cost reimbursements under our various collaboration agreements as reflected in the cost of revenue. The majority of those agreements also provide for development milestone payments and royalties or other form of revenue sharing from successfully developed products. Gross profit for the first nine months of million was approximately $0.3 million in comparison to approximately $0.4 million during the first nine months of 2017. Gross profit for the third quarter of 2018 was approximately $0.1 million in comparison to approximately $0.2 million reported for the third quarter of 2017. Moving on, research and development expenses continue to be our single largest category of expense despite a decrease in this category. The R&D expenses for the first nine months of 2018 decreased to approximately $10.8 million compared to approximately $12.3 million for the same period in 2017. Our R&D expenses for the third quarter of 2018 decreased to approximately $3.9 million compared to approximately $4.3 million for the third quarter of 2017. This decrease in large part reflects operating efficiencies achieved as a result of our new corporate structure that became effective at the beginning of this year. Operating loss for the first nine months of 2018 was approximately $14.7 million, in comparison to approximately $15.9 million in the first nine months of 2017. Operating loss for the third quarter of 2018 was approximately $5.1 million in comparison to approximately $5.5 million in the third quarter in 2017. The decrease in operating loss was mainly due to decrease in R&D expenses as described above, and the decrease in G&A expenses, which was partially offset by an increase in business development expenses. The net financing expenses for the first half of 2018 were approximately $0.2 million in comparison to net financing income of approximately $1.3 million in the corresponding period in 2017. The net financing income for the third quarter of 2018 was approximately $0.3 million in comparison to net financing income of approximately $0.5 million in the comparable quarter in 2017. This decrease in the first nine months of 2018 is mainly due to [indiscernible] of marketable securities following the increase in the US treasury bond interest rate. So despite the decline in operating loss following the new corporate structure, the loss for the first nine months of 2018 increased to approximately $15 million in comparison to approximately $14.6 million in the first nine months of 2017. Loss in the third quarter of 2018 decreased to approximately $4.8 million compared to approximately $5 million in the third quarter in 2017. With that said we would like now to open up the call for any questions you may have. Operator?

[Ofer Haviv:]

Yes, thank you. I would like to thank everyone that participated in the call today. Thank you and good day.

[Operator:]

This concludes Evogene's third quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.