Evogene Ltd.
Q1 2017 Earnings Call Transcript

Published: 17 May 2017

[Operator:]

Welcome to Evogene's First Quarter 2017 Results Conference Call. All participants are at present in 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 May 17, 2017. 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 earning releases, which states that statements made in those earning 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 obligation 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 first quarter 2017 conference call. With me today is Alex Taskar, our CFO. My comments today will focus on the recent progress we have achieved, in both our collaborative and internal key product programs. This progress, includes an overall key corporate initiative, to expand our capabilities and activities at the discovery phase, and into the early and even advanced development phases. This initiative is anticipated to result in both significantly increased commercial opportunities, and the ability to obtain a greater share of revenue from the developed product. Following my comments, Alex will discuss our financial results for the first quarter of 2017. We will then open the call for your questions. With that, let's review some of the recent progress we have made in each of our three core business areas, Ag-Biological, Seed Traits, and Ag-Chemicals. I will begin with Ag-Biological, a field based primarily on microbials of plant extract based product. Ag-Biological products are increasingly being adopted by farmers to supplement existing seed and protective chemicals solutions. Currently, we are focusing our Ag-Biological efforts on the development of microbial based biostimulants, that address yield, drought, and plant health challenges. We are also involved in an activity for the development of microbial based biopesticide, that address various insect and fungi control, manage through our collaboration with Marrone Biotechnology Innovations. With respect to our internal biostimulant program, late last year, we disclosed that we had achieved positive initial free trial results in corn under drought conditions. Results demonstrating, both increased efficacy and stability. Today, I am pleased to disclose that Evogene is now undertaking second year field testing in corn for approximately 20 promising microbial strains, in order to further validate performance of this strain, as well as evaluating microbial strain combinations to drive further efficacy and stability. In addition to this corn focused activities, we are pleased to disclose, that we recently expanded the scope of our internal biostimulant program to it, and selected microbial strains have already shown initial positive results. As previously mentioned, we have a corporate initiative to move downstream path discovery in our focused areas. This has been demonstrated in our biostimulant activities by adding to our microbe discovery efforts, key product development activities, including microbe seed coating formulation, and microbe culture fermentation. We expect, that by integrating this development stage activity, we will be better positioned to optimize key product features for our microbial based product, such as product efficacy, consistency across plant varieties, and product shelf of life. In order to support our entry into microbial formulation implementation, we successfully established the required infrastructure, including opening two new state of the art laboratories, and assembling a world class research team. Also one of our newest areas of activity, we believe that our rapid downstream integration progress in this area, is clearly demonstrated by the fact that we have already achieved first generation microbial seed-coating formulation technology, for leading strains in corn. These coated seeds are currently being evaluated in field testing. As mentioned, in addition to our biostimulant program, we are also pursuing Ag-Biological bio-pesticides with our main activity in this area being our collaboration with Marrone Biotechnology Innovations. This collaboration, initiated in July 2014 aims to bring to market, new insect control solutions, both Seed Traits by Evogene and bio-insecticides by Marrone. Under our agreement, the two companies have agreed to share revenues from all products that may result for either company from this collaboration. We recently announced, that Marrone will advance certain novel bacteria related to Evogene identified proteins into Marrone biopesticides product development pipeline. With the promising results of our internal biostimulant program and the progress with MBI, Evogene is currently evaluating the possibility of initiating an internal product development program for biopesticides. We expect to conclude our evaluation process with respect to this area later this year. Let me now move to our Seed Trait activity, which focuses on yield and environmental stresses as well as biotic stresses, such as disease and insects. As a center of our yield and environmental stress program, is our ongoing collaboration with Monsanto. This collaboration continues to progress, focusing on a trait first approach, which has at its core, the identification and factorization of a series of key enabling traits, Evogene gene candidates, that have demonstrated positive results for yield enhancements in corn and soybean, are being further optimized with this approach and then evaluated in Monsanto's pipeline, via field trials. This positive result supporting increasing shift in our activity focus from gene discovery to drug development efforts. A second area for us in the Seed Trait is insect control, based on novel Evogene discovered toxins. This is an area of high industry interest and market need, in view of the continuously developing resistance of insect to available insect control solutions. You will recall, that last year, we achieved an important milestone in our insect control Seed Trait activity, with the validation of a set of Evogene predicted toxins, displaying insecticidal activity on one insect from the Lepidopteran family. Currently, a subset of these toxins have been further tested and demonstrated insecticidal effect on additional insects of the same family. This is a strong indication of the potential for broad applicability of this toxin on this entire, very important insect family. The next step is for selected toxins to be introduced into target plants for crop testing. Today, I am very pleased to announce that in addition to these positive results for the Lepidopteran family, other recently discovered toxins have shown initial results of insecticidal activity on the Coleopteran family, a family of insects that pose a widespread worldwide threat to corn. As our shareholders know, essentially, all of our product programs rely on the use of our unique industry leading and broadly applicable computational predictive biology infrastructure. In the area of Seed Traits, we utilize our technology platform to address the main challenge of identifying the required genomic modification to improve the trait of interest. Until recently, performance and validation of the predictive genomic modification was through the insertion or transformation of a modified genes into the plant. Today, a new evolutionary technology known as genome editing, is available for performing the actual modification. A technology we are now integrating into our infrastructure, primarily to be used in our Seed Trait product program. Genome editing, allows specific modification of a given genome in a highly precise and targeted manner, providing an alternative of minimal intervention compared to existing transformation solutions, while obtaining all the potential advantages. Genome editing therefore, provides significant opportunities for biotechnological crop strain improvement, not previously available. It is clear, that the key requirement for genetic editing, is to know precisely what you want to edit. Therefore, in view of our proven leadership in matching genomic feature with trait, we believe that this is a particularly attractive technology for Evogene to supplement its predictive discovery infrastructure. At present, we are incorporating genome editing technology in our internal yield and environmental stress resistance program for soybean and wheat, and examining incorporation of this technology in our disease control program, such as, Fusarium, a fungi affecting diverse crops, nematode resistance in soybean and Black Sigatoka, a fungi affecting over 50% of banana production worldwide. With that, I will now move on to Ag-Chemicals. Over the past two decades, weed resistance to existing chemical solutions has sold, primarily due to overuse of this chemical, that acts on a very limited number of known modes of action. At Evogene, we aim to discover key causes that will affect new modes of action to serve as a basis for the next generation of herbicide solutions. As previously disclosed, we have identified and validated a set of targets, which serve as the foundation for our collaboration with BASF and our internal pipeline. We are continuing with our discovery efforts to identify additional candidate chemicals molecules, for both internal and partnered programs, and are progressing according to plan. On our last call, I shared with you that in our internal herbicide program, we had validated 10 chemical compounds, computationally predicted to impact six Evogene discovered target for the herbicidal activity. Today, I am pleased to let you know, that the success from those compounds has demonstrated initial positive greenhouse results. In parallel, we continue our work aimed at establishing ecological proof of the novel mode of action for these 10 chemical compounds. Earlier in my remarks, I mentioned the significant advantages to the company of moving forward beyond discovery and have mentioned a few of the earlier, where we are seeing significant progress with this important corporate initiative. With respect to this, [indiscernible] Ag-Chemical, as we continue with that to-date, a very successful discovery phase, we have in addition, integrated certain early product development phase efforts. This includes, establishment of a computational infrastructure, addressing key parameters for molecule optimization, such as efficacy, toxicity, resistant development and safety. Beyond the core areas of our work in the agricultural sector, Evogene is examining other potential areas, where our proprietary technology and know-how can create additional value for our stakeholders. Evogene is unique with its predictive computational biology platform, combined with our multi-disciplinary know-how in biology and chemistry. This powerful combination of interdependent capabilities, allow the creation, integration and analysis of dedicated big data for the purpose of systematic in seed predictive discovery, and now also, early product development in our chosen area of focus. These capabilities are unique to Evogene, and are not confined to providing solution only to the ag industry. But rather can address additional areas, we are taking integration of biological knowledge, with cutting edge competition capability, can provide significant competitive advantages in the discovery and development of breakthrough products. We are now actively exploring certain specific fields. In conclusion, as I hope I have demonstrated in my remarks today, we are making important progress in all three of our core business areas; ad-biologicals, Seed Traits and Ag-Chemicals. In addition, significant efforts are being addressed towards our corporate initiative of moving beyond the discovery phase, to incorporate product feasibility and development activity in multiple areas. We expect that all of this effort will result in both numerous opportunities for new types of collaborations, and the ability of Evogene to obtain an increased share of future revenue from products, based on our discovery and development activities. Moreover, we continue to evaluate other new areas of interest, where our technology would potentially be conformative. Collectively, these efforts put Evogene in a strong competitive position, and we look forward to sharing with you our continuing achievement, as we expand and enhance our very unique company. With that, I would now like to turn the call over to Alex, for his review of the financials. Alex?

[Alex Taskar:]

Thank you, Ofer. Let me begin with reviewing our balance sheet. Evogene continues to maintain a strong financial position with $83.4 million in cash, cash related accounts and bank deposits as of March 31, 2017, which represents a decrease of $4.8 million from December 2016. With respect to cash use, viewing the currently expected course of business, and no new revenue sources from existing or new collaboration, we continue to estimate that our net cash usage for the full year 2017 will be in the range of $16 million to $18 million. Let's now turn to statement of operations; to-date our reported revenues consisted primarily of research and development revenues, reflecting R&D costs for investment and our collaboration agreement. Looking forward, we expect the main contributor for revenues in profit will be milestone payment, royalties or other form of revenue sharing from our current and future collaborations. Specifically, total revenue for the first quarter of 2017 was $0.7 million compared to $2 million for the first quarter of 2016. The decline in revenues reflect the net decrease in research and development cost to investment, in accordance with the old plan under Evogene's various collaboration agreement. This decline is mainly due to the advancement of our collaboration agreement with Monsanto from gene discovery to pre-development efforts, resulting in a reduction of activity scope. As we look forward, we expect this revenue trend to continue. Our cost of revenue consists of collaboration related R&D expenses. Therefore, the decrease in cost of revenues to $0.6 million in the first quarter of 2017 from $1.5 million from the same period in 2016, relates mainly to the decrease in revenues from such period and the specific terms for investment according to each relevant agreement. Moving on as Ofer described, we continue to increase our investment in our focus areas. As such, research and development expenses for the first quarter of 2017 were $4 million compared to $3.7 million for the first quarter of 2016. This increase was primarily due to increased funding of our internal pipeline in biostimulant and herbicide discovery. In order to address the shift in activity scope of our collaboration with Monsanto, and the change in composition of our activities; both as discussed by Ofer and myself, we have increased our staffing needs in certain areas and function, and decreased in others. As a result, by the end of the quarter, there has been an approximately 8% net reduction in total headcount for the company since year end 2016. Operating loss for the first quarter of 2017 increased by $0.7 million to $5.3 million compared to $4.6 million in the comparable quarter in 2016. The increase in our operating loss was primarily due to the decrease in revenues, which was partially offset by a net decline in other expense category. The net financing income for the first quarter of 2017 reached $0.4 million in comparison to $1.2 million in the comparable quarter in 2016. This decrease is due to relatively high capital gain, derived from the company's marketable securities in the first quarter of 2016. Net loss for the first quarter of 2017 was $4.8 million compared to the net loss of $3.4 million in the comparable quarter in 2016. The increase in the net loss was primarily due to decrease in revenues and decrease in net financing income, which was partially offset by a net decline in other expense category. With that said, we would like to open up the call for any questions you may have. Operator, please?

[Operator:]

[Operator Instructions]. The first question is from Christopher Parkinson of Credit Suisse. Please go ahead.

[Graeme Welds:]

Hi. Good morning everyone. This is Graeme Welds on for Chris. I just had two quick questions, one on genome editing; this has been a hot topic in the industry and I am just curious, Ofer, you could go -- you offered some color, and I am curious if you could just speak a little bit more about how you are thinking about investing and developing this technology across the platforms that you already have? How does that affect your cash spend, and what do you think are kind of the challenges to getting up to speed there, and also, how Evogene will compare to some of the other larger players we are participating in growing this technology?

[Ofer Haviv:]

Hi Graeme, this is Ofer. Thank you for this question and I agree with you that genome editing is quote evolutionary technology that allowed the industry to develop innovate a better and new type of product. I think that the most important thing to understand, when you are talking about genome editing, is that there is two questions that you need to address, in order to develop an improved Seed Trait. The first question is, what is the change need to be done, in order -- in the genomics itself, in order to improve the trait? And the second is how, how you are doing this change? So genome editing is a technology that address the second question, how to do the edit. And Evogene, from its initiation, was focusing mainly on the question, what is the edit or what is the change needed to be done, in order to improve the trade. So if in the path [23

[Graeme Welds:]

Got it. Thanks a lot for that. That was actually really helpful. And so then just one more quick question for me is just, you have been making -- approach other company towards kind of moving your operations a bit more downstream. I am just kind of curious as to, what has that process been like for you guys? What have been kind of the growing pains into moving into that area, and ultimately, what are some of the greatest sort of partnerships that you expect to potentially arise from your move more into the developmental path? And of your three kind of key business areas, where do you see the greatest opportunity there?

[Ofer Haviv:]

Okay. So first, maybe towards to emphasize that, we select very carefully, the area that we want to move to the early development phase or maybe even to advanced phase. It's an area, where we believe, Evogen with its growing budget and capability, we can manage this type of volume and budget needed. I can give an example, in case of yields [indiscernible], where the validation of hundreds of genes like Monsanto do for a company like Evogene, it will be too expensive -- I mean, in such a type of activity, we will prefer to do the early development phase, using our partners skills and budget. But in cases like insects control, where after a relatively short period of time, you are focusing on a very small number of genes, or also in chemistry, that again after a set of screening systems, which are not very expensive, you are focusing on a much more smaller number of molecules. This is the type of products program that I can envision Evogene with its current budget, can support early development, and in some cases even advance development. And maybe I should even refer to advanced development, we are planning to do it, mainly for now only, in Ag-Biological type of products, because over there, the whole infrastructure and also the budget we estimate, is something that we can handle internally. So this is first how we judge what area to move into the early development, or maybe even advanced development. And in all cases, it's something that we believe that we can support from various perspectives. What does it mean from the commercial terms? It could be quite significant; because, actually it reduced a significant portion from the risk, from your partners and you are in a much more advanced stage in the product process. As an example, in Ag-Biological, it's very nice to find the right bacteria that can improve the trait, improve yields, as an example, biostimulant. But another very important question is, do you know how to -- what is the right way to do the fermentation. So this is a type of additional knowledge, that if you bring to your partners, it reduces significantly the risk of reaching to the product with this new technology. And of course, it should be reflect in the commercial terms that you will receive it.

[Graeme Welds:]

Got it. Thanks for that. Very helpful.

[Operator:]

The next question is from Brett Wong of Piper Jaffray. Please go ahead.

[Brett Wong:]

Hey, thanks for taking my questions. Ofer, I just wanted to ask a continued question on your last comment around the improvements in your collaboration, given the more focus -- increased focus on more downstream capabilities. Can you share, kind of what -- maybe just generally, what percentage ranges of value capture you see, given this focus more downstream compared to the just discovery?

[Ofer Haviv:]

I think what we disclosed in the past, that in case of Seed Trait, if you deliver genes after the discovery phase, so we are talking about one digit, something more close to the 6%, 5% royalty rate, and if you deliver it in a more advanced stage after a proof-of-concept in [indiscernible] plant, it will be even two digit, something between 12% to 15%. And I think this is quite significant, and I think that also, it can -- again I can't get into the details, because its classified, but you will see a very-very significant change also in Ag-Biological from a bacteria that you -- become evident in a small field trial, compared to a broad field trial, meaning that you also know how good is the formulation and fermentation, especially if you are talking about seed coating. This is a modern double [ph] the royalty or the payment that you can look for.

[Brett Wong:]

Great. That's very helpful. And then just wondering, you touched a little bit about this, but maybe, more granularity around the increased costs, you have been more downstream in terms of the fermentation asset building team, that kind of team? And why not work with a lab or something that has these capabilities already in place?

[Ofer Haviv:]

Okay. So we need to make very important distinguish. There is one thing to use a lab to produce a product for -- when in the commercialization phase, meaning to produce a huge quantity. This is something that I don't think that Evogene should do it, actually something that we expect our partner to take responsibility, and I won't be surprised if even he will use a third party to do so. When we are talking about fermentation and formulation, we are talking about in the development phase, meaning that we are doing it in small quantity, just to have that right protocol to know how to do it. We are not going to build a factory to do so. It's a -- we are talking about a team of relatively very small number of people, that need to reach to the right protocol that later on, you will scale it to a commercial level, with a third party. So the budget -- if you can see, the run rate that we see for this year, precedes the same like previously, and I am not expecting to see it increase also in the future, because of us doing development activity. If this is addressing your question?

[Brett Wong:]

Yes. Yes I mean -- and I understand that it's not a commercial scale-up. I was just wondering, if there is clearly places publicly, that you already collaborate with, that have these capabilities and the personnel, I was just wondering why not just use what they have. But I understand that and thanks for the color. And then just last for me, I know it has kind of been a short stint since you last updated us, but you provided some nice color on your expectations for the year. Just wondering if you are seeing anything different over the past 2.5 months that changes your focus or your expected progress that you have in mind, that you got over 2017?

[Ofer Haviv:]

Okay. So just one comment regarding the previous question; again, without getting into the details, certain from the bacteria, that we are focusing on today, it belongs to families that you need to develop the protocols for fermentation formulation internally, and this is why we need those people to develop it, because it's not necessarily this type of technology exists among our partners. And this is part of the reason why we believe that also our products are going to make a difference in the market. But it's not just in order to improve the commercial terms, it's also because we are going to generate some unique fermentation and formulation technology for this specific product. But we can -- maybe we can discuss it later on also offline. Regarding what we see; I am quite -- I think that in this call, I can say that I have started to be much more optimistic about the general atmosphere in our industry. I have seen this process of merger and acquisition. In many cases, the big companies are -- there is much more clarity on what's going to happen, and what's going to be the responsibility of each company in the future. And we don't see again, an increase of the activity in research level and interesting to start to talk again on a collaboration. So from my perspective, I think as we start to see a change in the overall atmosphere in our industry, which I think that also would have an effect on ongoing discussions between Evogene and its partners. And this is something that it's -- I started to see it in the last two, three months, but it's getting stronger as time is passing. I think that the fact that there was more clarity about the merger between DuPont and Dow, it has really helped for these two companies to know what they want to achieve. I think that Syngenta and ChemChina is more clear, and I think that also from Evogene's perspective, we are really advancing it in certain area, even faster than what we expected in our internal product program. I am very excited with the results that we have seen in the Ag-Biological, the chemistry and insect control. I am also very excited with our product program in plant disease, for improving Seed Trait. So I am really looking more positive way than I was in the beginning of this year, for the second half of 2017.

[Brett Wong:]

Great. Thanks so much.

[Operator:]

[Operator Instructions]. There are no further questions at this time. Before I ask Mr. Ofer Haviv to go ahead with his closing statement, I'd like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the U.S., please call 1888-295-2634. In Israel, please call 03-925-5937. Internationally, please call 9723-925-5937. Mr. Haviv, would you like to make a concluding statement?

[Ofer Haviv:]

Yes, thank you. I would like to thank you all for your participation on today's call. We look forward to speaking with you again on our next call. Thank you.

[Operator:]

Thank you. This concludes Evogene's first quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.