Evogene Ltd.
Q3 2017 Earnings Call Transcript

Published: 22 Nov 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Evogene’s Third 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 November 22, 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 Mr. 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 2017 conference call. With me today is Alex Taskar, our CFO. On our conference call today, I would like to provide an update with respect to our recently revised and expanded market focus and new corporate structure which we believe will put the Company in a position to capture higher value and create additional opportunities. I will also provide an update on the progress in each of our area of activity, which includes our three asset ag divisions, Ag-Biologicals, Ag-Seeds, and Ag-Chemicals, and our two subsidiaries Evofuel and Biomica, our new subsidiary in the area of human microbiome, which we recently announced. Following my comments, Alex will discuss our financial results for the third quarter of 2017. We will then open the call for your questions. Before going into details regarding our revised and expanded market focus, I would like to explain our motivation. The robustness and flexibility of our technology platform allowed much more than what we targeted a few years ago. For more than a decade, significant technological developments and accumulated knowledge have been integrated into our technological platform, directly enhancing and expanding these capabilities as we target major unmet needs. This now allows the application of these capabilities in the ag world to new product types and even advanced markets outside the ag world. With that in mind, the Company defined five key criteria for potential product program selection. First, there must be a large market opportunity and clear need for innovation. Second, the major industry roadblock to developing innovative products can be directly addressed with our computational predictive biology platform, with providing Evogene an important competitive advantage. Third, there is a clear path and a reasonable time to commercialization and/or when recognized, value enhancing milestones during the development period. Fourth, preference would be given to programs where we can leverage existing assets, accumulated over the years to accelerate our product development process Five, we will select products which we believe will effectively contribute to human wellbeing royalties. These key criteria, together with our robust technology, have led to a revised and expanded market focus in our ag activities and for the first time to pursue activities outside of the ag world. With respect to our core agriculture activities, as I previously mentioned, these activities, which had been divided into two, crop enhancement and crop protection units are now part of three product oriented divisions, Ag-Biologicals, Ag-Seeds, and Ag-Chemicals. Each division is managed by a general manager, and has its own business development staff, and all three are pursuing an expanded market focus, including new several product programs. In our Ag-Biologicals division in addition to bio-stimulant products, we have initiated work on bio-pesticide products as well. In Ag-Seeds division, in addition to transformation of our gene candidates, via generating modification methods, we have now added genome editing capabilities at the new technology in order to achieve the desired modification. And in Ag-Chemicals division, in addition to development of herbicides, we initiated insecticide product program. I would like to emphasize that all these programs have a clear path and short time to commercialization are well-recognized and value enhancing milestones. Additionally, as mentioned, we expect to capture additional value outside ag world in suites such as human health. Biomica, our recently formed second subsidiary represents Evogene’s first efforts in this direction. Biomica’s mission is to discover and develop human microbiome-based therapeutics. The subsidiary was cofounded and is being led scientifically by Professor Yehdua Ringel, a global authority on gastroenterology. Biomica will be funded by Evogene for a period of up to two years to achieve its first key milestones. The active corporate structure while supporting Evogene’s expanding areas of focus will allow more efficient use of resources. For example, as recently announced, we anticipate that our net cash usage in 2018 will be $14 million to $16 million without including other potential revenue streamed from our activities compared to an expected net cash usage in 2017 of $16 million to $18 million. Moving on, I would like to briefly review some of the recent progress we have made in our three ag product divisions and our two subsidiaries, Evofuel and Biomica. I will begin with Ag-Biologicals where we recently announced collaboration with DuPont-Pioneer to bring to market in a broad ag care approach bio-stimulant corn seed treatment. Corn plants are for microbial candidates discovered and tested by Evogene to enter DuPont-Pioneer’s corn field trials in the U.S. during next year’s season. In our internal bio-stimulant program for wheat, we are continuing through second year field trials for further validation of promising microbial in the coming months. These bio-stimulant product programs are exciting as product development is relatively short and according to industry estimate would take only five years from initiation to market, depending on regulation. We are recently announced that our Ag-Biologicals activities also include bio-pesticide product development. Through the use of existing assays, we see the opportunity for two important bio-pesticide product offerings. First, we’re leveraging Evogene validated microbes with positive results which were generated in our insect control and fungi resistance program for corn and soy. Second, we are utilizing our proven computational predictive biology platform, to discover new microbes. For this second product offering, we are focusing on additional pests and on high-value specialty crops. Moving now to our Ag-Seeds division. Before reviewing specific product programs, I would like to emphasize a very major change in the focus of this division, which is in corporation of genome editing technology. This change is consistent with our criteria of shortening time to commercialization, while maximizing value from existing assets. This technology allows making precisely targeted modifications in a cell’s DNA. Genome edited products are targeted to be classified as non-GMO, which may reduce regulatory barrier and improve market access. I will now begin with our first segment in this division yield and environmental stress, seed traits. With regard to our ongoing collaboration with Monsanto, as we previously announced, Evogene has successfully completed the gene discovery phase and the collaboration will now focus on progressing selected gene candidates through additional testing in Monsanto’s product development pipeline. During the recently completed gene discovery phase of the collaboration, as we announced, Monsanto chose to nominate more than 1,000 genes to explore the development pipeline and such those genes are now completing another year of validation testing. In our internal product program for yield and environmental stress trait in soybean, we are incorporating genome editing. Utilizing proprietary data, we have completed the stage of identifying several genes that are highly correlated to yield. The next step for us will be the identification of the required edits to enhance the desired properties in those genes, after which we will undertake the task of performing the edits in-house. And second segment within our Ag-Seeds division focuses on disease resistance seed traits. With regard to our ongoing collaboration with Rahan Meristem for the development of Black Sigatoka resistance bananas, we recently announced positive results in second year field trial, which we intend to also leverage with genome editing. More details on this can be found in the presentation uploaded to our website. In our third segment, in Ag-Seeds, insect control, we’re happy to report in this call of phase advancement for additional genes, even though these programs were initiated only in 2014. In our Coleopteran insect control product program, targeting Western Corn Rootworm, we’re now able to report our second gene to advance to Phase 1. In our Lepidopteran control product program, targeting Fall Army Worm in Corn and Soy, soil we had a first gene to advance to Phase 1 with first year’s crop testing results anticipated in 12 to 18 months. Moving now to the last of our three agricultural operating divisions, Ag-Chemicals. This decision includes both, herbicides and more recently, insecticide activity. In our internal herbicide pipeline, we continued to integrate product development criteria such as efficacy safety to optimize 10 validated chemical compounds, computationally predicted to impact seven Evogene discovered herbicidal targets. This, in order to reach an optimal product candidate what is referred to as a leader. With respect to our collaboration with VSF, [ph] we are progressing according to plan. In our new internal insecticide product program, we have decided to focus on novel insecticides with a new site-of-action and on optimization of an existing insecticide. Both product offerings focus on a key nerve and muscle target, the farmers’ insecticide-of-choice. We have already identified several targets to undergo analysis by our computational platform. With respect to our subsidiary Evofuel, which is focused on the development and commercialization of castor seeds, we are very pleased to disclose revenues from castor seeds sales, even if modest. A key achievement during 2017 has been a breakthrough in terms of mechanical harvesting capabilities, which has been a major bottleneck in the commercialization of castor seeds. In the upcoming year, our castor seeds varieties are expected to undergo field trials with potential customers in four different countries in Central and South America. Our recently formed subsidiary, Biomica is focused on the discovery and development of human microbiome-based therapeutics. Even though, these activities have only recently been initiated, Biomica has already tailored and enhanced Evogene’s computational predictive biology platform to create a dedicated infrastructure for the discovery of live bacterial drug candidate. In addition, Biomica has begun establishing the relevant databases for its needs. In conclusion, during the past few years, Evogene has been evolving from a plant genomic company to a company addressing a wide variety of biological challenges for the development novel life science based products. Furthermore, we believe that our revised market focus and corporative organizational structure will drive the Company’s growth to reach new achievements. With that, I would now like to turn the call over to Alex, who will review our financials. Alex?

[Alex Taskar:]

Thank you, Ofer. Let me begin to review our balance sheet. Evogene continues to maintain a strong financial position with approximately $76 million in cash, cash-related account and bank deposits as of September 30, 2017, which represents cash usage of approximately $12.3 million during the first nine months of 2017 and approximately $3.8 million during the third quarter of 2017. With respect to cash usage, assuming the currently expected course of business, we estimate that our net cash usage for the full year 2017 will be in the range of $16 million to $18 million. As also mentioned earlier, in 2018, we expect that Evogene’s updated corporate structure will lead to net cash usage of $14 million to $16 million, not including other potential revenue streams. Let’s now turn to statement of operations. To-date, our reported revenues have consisted primarily of research and development revenues, reflecting R&D cost reimbursement under our collaboration agreements. Looking forward, we expect the main contributor to revenue and profit will be milestone payments, royalties or other form of revenue sharing from our current and future collaborations. Specifically, total revenue for the first nine months of 2017, were $2.6 million in comparison to $5.4 million, in the comparative period in 2016. Total revenues for the third quarter of 2017 were $0.7 million, in comparison to total revenues to $1.5 million for the third quarter in 2016. The decline in revenues reflects the net decrease in the research and development cost reimbursement in accordance with work plans under Evogene’s various collaboration agreements. As noted in the past, this net decline is mainly due to advancement of our collaboration agreement with Monsanto, from gene discovery to predevelopment efforts, resulting in reduction of activity scope. Looking forward, we expect this revenue trend to continue. During the first nine months of 2017, we saw a negative impact on our expenses due to depreciation of the U.S. dollar in comparison to the Israeli shekel. Our expenses, mostly salaries, are denominated in Israeli shekels while our reporting currency is USD. The cost of revenues mainly consist of collaboration related R&D expenses. Cost of revenues for the first nine months of 2017 were $2.2 million in comparison to $4.5 million in the first nine months of 2016. Cost of revenues for the third quarter of 2017 were $0.5 million, in comparison to $1.4 million in the third quarter of 2016. The decrease in cost of revenues relates mainly to the decrease in revenues from R&D cost reimbursement for such periods. Moving on to our R&D expenses. We continue our investments in our internal product programs. Research and development expenses for the first nine months of 2017 were $12.3 million in comparison to $11.7 million in the first nine months of 2016. During the third quarter of 2017, R&D expenses were $4.3 million in comparison to $3.9 million in the third quarter of 2016. The increase in R&D expenses was mainly due to an expansion of investments in internal product programs and due to exchange rate fluctuations, mentioned above. Operating loss for the first nine months of 2017 was $15.9 million, in comparison to an operating loss of $14.9 million for the first nine months of 2016. Operating loss for the third quarter of 2017 was $5.5 million in comparison of $5.2 million in the third quarter in 2016. The increase in operating loss was mainly due to decrease in revenue and an increase in R&D expenses. The net financing income for the first nine months of 2017 was $1.3 million in comparison to $2 million in the corresponding period. The decrease is due to relatively high capital gains derived mainly from the Company’s marketable securities in the first half of 2016. The net financing income for the third quarter of 2017 was $0.5 million in comparison to $0.1 million in the comparable quarter in 2016. Net loss for the first nine months of 2017 was $14.6 million in comparison to $12.9 million in the first nine months of 2016. The increase in the net loss was primarily due to decrease in revenues and increase in R&D expenses and the decrease in net financing income. Net loss for the third quarter of 2017 was $5 million compared to the net loss of $5.1 million in the comparable quarter in 2016. With that said, we would like to open up the call for any question you may have. Operator?

[Operator:]

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question is from Chris Parkinson of Credit Suisse. Please go ahead.

[Graeme Welds:]

Hi, everyone. This Graeme Welds on for Chris. A lot of exciting times kind of going on for Evogene. Curious, if, given all of the changes kind of through the corporate structure and trying through refined areas of focus while at the same time expanding into new areas where your existing assets kind of have applications. I am wondering how you guys are thinking about balancing that. And the current setup that we have right now, should we kind of think about that as the steady state going forward, or is this something that you think will continue to evolve, over time?

[Ofer Haviv:]

Graeme, thank you for the question. This is Ofer. First, I would like to emphasize, once again, -- I hope that it was very clear through my section in this call, because everything that we’re doing is relying on the technology that we develop here in Evogene, very robust, and what allowed us really to do so many things in the same times. And in addition, we are leveraging assets from one place to another, such -- some of what we described in case of bio-pesticides where we are -- the bacteria that we use to look for gene for insect control, so now we are using it -- the bacteria itself, not just the gene to be introduced into the field itself. So, there is a lot of synergy between one area to the other. And of course, we are not expecting that each of these projects, we will advance all the way to the market and we will collaborate with the partner; this is going to take this innovation further on. I think that when we are talking about the ag world, so probably what you see just now, this is what going to lead the Company for the next few years. We defined specific products that we are focusing based on the criteria I mentioned earlier, and regarding our activity with Biomica and Evofuel. So, these two areas are managed completely two separate company with their own management. Yes, they are relaying on our technology as their competitive advantage. But, they have very clear budget, very clear target. And based on their achievement of the target, this will define their future. So, Evogene, majority of the activity is focusing on the three ag divisions, which as I said, I think that we’ve reached to the stage that it’s very clear to us what we want to achieve in each one of them. And the other areas, I think they would be organized as a separate company and we will fund them until they will achieve their initial milestones. And after this, it will be -- the Board will consider how we want to move forward with this opportunity.

[Graeme Welds:]

Got it. Thanks for that Ofer. That’s really helpful clarification. And then, just one more quick question for me was just actually around your cash guidance for next year. Obviously, you guys are looking to be a bit more kind of efficient in terms of your cash burn. And I’m just kind of hoping if you could walk through what some of the key drivers are there in terms of what you’ve been able to streamline kind of through the new organization of the business to enable you to do that?

[Ofer Haviv:]

I think that the fact that we moved from the structure -- to the new structure, I think that there was in some cases some overlap that we can cut it. And this is one area where we succeeded to reduce expenses, and also the fact that we were doing this mega collaboration with Monsanto. So, it wasn’t just reducing our cost of goods sold, but also it was a lot of overhead that was coming with this collaboration that currently we reduced them. So, this is what really helped us to reduce our expenses. So, it’s really increased efficient of our R&D team. We are not -- the business team actually will expand a little bit. G&A is more or less the same, but the R&D is much more efficient. And one of the reasons, because we defined very clear, what is the product that we want to focus in each area and area. In general, the majority of the budget will be in the ag world and only a fraction will be for the new area outside of the ag world. This is the other additional information I would like to share with you. And maybe the last thing, please remember that our projection is not taking into account any future revenue or any other consideration that might took place next year. So, this is the expense -- the burn rate we see to support our existing activity according to our current expectation. Hopefully, we will see some good things happen next year and then we might update our projection.

[Graeme Welds:]

For sure, totally understood. Thanks for that, Ofer. That’s all for me.

[Ofer Haviv:]

Thank you.

[Operator:]

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

[Brett Wong:]

Hey, Ofer and everyone. Thanks for taking my questions. I just wanted to follow up on your last comment. Just wondering what you think the likelihood is that you’ll establish the partnership or relationship next year, given that we’re seeing the top side consolidation complete here or we should see it complete in the first half of next year?

[Ofer Haviv:]

I think that I mentioned in previous call that we see improvements in the general atmosphere of the ag industry, especially in the area of -- especially among the companies that already finished the process of mergers or acquisitions. I still see and support this statement, I bet on what we see today and discussion that we are conducting, I’m quite optimistic that hopefully some interesting stuff will happen in the first half of next year. You know, discussions with big organizations always take time, and collaboration agreement always takes a while before you commence understanding. But in general, I’m quite positive that good things will happen during the first half of next year.

[Brett Wong:]

Okay. That’s helpful. And then, on kind of similar lines, looking at Biomica, wondering just what your view is of the potential there overall and then, the likelihood that you kind of establish a partnership before kind of a two-year funding through Evogene?

[Ofer Haviv:]

On fund, what I can disclose in this stage, but the reason that we decided to establish this company and it’s taken us a while to validate these opportunity for almost a year before we decided going to move on. It was only when we came to the conclusion that our technology can really make a difference and that we have the needed heals [ph] in-house [indiscernible] join us only when we’re sure that what have in-house can really make the difference only then we move forward with this opportunity. One of the things that brought us to this point is that we conduct discussions with company in the field and we’re trying to realize what they are looking for. And what we learn is that what Evogene has is unique and could be interest for a company in the area to collaborate with Evogene, even in early stage. So, I can’t promise something for the first half of next year, but I think that we are not talking to you on an activity that it will take us like three years or two years to reach to a significant milestone, which could include also collaboration with company in this field. What is really interesting about the microbiome area though, yes, you can think about revenue, [ph] but there is other short type of product -- short time product if you can think of that not necessarily could be considered a drug but still can generate a value. And I think as I say, our team here is thinking on the long-term and short-terms as well, and this is what encourages us in this stage to move forward with this opportunity. So, apart from the milestones that are looking to achieve, could fall into the categories that we just now described in the terms of the next two years.

[Brett Wong:]

Okay. And then, just lastly on Biomica, what are your expectations on spend over those next two years? Again, just assuming it is as it is now and you don’t have just no partnerships or et cetera, et cetera coming over those two years?

[Ofer Haviv:]

So, it goes like this and this is -- for the next two years, I think, -- again, I won’t disclose the number but it’s a -- for the two years, it’s a single low digit, okay, for these next two years. But please remember that in Evogene when we are conducting an activity, and it doesn’t matter what unit you’re talking about, so the direct money that we invest, you can almost multiple it when you think what we you need -- what level of budget you need if it was independent company. Because we have as -- an example, the corporate activity of Evogene is serving five units at the same time that if each one of them was separate company, so just think on how much money you need in order to manage the need that the general and administration need of five units or let’s move on for -- if lab and infrastructure, we are really -- leverage every meter of lab we have here for more than one unit. So, yes, even though the market funding we invest is not significant but the way that we are working here and the fact that they haven’t access to a technology that was -- that we invested in the past tens of millions of dollars and they had an immediate access to this technology, it’s something that other companies cannot even think about. Yes, it’s just us now but they -- starting from this point that they have all the needed infrastructure in place and they have an access to a technology that can really take them in almost no time to a place that they can start talk about the specific assets that can generate interest amongst our partners. And we see again and again in every areas that we are moving in, compared to when you count the time from we initiated activity and what we achieve, it’s only because we initiated this activity in Evogene, an example Ag-Biologicals. I think that we announced that Evogene has started activity in 2016. In 2017, we already announced a quite significant collaboration with DuPont-Pioneer. Ag-chemistry, two years after we announced this activity, we had collaboration with VSF. And I have high expectation for this activity for next year as well. I can’t see any other situation in biology that you can generate such type of relationship and achievement in such a short time, unless you rely on existing technology and infrastructure like we have in Evogene. So, maybe this is the main message I’m trying to say about also Biomica. So, the amount of money we put is relatively small from Evogene for the next two years, but the effect of what Evogene can bring to this company is quite significant.

[Operator:]

[Operator Instructions] There are no further questions at this time. Before I ask Mr. Ofer Haviv to go ahead with 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 1888-326-9310. In Israel, please call 03-925-5927. Internationally, please call 9723-925-5927. Mr. Haviv, would you like to make your concluding statement?

[Ofer Haviv:]

Yes, thank you. Based on the continuous progress and achievements described on our call today, we are confident that Evogene is well-positioned for future success. Thank you 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 third quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.