Evogene Ltd.
Q1 2015 Earnings Call Transcript

Published: 19 May 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Evogene’s First Quarter 2015 Results Conference Call. All participants are at presence 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 19, 2015. 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 relates to future events, risk 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 restates the statements made in those earnings releases and in a similar way on this earnings conference call that are not historical fact, maybe 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 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 risk factors potentially adversely impacting our performance can be found in our reports filed with 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:]

Good day everyone. Thank you for joining us. On the call with me today are Sigal Fattal, our CFO and Assaf Oron, our Executive Vice President of Business Development and Strategy. I will begin the call with introductory comment, Sigal will then comment on our financial results for the quarter. Following Sigal, in today's call Assaf will focus his prepared remarks on the insect resistance segment of our biotic division, rather than reviewing as we have in the past, we can progress in each of our four divisions. We will then open the cal for any questions you may have. This past quarter, we were very pleased with our continuing progress in each of our four market oriented divisions, we saw advances in development across our individual product programs and increased recognition by the industry of our broad discovery capabilities, as demonstrated by our recent announcements regarding the integration of our gene optimization program into our collaboration with Monsanto following the entry of over 1,000 Evogene candidate genes into their product development pipeline, and the signing of our first collaboration with a leading multinational food company. In my prepared remarks today, I would like to focus on how both current market condition and continuing long-term trend are impacting and related to Evogene. Looking at the world-wide agricultural market, demand for key crops continues to increase steadily to new record level. For example, corn consumption during the past five years has increased by 25%, and is expected to reach record levels this year. The same trends can be seen in soybeans with the past five years consumption levels increased by roughly 20% and focus that for next year showing a 5% increase in demand. In view of the combination of continuing world-wide population growth and changing food habits, these increases in demand are certain to continue. Currently as most of you are aware, commodity prices are quite low due to all time high production level in the past two years, this softness in commodity price has resulted in significant short term financial pressure on the industry, but looking into the future, the outlook for agriculture production is very different. With on-going changes such as increasing resistance of insects and weeds to current pesticides and herbicides, along with negative trends in [arable] land and environmental pressures, it is reasonable to project that without significant technological improvements, even sustaining today's levels of production will be a major challenge. To address this need for significant technological improvement, it is clear that much deeper understanding of the biology of plants including the impact on plant biology of the environment will be needed along with the advanced computational ability to handle the enormous amount of data involved. Evogene is uniquely qualified to address this challenge. For the past 10 years we have been establishing broadly applicable discovery platform combined with deeper understandings of plant biology with industry leading 'big data' integration, analysis and prediction computational technology and these capabilities has been recognized by an increasing number of collaborations with leading seed and other ag-bio companies. In my remaining prepared remarks today, I would like to give you a few examples which I hope will demonstrate how this combination of plant biology understanding and computational capability is required and is now being utilized by Evogene to address key industry needs. First in the era of [indiscernible] representing Evogene’s initial and therefore most matured area of activity with 17 product programs with the industry, the next generational product will almost certainly depend on the identification of appropriate gene combination rather than stent alone genes and identifying effective gene combinations for yield improvement is one of the most complex task in computational biology not only because of the complexity of factors affecting yield, but also because of the enormous number of possible gene combinations. The only way to address this problem is with substantial biology driven computational power such as we had uniquely established at Evogene. Second in the area of insect control, where future product will most likely be based on genes from the microbial, the challenge is the side of the relevant database which is truly enormous. Just to give you an example, we have over 40 million genes in our plant database, but our microbial database allows for more than several order of magnitude of this amount, there are literally tens of hundreds of millions of bacterial genes to analyze. Again it’s our belief that the only way to successfully approach this problem is with extremely sophisticated computational and analyses capabilities that has been established as part of our discovery infrastructure. My third and last example is in the early of novel herbicides discoveries. This is a huge market opportunity with extreme industry interest. Here is the challenge in both to identify a novel protein which is critical to the life of the plant and to develop a chemical molecule that blocks the activity of this protein. In this important field, the industry has been trying for more than 20 years to address this challenge, but with very limited success. We believe this lack of success is primarily due to the fact that essentially all of these efforts has been based on the screening of chemical libraries although often extremely large were established without sufficiently taking into continuation. The underlying plant biology they were trying to influence. The problem with this approach is to understand by recognizing that even with millions of chemical compound in your library. The library still represents only an extremely small fraction of the universe of possible compound. Here again Evogene’s capabilities in understanding plant biology and extensive computational power can directly address both the identification of novel protein target and the creation of specialized chemical libraries driven by propriety understanding of plant biology. Although we only recently entered this field, our rapid progress was demonstrated in part in February by our announcement of the development of a biology driven end-to-end herbicide discovery platform. To summarize in each of these cases and others when evaluating our potential entry into a new agriculture related early activity, we required the proposed area to meet four specific criteria. A very large potential market, significant industry interest, clear unmet market needs and most importantly that expected ability for our computational biology infrastructure to uniquely address that need. I would now like to hand over to Sigal to comment on our quarterly financial statement published today. Sigal.

[Sigal Fattal:]

Thank you, Ofer. And hello everyone. Today I would like to start with the most important item by far in our financial statements that is of course our liquidated situation. As noted on the balance sheet, we continued to maintain a strong financial position ending the first quarter of 2015 with $113 million in cash and equivalents a decrease of $3.1 million during the quarter. We expect net cash - cash usage for the full calendar year 2015 without taking into consideration new collaboration or other potential cash sources this year if any to be between $16 million to $18 million. Although I just stated our cash represents the most important asset listed on our balance sheet, it is by no means our most important asset. However, under accepted accounting principal, our most important asset do not appear in the balance sheet. These are our scores as mentioned by Ofer. The industry leading discovery infrastructure established over the past decade, our many ongoing collaboration and our growth areas of insect resistance, ag-chemical and other field. Moving back to the financial statement, revenues from research and development payments for the first quarter of 2015 were $2.7 million compared with $3.8 million in the first quarter of 2014. This net decrease largely results from the previously disclosed amended work plan with Bayer. As previously stated, our future profitability is expected to rely largely on the royalties and other revenue sharing arrangements derived from our existence and possible future collaborations as well as seed sales from our Evofuel subsidiary. In that regard it is important for me to note that before our US IPO research revenues which reflect R&D cost reimbursement under certain of our collaboration agreements were a meaningful contributor a cash flow. However, given the strength of our balance sheet, this is no longer a requirement. Therefore, looking to the future we tend to consider on a case-by-case basis self financing or jointly financing with our partner, certain activities under future collaborations particularly with respect to our newer growth areas. Although possibly resulting in net short-term R&D revenues, then would otherwise be the case are [indiscernible] negotiating the term for future collaborations will be maximized long-term revenues consistent of course, with maintaining our financial trend. Next as pointed out in prior calls, our capital expenses for R&D type activities are accounted for in two separate line items in the statement of operations. First is cost of revenues, representing those R&D activities conducted in support of our ongoing collaboration and the second being R&D expenses, which refers to expenses incurred by Evogene for infrastructure investment and other self funded research activity. Self funded R&D expenses show $3.5 million for the first quarter of 2015, compared with $2.7 million in the first quarter of 2014. This increase reflects the continued building and enhancing of our infrastructure in general and in support of our full operating division. I will be glad to address any questions you might have about these or other items in our statement during the Q&A session. With that said, I would now like to turn the call over to Assaf.

[Assaf Oron:]

Thank you, Sigal and good day everybody. As Ofer mentioned in this call, I would like to focus my remarks today on insect control, an activity we launched mid-last year within our biotic division. Before I do, because we will not be providing a division-by-division operational review I’ll just say that we are tracking well across our four product divisions and pleased with the progress we’re seeing. If you have specific questions about any of those areas, I’ll be more than happy to address them in our Q&A session. As you are probably aware, worldwide damage to crop production due to insects is one of the biggest determinates to global agricultural production. Furthermore, this damage due to insects currently estimated at 20% of global yield is expected to become even greater problem in coming years. Among the trends underlying this expectation are the growing resistance of insects to currently available insect control products, primarily biotechnology seeds sowed by the grower and insecticide applied in the field some of which were introduced 20 or more years ago. At the Caribbean increasing resistance that we’re seeing is the fact that most of the current solutions for insect controls seeds trades come from basically one type of bacteria named Bacillus thuringiensis commonly referred to as BT to which insects have grown resistance over the years by developing a natural bypass mechanism to the toxins. We are seeing this on a global scale especially in South America, but also increasingly in the U.S. This growing resistance to existing solutions is [poised] [ph] to continue to drive the market for the next generation biotechnology insect control technologies. Within the overall insect control market, biotechnology seed trade represents approximately $4.5 billion in revenue per annum. In addition to the problem of growing resistance, the market has projected to continue to increase driven by increasing penetration rates for existing products and the need for new seed based products addressing insects where there is no current solution. For example, for the henectrine insect order which includes insects such as stink bug and [acid] [ph] as discussed by Ofer in his remarks today, Evogene is uniquely positioned to address these critical unmet needs. Therefore, approximately a year ago, we launched our insect resistance program and began to apply our extensive plant biology knowledge and worldwide data integration and analysis capability to the discovery and development of new insect resistance trade displaying new mechanism both to address new market and to mitigate resistance. By leveraging our previously existing broadly applicable capabilities we’ve already successfully expanded the capacity of our database, the specifics targeting of our analysis tools for this [indiscernible] and our validation infrastructure. So how is the way Evogene addresses this unmet challenge unique. I mentioned earlier that practically all of the existing insect control trades are based on only one bacterial source commonly referred to as BT. Well, today we can access many more. Recent advancements in microbial data production allow researchers today to generate genomic data from tens and hundreds of millions of bacteria exponentially growing the potential gene pool. However, at the same time, this is of course creates a huge big data challenge and this is where our infrastructure provides Evogene with a critical competitive advantage through the application of our cutting edge database assembly tools to first create a novel huge comprehensive and ready to mine database. We then utilize our advanced computational tools to identify the most relevant genes with effective toxic to the insect. This identification relies on a number of sophisticated analysis tools and approaches including machine learning algorithms providing continuous improvement over time. As with each specific new area, we select, we've developed and added to our infrastructure tailored assembly and mining platforms through novel toxin discovery. This has been accomplished in an extremely short time, since in large part it consists of extensions or modifications of already existing Evogene capabilities. Based on these achievements, we’re now moving forward with our discovery program to identify novel candidate toxins with new modes of detection. As we discover candidate toxins, they will undergo screening at our new U.S. site based in St. Louis, this screening forces the insect to be toxins utilizing a high group of feeding based assays which can detect a toxin’s effect on insects. This validation process which takes approximately 12 months to 18 months is expected to result in a number of validated toxins, which we expect will then move forward in product development under our seed partners’ pipeline. Our activities in St. Louis are headed by Dr. James Presnail, whose appointment we were pleased to announce earlier this year. Dr. Presnail brings with him three decades of best knowledge and experience in the planning, execution and management of insecticide gene discovery and efficacy testing having held senior positions in this area at DuPont Pioneer and he joins the very talented pool of people we have here on the grounds in Israel. I hope I was able to provide you today with some additional insights into this newer segment of our business. We see insect resistance as one of our main growth drivers and believe that in this area as well as our other selected areas of focus, our unique capabilities will lead to multiple next generation products addressing critical needs in agriculture. Let me now turn the call over to the operator, who will open up the call to any questions that you may have.

[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.

[Christopher Parkinson:]

Perfect. Thank you. You did this a little already with this Assaf section, but could you just give us further update on your independent efforts, you did a lot of as I said on IR, but also crop protection and then also for both of them the potential to sign new collaborative agreements. Thank you.

[Assaf Oron:]

So in both the areas of insect resistance and our herbicide discovery as part of our clinical activity, we’ve been having investing efforts in funds in order to build our discovery capabilities all the way from data to the database mining tools as well as validation. So I’m happy that this year we see in both of these areas activities, we’re in a position to complete and have the full proposition of discovery capabilities in these areas. Of course naturally I can’t state exact timing on potential collaborations that we may enter into. But the fact that we have established all of the required infrastructure through discovery, we believe that positions us better for such activity.

[Ofer Haviv:]

Chris hi, this is Ofer. In previous discussions, I mentioned that we see a lot of interest among amounting big players in our industry in what Evogene is doing in this area, so we continue to see this interest. I think that the question here is left if [indiscernible] can enter into a collaboration to tomorrow what will be the term and what would be the right time. So we are very positive about Evogene, but in commercial potential in this to area and yes as Assaf just now described we are now in a very good position to move forward with it.

[Christopher Parkinson:]

Perfect, thanks and just a quick follow up. Can you also just give us a quick update on the near and long term strategy for Evofuel and how pleased you are with the recent progression and if you think that’s either met or exceeded your expectation within last 12 months. Thank you.

[Ofer Haviv:]

Well, with respect to Evofuel we showed our fuel trials in February. The activity is going very well both in Brazil and in Argentina. Of course but the season has not ended yet that will happen us only by the end of the summer and then we’ll be able to see the results of that activity. In the past 12 months we more than doubled the area of size that we are working in Brazil and Argentina and trailing in scales that we’ve never then before. All of this in order to prepare for the commercialization that we are aiming for in 2016. For the short and more mid or long term, short-term would be first the commercialized in 2016, we expect in the first, maybe two or three years that the [products] [ph] of the growers that we are working with will flow mainly to the existing uses of Castor bean oil which is the industrial uses such as paint, lubricants, pharmaceuticals. And beyond that because that is a interesting market, but not a huge one we believe that in the mid and long term we will be able also to show economic relevant also for the biodiesel markets and build our first much broader uses.

[Assaf Oron:]

I can add though Chris from my perspective, I think that being in position is we are working with two soybean grower in Brazil and [indiscernible] and knowing that we are working together with a CNH on developing a combine to herbicide a unique variety and knowing the size of operation in Brazil. So I think that we are a little bit ahead of our expectation in this stage of this program.

[Christopher Parkinson:]

Okay perfect. Thank you very much.

[Operator:]

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

[Brett Wong:]

Hey guys thanks for taking my question. I was wondering if there is anything you can provide any more detail around the new collaboration with the multinational food company obviously I know you guys can’t disclose a lot of anything but just wondering kind of how that’s going to fit into your current affordable segment to kind of be abiotic or biotic and really any color you can provide that would be helpful.

[Ofer Haviv:]

So the additional information that we can provide of us is we’ve entered this new collaboration, its focused is again leveraging our yields and our abiotics stress capabilities at this stage although it may expand to areas also beyond that. For commercial reasons both parties agreed that the details of the collaborations will remain confidential and we respect those requests of our clients. It’s on the crop that we have not collaborated before, so it’s a new crop for us, but it’s actually leveraging all of the knowledge that we have gained in other crops and yields and stress and of course is that’s part of our strategy and yield and stress that from each collaboration that we enter, we can - the business is model such that we can leverage all of those assets to crop to other crops, so that’s’ exactly what we are doing to broaden our reach in this division.

[Brett Wong:]

Okay, thanks. And then kind of looking at abiotic and biotic stress obviously that is seems to be some significant opportunity with abiotic stress, would you say that you’re now more focused on biotic stress than any biotic stress?

[Ofer Haviv:]

I don’t think that we are more focused on the biotic stress, I think that actually we expand our activity, our budget significantly in the biotic arena. From our perspective, in the area of yield and abiotic stress which this is the more mature area of our operation. We are now more focusing on how to as is our partners in advancing our genes in their pipeline to see them moving to Phase II, Phase III and reaching to the market. And over there, we are working with Monsanto, working with DuPont, Bayer, so actually we are more focusing on product development than discovering new genes. Moving to biotech area so here this is really we are just in the beginning of the discover the potential, the commercial potential of this area for Evogene. And we are very excited because there is a clear need, there is a serious problem and we know that the industry is looking for solution. So I think that we are in a great position and to leverage our technology, our knowhow into this area and important things will happen for Evogene in the future.

[Brett Wong:]

Okay. And do you see kind of a timing benefit clearly with kind of the smart focus in biotic stress?

[Ofer Haviv:]

Can you repeat your question? I’m not sure we understand it?

[Brett Wong:]

Just wondering, clearly you seeing a timing benefit in terms of progressing potential trades within biotic stress compared to abiotic?

[Assaf Oron:]

Yes well as I mentioned earlier, first one of the big advantage is for the people that are moving forward our biotic activity is the fact that we have a lot of infrastructure in place already, I mean the database, the computational analysis tool. So it’s really we are able to expedite many of the new set we have and have actually heard from people outside Evogene that we’ve shown what we’ve done, how impressive it is, especially what we’ve been able to do in such as a short time and with such a limited data compared to many companies that have been in this area for a very long time. So today the accessibility, the data, the platforms that we have are very mature and can really allow us to move more quickly in this area. I don’t know if this is what you meant, Brett, but if another thing about biotic in general is that there is an advantage that you can relatively see some results more quickly just from the nature of those trades, if you are trying to kill a bug then you can more easily see if it’s alive or dead and what you’re doing works. So I think that’s also one of the benefits and interests in this area of biotic stress.

[Brett Wong:]

Thanks. Assaf that’s helpful. And then kind of looking at Chris had asked about potential partnerships and you talked about Ag camp, I think he also asked a lot about biotic stress but just wondering if there is any update or thoughts around timing and development there for biotic stress.

[Assaf Oron:]

So I think with respect to both as Ofer also stated, the fact that we have established most of the infrastructure required for discovery, put us at a better position, a good position in order to engage in some of those collaborations although of course, we can’t state anything regarding the exact timing of that.

[Brett Wong:]

Okay. Fair enough. And then one last one from me, I’m just looking at your collaboration with Monsanto, how important has gene optimization become in comparison to new trade development. So basically kind of asking the other way, what percent of your efforts are spent on new trade development versus --?

[Ofer Haviv:]

So I think that today more and more activities focusing on gene optimization. We should remember that, lately we announced that more than one thousand genes that were discovered by Evogene are today in Monsanto pipeline going through target plan validation. And as we also disclosed that today we have an access to the information, Monsanto generates around those genes in field trials that Evogene can use them for gene optimization. So we see more and more activity shift from discovering additional gene which we are still doing it, there are still area where we would like to see more genes entering to validation, but we are moving from discovery new genes to more and more how to build a right construct, what is the promoters which, this is another DNA segment that actually activity the genes. What is the right gene combination we are putting a lot of emphasis into identify what are the genes that will be more stable to the worst [atmosphere] climate condition. So yes, there is we see shift of focus in this collaboration from the discovering huge quantity of genes to more how we ensure increase probability of success, increase efficacy of our genes to advance in Monsanto pipeline towards commercialization.

[Brett Wong:]

Excellent Ofer. Thanks a lot. End of Q&A 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 would like to remind participants, that replay of this call is schedule to begin two hours after the conference. In the U.S., please call 1888-782-4291, in Israel please call 03-9255-901, internationally please call 9723-9255-901. Mr. Haviv, would you like to make your concluding statement.

[Ofer Haviv:]

Thank you everybody. I appreciate your time today and I look forward to continuing to update you on our growth and other exciting development next quarter. Thank you.

[Operator:]

Thank you. This concludes Evogene’s first quarter 2015 results conference call. Thank you for your participation. You may go ahead and disconnect.