Evogene Ltd.
Q3 2015 Earnings Call Transcript

Published: 18 Nov 2015

[Operator:]

Following management's former presentation, instructions will be given for the question and answer session. [Operator Instructions] As a reminder, this conference is being recorded. 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 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:]

Good day, everyone. Thank you for joining us on this call. With me today are Sigal Fattal our CFO, and Assaf Oron our Deputy Vice President, Corporate Development. I will begin the call with opening remarks, Assaf will then provide status update, followed by Sigal with comments on our financial results for the quarter. We will then open up the call for any questions you may have. My opening remark today will focus on two related topics. First, I would like to provide an overview on how we see Evogene's opportunity with respect to the worldwide need for food, seed and fuel. And second, I would describe certain ongoing organizational change aimed at accelerating our growth and leveraging our asset as we address this opportunity. We believe, that our unique position in the industry and the opportunities now available to us can be summarized by five segments, some obvious and other that may not be. First, the worldwide need for food, seed and fuel will be continuing and most likely will increase in the future. Therefore, the demand for the input product required to produce it, such as a seed, ag chemical and ag biological will also likely be increasing. Second, is that we have weakness in the past, that with respect to input product for agriculture, such as biotechnology seed or crop protection chemical, a product providing significant measurable new benefit can dominant a major market fairly, quickly gaining market share from prior leaders. Third, is that today more scientific approach to the development of ag product provide the potential for significant improvement in the quality and efficacy of those input product. The precocitive understanding are being obtained in many aspect of life science including genomic and the ability to create mega experimental data to pursue further understanding our key factors underlying this potential. Four, is that most of the major season ag chemical companies, almost all of whom are public companies, are today attempting to maintain profit in a time of low commodity prices, in many cases making cuts often in research. Fifth, is that Evogene for over a decade have focused on expanding a scientifical research and understanding in agriculture. We have created a unique infrastructure combining deep understanding of ag science many types of ag related big data in their ability to handle and integrated those various data types. And perhaps most importantly, unique algorithm and other computational tool, to gain further knowledge leading to the ag discovery of improved product candidate out of the data. Furthermore, in line with our strong balance sheet know that in substantial cash balances, relatively to our annual cash burn, we intend to continue to both further enhance the infrastructure and to invest in each of our market areas of focus, consistent with our strategy and long termed plans. The net results of those five statements for relatively small company like Evogene, is that we believe they present us with the opportunity to further strengthen our technology leadership position and does provide us with the potential to lead the discovery of next generation ag product. Furthermore, looking at our existing and developing product program, and the market need that they address such as improving yield, insect control and normal herbicide, which only believe in our ability to significantly contribute to the development of new product with substantial measurable benefit to our industry. As previously mentioned, I would now like to comment on a certain ongoing organizational changes that have been designed for the implementation of a more focused strategy with increased leveraging of our past achievements as we address this unique opportunity. For most of our corporate history, we have been focused fortunately very successfully on identifying specific product need and establishing the infrastructure and capabilities to address those needs. This was accomplished largely on a program-by-program basis. As we expanded into new field and product application, we applied such capabilities that would be necessary for the new activity and then created whatever additional capabilities or data would be needed. The result is that we now have an enormous amount of agriculture related discovery analysis invalidation infrastructure consisting of scientific knowledge data, computational capabilities in various specific discovery invalidation platform. In view of this, we believe that a different organizational structure for the company should allow us to more fully take advantage of with the opportunity we now have as I earlier mentioned. Currently, we are finalizing this change which will officially take place at the beginning of next year. The key to this new organizational structure is to group all of our line operations into two hub. Crop enhancement, which aims to improve yield and tolerant to abiotic stresses such as drought and crop protection, which aims to improve crop resistance to various biotic organism such as insects, fungi and weed. For those of you familiar with the industry, the terms crop enhancement and crop protection should not be new since most of our major season ag chemical companies divided their operation in this manner. Each of those two new operating unit will begin with substantial field specific expertise. A professional team that has been involved in Evogene key collaborations in the relevant area in the past, designated databases, proprietary data generation and validation capabilities, and very specific ag routine and data analysis tools all driven by multiyear experience in the field. Each of the two operating unit will be led by a senior Evogene executive who will have responsibility for all operating aspect of the respective area including research development and related research and development activities. In accomplishing these three organization, we are very fortunate to have a very talented and seasoned group of executive at Evogene. Some of whom will be assuming new position in the revised organizational structure such as the two senior executives who will be leading each of the operating unit. I will not be identifying any of those executive by names in my remarks today. If you’re interested, please visit our website for names and background information. In addition to the two operating units there will be an R&D infrastructure unit, which will contain all of the technology platform a valuable for use in both units and will be responsible for the development of new capabilities. Most of the companies R&D personnel will be in this R&D infrastructure unit. In order to ensure the maintaining and further developing of Evogene’s scientific and technology vision and this reflection of this vision into the nine multiyear strategy plan. There will be two senior executive position, a CTO and a CSO. Those two senior officers will also define and review the scientific performance of the operating unit ensuring that we continue to maintain a high level quality. To conclude my part in this call, I would like to emphasize my earlier statement with regard to the significant change appearing in our industry as product development becomes more science driven. A key aspect allow this change is the availability and ability to analyze what is commonly referred to as "big data". At Evogene, we have been producing and integrating enormous amount and types of complex ag related data originating from various sources long before the concept of big data became almost a bad word in the industry. This is an area where we now have and are confident that we will retain a significant competitive advantage and is the area where we believe is now and will remain fundamental to the development of innovative product in the dynamic commercial ag product environment. As previously stated, Assaf will now provide an average status for some of our ongoing key activities. Assaf?

[Assaf Oron:]

Thank you, Ofer, and good day everyone. I would like to take you through an update on our line operations. However, in doing so, instead of updating according to four product division as I have in the past, I will provide this update based on our new organizational structure just described by Ofer. Our crop enhancement hub includes all the activities of our former yield and abiotic stress division and in addition are increasing activities in ag biologicals. Our proper section hub includes all of our former biotic stress division activities such as disease and insect resistant trait as well as ag chemicals. In addition to these two operating hubs for the parent company Evofuel will continue as a wholly own development stage subsidiary focusing on commercialization of improved castor seed. Unfortunately, Evofuel is being impacted by the widespread negative economic situation for commodities in specifically the challenging environment in Brazil where we expected to first commercialize our seeds. Multi-year and multi-sets field trials to-date, Evofuel's advanced seed have demonstrated the ability to produce castor as a row crop, and jointly with CNH industrial, this newly designed harvester has demonstrated the ability to allow the mechanical harvesting of the crop. In addition, we recently successfully registered three of our leading castor varieties in Brazil. And next year we intend to expand our field trialing infrastructure and development collaborations in Brazil. However, in view of the clear need to focus our core business in crops along with SLC's and Evofuel's understanding of the need to further evaluate castor crop on an experimental scale, we currently do not intend to move forward to commercial production with SLC next year. In the 2015, '16 trial and season we expect to continue to work with our existing partners including SLC and Insolo and are also undertaking steps to broaden the scope of potential customers, mainly medium size and large growers in Brazil and generally in South America. Returning to my updates for Evogene through operating hub, I'll begin with crop enhancement. In this area of activities, we're progressing in accordance to our work plan across all of our 18 seed trades' product program for yield in abiotic stress tolerance and are pleased with the progress we're seeing. Under our major collaboration with Monsanto, both parties are committed to the ongoing discovery and validation activities conducted in the lab greenhouse and field throughout. Through the joint research of Monsanto, including learning unlocked through the date and analytic we have been able to identify a series of key enabling traits which we believe will improve plants overall performance leading to increased yield. These insights are expected to help drive efficiencies in our yield and stress program as we further focus the program in exploring these enabling yield [indiscernible]. Still under crop enhancement, we recently formally initiated discovery activities in the area of ag biologicals to the improvement of yield rendered as a bio-stimulant activity. Ag biological are substances of natural origin such as microbial or plant extracts and are applied as seed coating or through a full year manner in the field. We find this areas to be of tremendous opportunity for Evogene for various reasons. However I will focus on the main three. First, growth. The area is experiencing meaningful growth. Biologicals are expected to grow from $3 billion to $8 billion in 2020. Second, in unmet need. Corn and soybean growers are seeking to improve yield performance and to-date there is only a limited range of biological product which are believed to be a significant new offering for improving ag productivity. And third, compared with ag chemicals or GN trait development the time and cost of market are shorter, five to seven years and lower, $5 million to $10 million. Our initial focus in this area of ag biologicals is on bio-stimulants that are expected to improve yield and drought tolerance in field crops such as corn and soybean. We believe we are in a position to provide ground breaking products to the market based on our assets and capabilities generate through over a decade of activity in improving yield and abiotic stress and feed traits for field crops. As well as our leading big data integration and analysis platform that enables to identify promising microbial that could serve as a basis for potential bio-stimulant product. Moving to our crop protection hub, our biotic seed trait program are progressing well in both disease and nematode resistance, as well as our broad internal program for insect resistance trait discovery. Following our announcement in the previous quarter on the completion of our first insect resistance discovery round for novel toxins, these toxins are now undergoing validation at our St. Louis site. I am very pleased to state that tomorrow, November 19, we will have the official grand opening of the St. Louis site. This event will include participants from our senior management as well as representatives from some of our industry partners. The site is to-date with seven employees, labs and office space, primarily serving our insect control activity. In our stalk rot or Fusarium resistance program under collaboration with Monsanto, we are delighted to update we recently delivered to Monsanto a first batch of promising novel genes predicted to improve resistance to the disease in corn. Stalk rot is a major disease in corn, estimated to cause yield losses valued at $800 million in the U.S. alone. The disease is caused primarily by a fungus called Fusarium which is responsible for various diseases in many other crops such as wheat, barley, sugarcane and cotton. Hence, novel discoveries of gene which improves stalk rot resistance in corn could potential be of high value to improve resistance to similar diseases in other crops. Still under crop protection, in the previous quarter we announced reaching a milestone for the discovery and successful validation in plants of a first set of novel targets for herbicide. These targets have in the last quarter moved to the next stage of herbicide program, the identification of chemical molecules that are designed to inhibit the activity of the discovered targets. We believe that the assets and capabilities that are being developed, improve our positioning to enter into a first collaboration with a major multinational ag chemical company in this field. With that said, I'd like to turn the call over to Sigal.

[Sigal Fattal:]

Thank you, Assaf, and hello everyone. First, with the respect to the very important issue for company such as Evogene, that is liquidity, as noted in the balance sheet, we continue to maintain a strong financial position. We ended the third quarter of 2015 with approximately $106 million in cash and equivalents representing a decrease of $3.6 million during the third quarter and without any corporate debt. We expect net cash usage for the full calendar year 2015 without taking into consideration potential cash sources, if any, to be between $14 million to $16 million. Moving to the statement of operations, and currently our reported revenues are largely research revenues reflecting R&D cost reimbursement under certain of our collaboration agreement. Looking ahead, our future revenues and profitability are expected to be largely related to milestone payments, royalties and other revenue sharing arrangements derived from existing and future collaboration. Specifically, revenues from research and development payments for the third quarter of 2015 were $3.3 million compared with $3.1 million in the third quarter of last year. And for the first nine months of 2015, revenues from research and development payment were $8.5 million compared with $10.6 million in the first nine months of 2014. This net decrease for the nine months of 2015, largely results from the previously disclosed amended work plan with Bayer. As previously stated, our revenues from R&D related activities will most likely fluctuate from quarter-to-quarter, depending on the nature and the timing of our collaboration agreements. Prior to our U.S. IPO, research revenues were a key contributor to our financial stability. However, given the strength of our balance sheet, that is no longer the case. Going forward and on a case-to-case basis, we are considering self-financing or jointly financing with our partner, certain activities under our collaboration, particularly with respect to our newer growth areas. Although, this would result in less short term R&D revenues than would otherwise be the case, our goal is to maximize long term revenue consistent of course with maintaining our financial strength. Next, as pointed out in prior calls, our total expenses for R&D type activities are accounted for in two separate line items in the statement of operation. 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 refer to expenses incurred by Evogene for infrastructure enhancement and other self-funded research activities. Self-funded R&D expenses for the third quarter of 2015 totaled $3.1 million compared with $3.7 million for the third quarter of last year. The decrease derives mainly from the following three reasons. First, is the increase in the exchange rate of the U.S. dollar versus the Israeli Shekel affecting the company's expenses in terms of USD. Second, is the decrease in overhead expenses related to our self-funded R&D expenses and the third reason is that in the third quarter of 2014 we invested heavily in our discovery and validation infrastructure due to our entrance to new areas of activity. Looking at the nine months, self-funded R&D expenses totaled $10.3 million for the first nine months of 2015 compared with $9.8 million in the first nine months of last year. The increase relates to an increase in non-cash share based compensation. Thank you for your time, and we will now be glad to address any questions you may have about these or other items in my statement during the Q&A session.

[Operator:]

Thank you. [Operator Instructions] The first question is from Ehud Nir of Psagot. Please go ahead.

[Ehud Nir:]

Yes. I was wondering if you could please elaborate on how come in 2016 you are not going to see any revenues from Evofuel, this is contradicted by what you said in former conversations. So, are we going to see any kind of revenue from Evofuel into '16?

[Ofer Haviv:]

Assaf, can you address this question?

[Assaf Oron:]

Yes, of course. Hi. What we just mentioned over the call was that we do not expect to see commercialization and revenues coming from our relationship with SLC in 2016, specifically with SLC. We are still pursuing a number of paths and collaborating with several partners in Brazil and generally in Latin America, pursuing opportunities for commercialization, which may materialize in 2016 or 2017.

[Ehud Nir:]

Okay. And do you have an amount of what kind of revenues are we talking about from Evofuel into '16?

[Assaf Oron:]

This is an information that we’ve not published on the exact amounts and revenues that we expect. Usually in these aspect when we start commercializing seeds, relatively limited amounts of land 100 or 1000s of hectares and then it gradually grows. So, but we've not published any official numbers on the revenues that are expected.

[Ehud Nir:]

Okay, thank you.

[Operator:]

The next question is from Tyler Etten of Piper Jaffray. Please go ahead.

[Tyler Etten:]

Hi, thanks for taking my question. I was wondering if you could talk about what you guys expect going forward for CapEx spending.

[Ofer Haviv:]

For, once again?

[Tyler Etten:]

I was wondering what you guys expect going forward for your CapEx spending.

[Sigal Fattal:]

Our CapEx.

[Ofer Haviv:]

CapEx.

[Sigal Fattal:]

Yes.

[Ofer Haviv:]

So, yes. Hi, this is Ofer. So, most of the investment that we were planning to do built the infrastructure for our new area, both ag chemical and insect control. It already took place during a previous year and this year. We are now at the end of the construction of our new site in St. Louis. So, I don’t expect to see a significant CapEx for year 2016 in own. Actually it's probably even will be lower than what we invest previous year in order to build the infrastructure to allowed us to enter to the new field as I described.

[Tyler Etten:]

Okay, great, thanks. So, with Evofuel not coming or any revenue coming on line in 2016, is it safe to assume that you guys expect it to come online in '17?

[Ofer Haviv:]

Assaf?

[Assaf Oron:]

As --.

[Tyler Etten:]

With no expected --.

[Assaf Oron:]

Sorry, go ahead.

[Tyler Etten:]

With no expected revenue from Evofuel coming in 2016, is it safe to assume you guys are just pushing it up one year to 2017?

[Assaf Oron:]

Once again I'll try to clarify. With SLC, what we just announced is that we don't see ourselves commercializing with SLC in 2016, with respect to that specific relationship. This is the reason that we've meant. We thought of pursuing additional path, we have other collaborators, we announced --.

[Ofer Haviv:]

Assaf, it's -- I think that we -- Assaf is calling from another site. So, this is Ofer. I will address this question. So, as Assaf mentioned in what we disclose is that we are not anticipated to --.

[Assaf Oron:]

Ofer?

[Ofer Haviv:]

Yes, Assaf, the line is not.

[Sigal Fattal:]

You're breaking up.

[Ofer Haviv:]

You're breaking up. So, I will take this question, is okay?

[Assaf Oron:]

Go ahead.

[Ofer Haviv:]

Okay. So, what we disclosed is that we are not going to commercialize our cusp of variety during 2016 with SLC Agrícola. We are in the process with other partner that can lead us to and commercialize our variety in 2016. So, definitely if this could happen, and so expecting to commercialize in 2016 -- '17. So, it's something that's also in our forecast. So, the only thing that we disclose now is that we are not going to commercialize our variety with SLC Agricola next year.

[Tyler Etten:]

Okay, got it, thanks. And then one more. If you could just talk about what sort of crops in your abiotic stress package seem to have the most market value and what do you think you can monetize, I guess, out of all of the traits that you are working on right now?

[Ofer Haviv:]

So, the most important crop is corn. And that's right, the highest commercial value is yield. And most of our efforts next year is going to focus on in the last few years and in the future is focusing on these traits for this specific crop.

[Tyler Etten:]

Got it, thanks. I will pass it on.

[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 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 03-925-5901. Internationally, please call 9723-925-5901. Mr. Haviv would you like to make your concluding statement?

[Ofer Haviv:]

Thank you. These are exciting time for Evogene, as we focus our broadly applicable ag-bio discovery infrastructure to an increasing number of major market segments. This excitement relate in large part to seeing how our long term investment in building this unique capability is now allowing us to establish a leading and novel discovery capability in each of these huge market segments. Therefore, all of us at Evogene look forward with the benefit of our strong financial situation to sharing with you and the financial community, our continuing achievement. Thank you for joining our call today.

[Operator:]

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