Evogene Ltd.
Q4 2016 Earnings Call Transcript

Published: 27 Feb 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Evogene’s Fourth Quarter and Full-Year 2016 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 February 27, 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 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:]

Thank you and good day everyone. We appreciate you joining us today for our fourth quarter and full-year 2016 conference call. With me today is Alex Taskar, our Interim CFO. I will begin the call with a short introductory comment on Evogene's unique scientific capabilities and the continued expansion of our business lines. I will then present our strong progress in 2016 in the selected product program and expected trend for 2017. Alex will discuss our financial results for the fourth quarter and full-year 2016. We will then open-up the call for your questions. As I emphasized in past calls, Evogene advantage in the ag industry, stems from our ability to incorporate expert biological tradition into our product recovery and development. This unique approach is founded on the integration of two building blocks. One, a deep understanding of biological processes in plant and the living environment which surround them and second sophisticated computational algorithms. This continued integration has resulted in the creation and continued enhancement of one of the industry's most specialized and interconnected big data multilevel hub, allowing us to intelligently identify the plant genes, microbial genes, small molecule in microbes that will allow the development of the next generation of ag product. It is this unique predictive discovery and development infrastructure that motivate world's leading ag companies such as Bayer, BASF, DuPont, Monsanto and Syngenta to collaborate in most cases multiple times with Evogene, in multiple areas of high interest for those companies. This predictive biology platform has driven Evogene's rapid expansion over the past years. Just a few years ago, we were a player dominantly focused on product program for seed trait improvement in yield, drought, and nitrogen use efficiency. In contrast, today we’ve a robust and diverse product development pipeline. This rapid expansion was made possible by the financial resources generated from our U.S initial public offering in November 2015. During this recent period, we strengthened our activity in the seed trait by adding an insect control product program and expanded into two new target market, ag-chemical, where we’re focusing our product development effort on herbicide, and ag-biological where we’re focusing our product development effort on bio-stimulant. All three represent multibillion dollar market opportunities and have a significant commercial void that we believe can only be advanced by bringing innovative products to replace or supplement existing solutions. We spend most of 2015 building the necessary computational and validation enhancements to our infrastructure in order to address those new product opportunities, and in 2016 we were pleased to announce positive validation results in product development programs in each of our expanded target market. I’d like to briefly take you through some of this results. First, in seed traits. Early last year we announced positive field validation results in our yield improvement collaboration with Monsanto. This result demonstrates the potential of Evogene genes to achieve yield enhancement in corn and soybean, two of the largest crop worldwide. Since then we’ve continued to work closely with Monsanto to further optimize and validate this genes, as they’re advanced towards the next phase of product development. Also in the seed trait area, we’re focused on bringing new insect control solution through the discovery of Novel Toxin. In 2016, our insect control program achieved an important milestone with five toxins already validated and displaying insecticidal activity on target insects. This toxins are predicted to walk on novel mechanism of action, distinct from that of known toxin family. This is important in view of the constantly developing resistance of insects to those known toxin families. In 2017, the most promising toxin will enter yield optimization to improve efficacy and broaden the activity spectrum to additional target insects. Selected toxins will then be introduced into target plans for crop testing. Moving to our second target market, ag-chemical, our core focus is on herbicide, which represent by far the largest portion of this market. Here again, our novel herbicide discovery program is based on our unique approach of leveraging biological rationale to drive predictions for novel chemical herbicide candidate within modes of action. The program has two important stages. First, the identification of a target based on our biological understanding. This means identifying a protein essential to the weed [indiscernible], and second, discovering a chemical molecule that when applied in the field will enter the weed cell, bang to the target protein, stop its activity and lead to weed death. In July 2016, we announced the first breakthrough in this program, which was the identification of a set of novel target and a successful validation in plants. In September 2016, we entered into a collaboration in this field with BASF focusing on the discovery of chemical molecule predicted to inhibit this first set of target, identified by Evogene. Our collaboration with BASF is progressing according to plan and chemical molecule predicted by Evogene to inhibit the activity of the collaboration target protein will be tested in BASF herbicide pipeline. Our corporate strategy includes

[Alex Taskar:]

Thank you, Ofer. I’m pleased to be participating in my first conference call as Evogene's Interim CFO, having joined the Company at the beginning of this year. In the past, I was responsible for the financial and operational management of both multinational public and private corporation. I’m excited about joining Evogene and taking part in its terrific growth and expansion. Let's start by looking at our balance sheet. Evogene continues to maintain a strong financial position, having ended 2016 with $88.2 million in cash, short-term bank deposit, and marketable securities, which represent a decrease of $12.5 million from December 2015. Assuming regular course of business and no new revenue sources, such as additional collaborations, we estimate that our net cash usage for the full-year of 2017 will be in the range of $16 million to $18 million as we continue to make key investment across each of our core business. Moving on to the statement of operation. Our reported revenues consists primarily of research and development revenues reflecting R&D cost reimbursement under certain of our collaboration agreements. Longer term, we anticipate that our future revenues and profitability will largely reflect the receipt of development milestones payments, royalties or other form of revenue sharing from successfully developed product [indiscernible] to our existing and future collaborations. Specifically total revenues for the full-year of 2016 were $6.5 million, compared to $11.1 million in 2015. Revenues for the fourth quarter of 2106 were $1.2 million compared to $2.5 million for the same quarter in 2015. The declining revenues reflects the net decrease in cost reimbursement in accordance with the terms of our collaboration agreement, the majority of which result on the shift in the activity scope of our yield interest collaboration with Monsanto from gene discovery to development effort. The majority of the program scope is also reflected in the cost restructure and reimbursement as our previous focus on gene discovery in model plant validation were significantly more resource intensive than the computational work we now undertake in support of predevelopment activities. Consistent with these, our cost of revenues also decreased to $5.6 million in 2016 from $8.3 million for the same period in 2015. Cost of revenue for the fourth quarter of 2016 was $1.1 million compared to $2 million for the same quarter in 2015. As earlier mentioned, we continue to invest in each of our core businesses. Consequently research and development expenses for the full-year of 2016 were $16.4 million, compared to $14.4 million for 2015. R&D expenses for the fourth quarter of 2016 were $4.7 million compared to $4.1 million for the fourth quarter in 2015. This increase was mainly due to the expansion of our self-funding activities in key product programs, including insect control, herbicide discovery, and biostimulant. Net loss for the full-year of 2016 was $19.6 million compared to a net loss of $17.2 million in 2015 and $6.6 million for the fourth quarter of 2016 compared to a net loss of $5.5 million in the comparable quarter in 2015. The increase in our net loss was primarily due to the decrease in revenue and increase in self-funded research expenses discussed about, which were partially offset by the decline in other expenses categories. Finally effective December 30, 2016, Evogene transferred its stock exchange listing from New York Stock Exchange to the NASDAQ Global market, home to the world's most innovative growth companies. The transition was seamless to our [indiscernible] in support management's long-term growth objectives. With that said, I'd like now to open-up the call for any questions 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.

[Graham Wells:]

Hi. Good morning, everyone. This is Graham Wells on for Chris. Just a couple of questions from us. This year your R&D expenses were up and you’ve been broadening out your range of activities. So we're just kind of curious in our end how you’re thinking about cash management as you broaden range of the activities that you’re participating in?

[Ofer Haviv:]

Hi and good morning. This is Ofer. So, I think that when we’re looking at the total R&D expenses, we see -- when we compare between 2016 and '17, so we’re expecting that this will increase, but not significantly. I think that when you compare the burn rate from 2016 to the projected 2017, the guess is not so big, because during 2016 there was one -- the late payment from one of our customers that we’re receiving in January and it was due to work that we conduct in 2017, so actually the burn rate is -- for 2016 was a little bit higher. So the gap between that we expected to see for next year is not so significant. And we’re today using a more -- a higher portion from our cash to advance the promising heat candidate into the next phase and this is how we’re going to use the R&D expenses for next year.

[Graham Wells:]

Got it. Thanks, Ofer. That’s really helpful. And then I just had a quick question around the new collaboration that you guys announced with ICL. Just curious on your thoughts around that opportunity if you guys follow a little more and just broadly speaking the opportunity for Evogene and for your research capabilities within the fertilizer markets and what do you think the greater opportunity is there for Evogene off for the longer term?

[Ofer Haviv:]

I think this is a very interesting area for us. The fertilizer company today are looking for different avenue, how they can differentiate their product in generating higher margin, because fertilizer innovates its commodity. So they’re looking for different avenue to improve their margins and one of the way to do it is by adding any active ingredient to their fertilizer that can bring additional value to the farmers and it could be ag-biological, it could be -- maybe small molecules, and this is a new field for Evogene or maybe -- its nothing like a new field, its more this new type of partners that our technology could be add to his product and generate revenue for him and of course then we can get our share from the additional revenue that is going to generate. What is really nice is that we’re looking for type of product that can reach to the market much faster than some of our -- the other product program that we engage in the past and this is why we’re quite excited about this opportunity. This innovates our first step into this -- the world of working with fertilizer company. I don’t think this will be the last one. There is a nice opportunity over there for Evogene.

[Graham Wells:]

Got it. Thanks very much. And then just a last question from us on our end, more philosophical question kind of as you think about 2017, just wondering if you could target kind of one or two things that are really kind of the key milestones or goals you’re trying to achieve for this year to really be a successful year?

[Ofer Haviv:]

I think, if you go through the achievement that we summarized today in our press release to place in 2016. So from my perspective if we will see the same progress in our product program, meaning it is an example in chemistry that we would be able to show that our small molecule are killing a broad range of weed and that they’re really working on mode of action, and this is something that we’re trying to achieve during 2017. This will be a breakthrough for this program that if we increase the range of weed that we can kill and we have a biological proof evidence that its really new mode of action, this will be quite significant and it can be -- can open a new opportunity for us for moving forward. In case of ag-biological, we’re going to conduct a quite significant experiment in Israel which will be -- the year after we’re planning to have also a field test in the States. If we will -- we will report on that we repeat that good performance of our bacteria in another year, this will be very important announcement and this probably can lead to some collaboration activity in this area for at least some of the bacteria talking about insect control. So two important milestones for next year, so we’re talking about and we’re now valid -- the toxin gene that we identified it show a very nice efficacy on certain insect, but we would like to see that they have a broader effect on at least off insects and currently we’ve five that are advancing in this channel and this is again could be quite significant for Evogene. So I think -- and this is -- these are three milestone -- milestone is three type of product program, it could be quite important for Evogene, and we’re also waiting to receive results from our collaboration with Monsanto and we’re still in the process of validate those information and I think this is also something that I’m waiting to see the outcome from the field trials Monsanto conduct in 2016 on our gene. So this is the type of tenure [ph] -- milestones that we’re looking for, and -- but I think there might be some additional events that might happen that currently we’re evaluate internally that we can't disclose now. So, what I describe now, I think this is the main major milestone that we’re looking forward.

[Graham Wells:]

Perfect. Thanks very much, Ofer. Best of luck.

[Ofer Haviv:]

Thank you.

[Operator:]

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

[Brett Wong:]

Hey, guys. Thanks for taking my question. I just wanted to tag on one to what Graham was asking. On the other side, maybe talking about risks and things which you’re concerned about, obviously you’ve got a lot of field trials and testing going on this year to validate and kind of push new products into the next phase as you’ve mentioned, Ofer, but where do you kind of see big risks at the end of core [ph] kind of venue that are outside of just the field trial piece?

[Ofer Haviv:]

Where I see the risk, this is the question, Brett?

[Brett Wong:]

Yes, yes, risk in terms of showing continued progress in growth and ultimately staying on your commercialization timeline?

[Ofer Haviv:]

I think that what’s really -- I see a little bit some risk is there. The current atmosphere in our industry, this is -- this process of merger and acquisition, it don’t create exactly the right atmosphere to engage with the big companies. We are -- I think the whole industry is waiting that this trend will end, meaning that the merger or the acquisition will take place or not, but everybody we know exactly where they’re, because when I’m looking what Evogene has to date and knowing what -- how it's important for our partners and what -- how we can together advance it into product, I’m a -- as I’m quite frustrated with the situation today in our industry, because that quite limited from how -- and the type of collaboration that can engage and they’re moving forward. But I’m expecting that it will be only a question of time and then we will start to see quite significant, and I’m hoping to see a quite significant collaboration agreement and relationship that will -- Evogene will engage with the big ag and seed [ph] company.

[Brett Wong:]

Okay. And just staying on that topic, obviously we can watch the regulatory piece progressed for this M&A that’s happening in the space, and there are still expectations from all those companies that these things will get completed by the end of this year, can you just talk about your expectation on any timeline that you know from doing collaborations in what you see being more from inside?

[Ofer Haviv:]

On when regarding the industry, you’re talking about?

[Brett Wong:]

Just your thoughts on timeline, you’ve being in the industry?

[Ofer Haviv:]

So I think this year is going to be quite important, because I think at the end of this year we will all know what from this merger and acquisition is going to take this or not. When we’re talking -- when we’re meeting and talking with the companies, from their perspective it's going to happen. I don’t think that in the companies they have doubt if all of this merger and acquisition will take place. It seems at least when you’re looking at the share price of some of the company, I think that there is some doubt from the market which is going to happen, but I think that at the end of this year we will all know where we’re heading to and I think this is -- then it will be the time for company like Evogene to really flourish. I think that then all of these companies that after all they cut expenses, cut their R&D budget, they will all look for new product to feed their pipeline. They will look for innovation and about company like Evogene that we’ve --- almost in every product program such a nice achievement and a real stuff thing that we will benefit from this situation then.

[Brett Wong:]

Okay. Thanks. And just one last one for me, and you talked a little bit about this on your cash usage expectations, but is that increase for 2017 largely driven from more of a progress you’re going to be making in biostimulants and increased investments you’re going to do there or its just broadly spread across all the segments as a result of increased field trials?

[Ofer Haviv:]

I think that the increase will be mainly in the ag-biological phase and ag-chemistry phase. We’re going to keep more or less on the same level of investment in our investment core program and there will be quite significant reduction in our expenses on the yield and our stress program since currently we already deliver such a huge amount of promising gene to Monsanto and I think that now the focus is moving on their side on advancing the gene. So, main investments will be ag-biological, ag-chemistry. Over that there will be the increased insect control more or the less the same budget and yield [indiscernible] there will be a reduction.

[Brett Wong:]

Excellent. 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 statements, 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 1-888-782-4291. In Israel, please call 03-925-5901. Internationally, please call 972-3-925-5901. Mr. Haviv, would you like to make your concluding statement?

[Ofer Haviv:]

Thank you. I’m excited about the future opportunities I see for Evogene, looking across all of our business areas. I look forward to keeping you update on our progress and plans and would like to thank you for giving us the opportunity to date to share with you a summary of some of our most recent achievements, and lay out our key catalyst for 2017. We look forward to speaking with you again on our next call. Thank you.

[Operator:]

Thank you. This concludes Evogene’s fourth quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.