Evogene's (EVGN) CEO Ofer Haviv on Q3 2016 Results - Earnings Call Transcript

| About: Evogene Ltd. (EVGN)

Evogene Ltd. (NYSE:EVGN)

Q3 2016 Earnings Conference Call

November 21, 2016, 09:00 AM ET

Executives

Ofer Haviv - Chief Executive Officer

Eyal Leibovitz - Chief Financial Officer

Ido Dor - Executive Vice President and General Manager of Crop Enhancement Division

Analysts

Brett Wong - Piper Jaffray

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Evogene’s Third Quarter 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 November 21, 2016.

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 during 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 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 conference call. With me today are Ido Dor, Executive Vice President and General Manager of Evogene Crop Enhancement Division; and Eyal Leibovitz, our CFO.

I will begin the call with a brief introductory comment with respect to some of our most recent achievement and development across our various market areas. Ido will then detail the significant market opportunity we see from Evogene in ag-biological and review our current field trial results in the bio-stimulant products program. Finally, Eyal will briefly comment on our financial results for the third quarter. We will then open the call for your questions.

Looking at the third quarter and more recent activities, we are very excited with the continuous positive results across our product program, some of which were previously highlighted on our last quarterly call. To put these results in perspective, it is important to understand our unique research and product development process.

This process relies on our proprietary technology platform this combines interdisciplinary expertise in plant science and innovative competition on technologies to harness the potential of the ag-big data revolution.

Our proprietary technology platform, which was built over a decade and is constantly being enhanced and extended allows us to perform biological tradition in a manner that positions us in the forefront of our industry. This predictive capability is currently leveraged in two R&D hubs focus on improving crop productivity.

The first is crop enhancement, which aims to identify the logical mechanism that increase crop yield, drought tolerance and enhance fertilizer use efficiency. The second is crop protection, which aims to identify biological mechanism that protect crops from insect, disease and weeds.

This biological knowhow is utilized in various product program that address three core market areas, seed, ag-chemical and ag-biological. With seed, we look for genomic elements such as genes that improve a specific trait of interest in a specific crop. With ag-chemical, we look for small molecules.

The third as an active ingredient in a chemical that the farmer uses in the field such as herbicide and with is ag-biological we look for microbes that positively effects crop productivity when applied to the crop.

Due to our unique competition capabilities and deep understanding of biological mechanism that effect plants, we have the ability to identify genetic and other biological element that are key to the successful development of commercial agriculture product. We expect our capabilities will shorten time to market, reduce product development expenses and most importantly, increase the probability for success and product novelty.

The business model we have established is best on collaboration agreement through which we out licensed our product towards leading seed and chemical companies for further development and commercialization.

Such food aggression partners currently include BASF, DuPont, Monsanto, Syngenta and more. We are extremely proud of our past and current collaboration in most cases multiple collaboration with such agriculture related industry leaders.

Our many collaboration take various forms but in essence provide Evogene to refuel the future milestone payments and royalties of other forms of revenue sharing for the successful development and commercialization of the resulting product.

With that, let’s take a closer look at our recent results and achievement reviewed through Evogene’s three core market areas. Seed, ag-chemical and ag-biological.

I will start my review with our activates related to improved seed, a market estimated at a close to $40 billion, we have the broad activity in this area which focus on crop enhancement trait including yield, drought tolerance and fertilization and crop protection trait including insect control and plant disease.

Our most developed collaboration in this area is Monsanto, which mainly focuses on crop enhancement trait for the major field crop. As we discussed in last quarter’s call, the positive results we announced earlier this year demonstrating the potential of Evogene gene to achieve yield enhancement in corn and soybean based on Monsanto field trial results result were extremely encouraging. This positive results has allowed an increasing shift in our activity focus from gene discovery to plan development effort.

This effort are in support of the addition and advancing of our most promising candidate genes further in Monsanto product development process, primarily through competition optimization and construction of new gene combination.

The majority of the program scopes is also reflected in its cost restructure and reimbursement as our previous focus on gene discovery in model plant validation were significantly more resource intensive than the competition work we will now be undertaking in support of the predevelopment activities.

Our work in developing improved seed was expanded in October, when we announced a collaboration with IMA a leading Brazilian developer and marketer of cottonseeds for the discovery and validation of novel genomic element to support its product development of insect resistance cotton varieties.

The multiyear collaboration agreement provides for R&D fees and royalty payment from any future product developed under the collaboration. Another significant activity for Evogene in seed is the discovery and validation of microbial genes for insect control.

As discussed on our last call, under our collaboration with Marrone Bio Innovation, which is supported by the BIRD Foundation, we demonstrated toxin activity of Evogene discovered genes against target insect. Currently, these genes are advancing to in-plant validation into metal.

During the past several months an additional set of candidate toxin, which are not part of the collaboration with Marrone completed testing and we were pleased to announce [Indiscernible] of the candidates displayed, toxic activity in bioassays. Currently, these toxins are advancing to the next stage of optimization and characterization.

To reiterate these genes also display very low genomic similarity to currently used toxin family, potentially representing a new mode of action, which would provide an important solution for the growing resistant of insect to existing product. With our focus on microbial genes, they demonstrate the distance to insect Evogene is targeting a market, which we present trait value of several billion dollars.

Moving to our second market ag-chemical, which in 2015 was a $55 billion market. Herbicide alone which is Evogene’s current activity focus was nearly $25 billion opportunity. To briefly review our current activities in this area, we are focused first on the discovery of novel target specifically [Indiscernible] plant protein that participate in essential biological process so called mode of action in weed.

Second, we seek to discover chemical molecule this can inhibit the functionality of this identified targets resulting in weed death. This chemical molecule would then serve as the basis for the development of innovative commercial herbicide product.

With regards to our discovery of novel target, in July of last year, we announced the discovery and successful validation in plant of the first test of novel target for herbicide. This targets a part of our collaboration with BASF, which was signed in the fourth quarter of 2015.

During 2016, Evogene completed the validation of several additional novel target. In parallel to this effort, we are conducting discovery of chemical molecules to serve as herbicide through a variety opportunity and approaches, utilizing our unique competition of capabilities focusing on target based discovery.

I’m very pleased to inform you that during the past several months, multiple new chemical molecule successfully completed plant testing, displaying have decided activity on all plants. This chemical molecule advanced to the next stage of optimization.

With that, I will now turn the call over to Ido Dor, who will cover our third market area ag-biological.

Ido Dor

Thank you, Ofer. Ag-biological or biological based substantial solution represents a growing approach or guiding attachable liquidity and are being increasingly adopted by farmers to supplement seeds and protected chemical solution.

According to industry report the market for such ag-biological product which include both bio-stimulant and bio-pesticides who was estimated approximately $4 billion in 2016 and is expected to be grow at an annual rate of 12% to 15%.

One important indicator of this expected growth is the matter of major companies that have enter this market over the past several years via acquisition or joint ventures including BASF, Monsanto, Syngenta and DuPont.

This service is mainly driven by the expected introduction of the next generation of ag-biological product that are expected to sort the limitation of many of the current product rating to lowest [Indiscernible] and lack of stability.

We believe that once introduced the improved and stable performance of this product will provide farmers with a real cost effective solution for yield improvement that can be broadly adopted.

Looking at our internal ag-biological activity, as you may recall, Evogene is focused upward on developing bio-stimulant which are microbial-based solution, yield improvement and tolerance by mental stresses. This biologically derived agriculture solution are based on the microbial communities that we cite own or within the plant immediate in environment also known as micro-bio.

We currently focused on developing such solutions for the key crop, corn, soy, and wheat. We are bringing a unique approach to the development of bio-stimulant product, leveraging two significant recent technological revolution that occurred in the past few years.

The first is the dramatic involvement in the science of micro-bio, which is being adopted for understanding gain in human research into agriculture. The second returns to the ongoing data revolution that enable the generation of prior and advance type of genomic data at relatively low cost.

These two significant revolutions in science and technology together with Evogene’s proprietary competition predictive biology platform and its extensive knowledge based over the last decade of how plant work enable us to decode and harness the interaction between plant and their micro-bio. And as a result being an innovative force behind the product discovery optimization and development of the next generation of ag-biological.

We were excited to recently announce positive results for the first year of field validation which yielded positive efficacy and stability results. In these field trials conducted in Israel, more than 10 microbial strength exhibited to trait improvement with improved corn resistance to drought conditions.

These results are part of a broader testing, which includes greenhouse and other assays to devaluate efficacy and stability across different soils, germ [Indiscernible] and conditions. I encourage you to visit our website, where we share a more detailed presentation introducing our bio-stimulant activity and more importantly [Indiscernible] of the results achieved in three of the positive trends we identified find.

The positive results provide us with a set of promising microbial strength to address forward into product development and innovation of course provide experimental validation of their ability of our predictive biology platform to identify relevant microbial strength that impact targets rate.

The strong proposition we have in ag-biological is also reflected in the business model we have adopted for this activity whereby Evogene will be undertaking product development activities that are further [Indiscernible] to all the commercial products, including formulation and up scaling of the big strengths.

We believe that by undertaking these downstream activities, we are leveraging our asset and capabilities for optimization of the products candidate and potentially and enabling the capture of a great share of the final product value.

Looking ahead into 2017, we expect to drive forward the development of the positive strength I just discussed. Into further field-testing, as well as to initiate the development of the formulation in upscale technologies, this is necessary for product development. In addition, we have dozens of additional candidate strength that are now exhibiting direct improvement and gain out screening and which we aim to further validate in the field next year.

More so, later in 2017, we are planning to leverage Evogene’s knowhow and capabilities gained from our planned disease and insects program to initiate activity in the bio-pesticide segment focusing on development of biological based pest consoled solutions.

To conclude, our main objective in ag-biological is to develop product candidate that can be the basis of a strong commercial ag-biological product. This product candidate will be microbial that has demonstrated consistent efficacy and stability in target territories as well as optimized formulation and upscale technologies.

It will be these candidate strength that once develop where we look to out license to relevant cognizance for further development and commercialization with the view to have a commercial launch of an Evogene developed ag-biological product as early as five to six years from today.

Throughout this process, we will consider earlier stage collaborations in order to reduce risk and expedite the potential launch date of commercial product.

With that said, let me now turn the call back over to Eyal for his review of the financials. Eyal.

Eyal Leibovitz

Thank you Idor. Looking at our financial results for the third quarter and the first nine-months of 2016, we continue to maintain a strong financial position has been ended the first quarter of 2016 with 93.1 million in cash and cash equivalents representing a decrease of 3.9 million for the quarter and 7.6 million for the first nine-months of 2016.

The net cash utilization continued to reflect our discipline spending despite continuing to invest across our core growth areas. Looking ahead, we expect our net annual cash usage in 2016 to be slightly below our previously disclosed range of 14 million to 16 million.

Moving to the statement of operation, our reported revenues currently consists primarily of research and development revenues reflecting R&D cost reimbursement under certain of our collaboration agreements. In general, these agreements provide for development milestones payments, royalties and other form of revenue sharing from successfully developed products.

And therefore longer term we anticipate that our future revenues and profitability will largely reflect the receipt of such payments from our existing and future collaborations. Specifically total revenue for the third quarter of 2016 were 1.5 million compared with 3.3 million for the same quarter in 2015.

Total revenues for the first nine-months of 2016 were $5.4 million compared with $8.7 million for the first nine-months of 2015. This decline reflects the net decrease in research and development cost reimbursement in accordance with the terms of our collaboration agreement.

Consistent with the decrease in revenues from R&D payment, our cost of revenues also decrease to 1.4 million in the third quarter of 2016 from 5.2 million from the same period in 2015. Cost of revenues for the first nine-months of 2016 were 4.5 million as compared with 6.2 million for the first nine-months of 2015.

As I mentioned earlier, we continue to invest the cost of our growth area and secondly research and development expenses for the third quarter of 2016 were 3.9 million, compared to 3.1 million for the same period in 2015. For the nine-months ended September 30, 2016, our R&D expenses were 11.7 million, compared to 10.3 million for the same period of 2015.

These increases were primarily related to the expansion of those activates that are self-funded which are mainly focused on the development of competition platform and discovery and validation activities in our key growth engines insect control, ag-chemicals and ag-biological.

Finally, net loss for the third quarter of 2016 was 5.1 million compared with a net loss of 3.4 million in the year ago period. Net loss for the first nine-months of 2016 was 12.9 million compared with a net loss of 11.7 million for the same period in 2015.

The increase in net losses is primarily due to the decrease in revenues and increase in self-funded research expenses discussed about which were partially offset by the decline in our expenses categories.

This completes our prepared remarks for the third quarter. I would now like to open up the call for any question you may have.

Question-and-Answer Session

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.

Unidentified Analyst

Hello everyone. This is [indiscernible] on for Chris. Just a couple of questions from us. Thanks a lot for the details that you guys went in on kind of the ag-biological side in laying out, not only what you have seen this year, but also what your kind of goals are for 2017. I was wondering if you talk through a little bit in a similar manner kind of what your plans are for seed and ag-chemicals in 2017. If you could add a little more there. And then kind of - if you could give any color around what a best-case timeline would for potential commercialization of your promising candidates in those sections as well.

Ofer Haviv

Okay. So this is Ofer Haviv speaking. Regarding the first question about our plans for next year, so moving from one category to the next one, so in the area of seed, we continue to focus on in the area of crop enhancements. When you are talking about yield, drought and this matter is of trait, so our main activity in this area is together Monsanto where we delivered to Monsanto more than 1,000 genes that have been introduced into their pipeline.

Those genes show positive results last year and this year, we are waiting now and start to receive results on our genes in Monsanto field trend. And next year we will continue to focus on the genes that will show positive results towards a phase advancement. And usually we are together Monsanto disclose information about the results of 2016 in January, February at the beginning of the year after. And I believe that we continue to focus on most promising one.

Moving to our another activity area under the market segment of seed. So we’re talking about insect visitant, so we here we have a nice list of genes that shows positive results in biology assay, and some of them now enter into validation in model plant. And we are now adding additional information around those genes in order to prioritize the most promising one to be introduced into target growth.

Talking about our chemistry, so there is two significant activities in this area, one with BASF and the other one is internal. With BASF, we agreed on the target that the collaboration is going to focus now. And now, Evogene is identified for a library that they will be screened in their pipeline, in their validation process to see if they can inhibit the target that the collaboration is focusing on.

So we are expecting to receive results from this work next year, and this will be very important milestone. In addition, we have additional target that we identified which is not far from the collaboration with BASF that we also are now in Evogene screen chemistry against those target and see that we also receive information on this - and coming from this experiment next year. And we have high expectation from these two activities in this field.

And regarding our biological, we just disclosed now what is our planning and this is definitely a very promising area for Evogene. Another area just we are now looking into and it’s something that we mentioned in the past is how Evogene can benefit from the new revolution technology genome editing, which we think [Indiscernible] take Evogene experience and expertise in understanding outline is operated in economic level into a new product type in the seed market.

Until now we were using our technology and convert, which is done the standing of power plant it’s operating genomic level and converted it’s knowhow into a product using GM approach and genetic modified approach meaning using [indiscernible] gene into the plant on genome. Today, there is a new technology called genome editing, which is a completely different, definitely it’s a different way to modify the plant genome without introduce a foreign piece of DNA.

You still need to know what is the change you wanted to do and this is the strength of Evogene and we are in different internal programs, we are learning how we can benefit from this revolutionary technology in order to accelerate Evogene potential to reach to the market in this segment. So this is what we are now focusing and what we expect to see next year.

Unidentified Analyst

Awesome. Thanks Ofer, I appreciate it.

Operator

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

Brett Wong

Hi guys. Thanks for taking my question. First just wanted to dig into the new cotton collaboration. Just wonder if you can kind of talk about that opportunity in any way frame of the potential for Evogene.

Ofer Haviv

So the collaboration here, it’s a cottonseeds company located in Brazil, which they have a nice results in the fields of insect control. They start a little bit with the expression of the gene in a way that it really maximize its potential. And in order to find the right expression and trying to define DNA fragment that can lead us to expression. They felt that Evogene is the right partner to assist them and achieving these targets.

So they are bringing the gene, that we are bringing what is called promoter, which is a regulatory element, DNA regulatory element, which combined we are expecting to see the target. What is really nice is that we are expecting to see the results pretty fast, because it rely on a lot of work that they already conduct on the gene and we are just need now to express it according to the way they believe it’s making the different. I think that it’s a doable task from our perspective.

And regarding the terms, so it’s includes [R&D fee] (Ph) like in other Evogene model, of course they will be revenue sharing from the end product and we know the insect that they are target, is a quite significant issue for cotton growers in Brazil and other place worldwide. So it could be a very nice addition to our product program portfolio.

Brett Wong

Okay. Thanks Ofer and then you have talked about new collaboration agreements being limited during this phase of consolidation in the feed in 10 majors and recently we have seen extensions to timeline because it’s in by regulatory. So just wondering if you have any thoughts around the timeline for really this consolidation phase as well as more really ultimately win more collaboration opportunity may open up again for you and I guess on the same line of thinking, do you continue to see collaborations with smaller players like this cotton agreements in the near-term.

Ofer Haviv

Yes, so I think that’s maybe for the first time we start to see a more positive reaction from the market. Again, maybe it’s too early to see the light in the tunnel, but we start to see again positive response to the discussion we are conducting and I’m much more optimistic these days on the probability to enter into an agreement than I was a year ago with all this consolidation process going through.

So yes maybe still early to feel that maybe we are ahead of [Indiscernible] hard to talk with the relevant partners, but feel that there is a new wind coming from the first tier type of company when Evogene is approaching them. I want to make it very clear, there is no doubt that the results that we already achieved, if we want to license genes in insects control to one of the first tier company or into license and a set of bacteria from bio-stimulant product to one of the first tier company. This is not the issue, what is really important is what will be the terms, and what will be the size of the collaboration and this is something that we don’t want to compromise.

Seriously, if we want to have a license agreement, this s not the issue, but we are now looking for strategic relationship with partners which we are building not just one product, we are building a set of products sharing in from Asia and we are doing something significant for the benefit of both companies. And this is the type of coloration we are looking for and not just to license a gene, two genes, three genes, small molecules or license microbes.

This is something that we can do now; I’m referring when I say that they start to feel more positive wind coming from discussion is more regarding the more significant set of collaboration. So this is regarding the first tier set of companies which we’re all familiar with your name and they all know quite well Evogene and our capability. So this is in this section.

Regarding second tier type of company, yes, we are talking with the second tier type of companies and we might engage in the small set of collaboration with some of them. What is really interesting especially in the area of chemistry, and also ag-biological when we enter into these areas, what we find is that what currently that we develop can be used in a much broader type of collaboration than the one that we saw from the beginning.

So it opens us in new avenue to collaborate with companies which is not necessarily the typical and the first tier type of company that we used to work with. So maybe we will see additional small collaboration next year which is in addition to what we hope and looking for to engage with the first tier types of companies.

Brett Wong

That’s very helpful, Ofer. Thanks. Last one from me, on the last conference call you talked about some potential additional activity for your pipeline beyond current focuses basically in order to generate more value, which makes sense. And so wondering if you can provide any additional thoughts around what those opportunities look like and especially outside of Ag as you mentioned on the last call?

Ofer Haviv

Thank you for this question. It’s a good one. I can’t disclose at this point of time more than what I said in the previous analyst call, but I feel comfortable to repeat on everything I said in the previous call. Yes, we are looking to additional area outside of the Ag field and we are very positive about this opportunity and maybe the only thing I can add is that we are more positive about this opportunity compared to the previous analyst call.

Brett Wong

Fair enough, that’s excellent. Thanks a lot Ofer.

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 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 1-888-254-7270. In Israel, please call 03-925-5937. Internationally, please call 972-3-925-5937. Mr. Haviv, would you like to make your concluding statement?

Ofer Haviv

Yes. Thank you. I’m pleased with the progress we have achieved to-date across each of our business areas. However, I’m more excited about the future opportunities, I see from Evogene looking ahead. I look forward to keeping you updated on our progress and future plans and would like to thank you for your continued interest and support and for giving us the opportunity today to share with you a summary of some of our recent achievements. We look forward to speaking with you again on our fourth quarter call. Thank you.

Operator

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

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