Evogene Ltd. (NYSE:EVGN) Q1 2016 Earnings Conference Call May 19, 2016 9:00 AM ET
Ofer Haviv – Chief Executive Officer
Eyal Leibovitz – Chief Financial Officer
Assaf Oron – Executive Vice President-Corporate Development
Chris Parkinson – Credit Suisse
Tyler Etten – Piper Jaffray
Ladies and gentlemen, thank you for standing by. Welcome to Evogene’s First Quarter 2016 Results Conference Call. All participants are 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 May 19, 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 the 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 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 like to hand the call over to Ofer Haviv, Evogene’s CEO. Ofer, Please go ahead.
Good day everyone. Thank you for joining us on this call. With me today are Eyal Leibovitz, our CFO; and Assaf Oron, our Executive Vice President of Corporate Development, who will be joining us for the Q&A session. I will begin the call with a snapshot of our latest development across our two main operation hubs: crop enhancement and crop protection, and provide an initial preview of how we see 2016 evolving. Eyal will follow and elaborate on our financial results for the quarter. We will then open the call for any questions that you may have.
On our last call, I summarized our key business and technology achievement for 2015. We ended the year with a strong sense of accomplishment with respect to the robust R&D infrastructure that we have built and the applicability for developing next generation agriculture products. This infrastructure formed the engine supporting the innovation activities conduct within each of our two operating hubs allowing us to advance unmet needs in three key market segments in agriculture: improved seed traits, innovative ag-chemical and novel ag-biologicals.
Let’s start with our crop enhancement hub where our key activities focused on improving yield, drought, and nitrogen use efficiency. In this earlier of our business, we apply our predictive technology to two market segments: improved seed traits and novel ag-biological products. As part of our improved seed trait activity, the beginning of 2016 was already marked with a significant achievement in our multi-year collaboration with Monsanto. We discussed this milestone briefly on our last call, but as a reminder, early in the first quarter, we announced the first set of promising results received other field trials carried out as part of the Trait-First methodology.
This methodology implements an accumulated learning gained from the joint efforts conducted in the frame of the collaboration. This results which were reported for a subset of the 1,000 genes that have been entered to Monsanto product development pipeline, we believe that represents a key step forward toward achieving the targeted plant trait for yield improvement and confirm Evogene’s computational predictions for this set of novel genes. Looking ahead at our remaining activities for 2016, we will focus efforts on further advancing positive genes in the development process and evaluating additional ones. Further down the lines, efforts will focus on gene combination that will provide the most promising trait improvements.
Moving on to our next market segment in our crop enhancement hub ag-biologicals, which is our most recent area of activity initiated in mid-2015. In this market segment, we are focusing our discovery efforts on biostimulants. As a reminder, biostimulants are microorganisms that are applied to plants or soils to improve yield or resistance to environmental stresses such as drought. Evogene has a significant advantage in this area, leveraging its assets and know-how gained over the years in the area of yield improvement.
Our initial efforts in biostimulants focused on corn with future efforts to being targeted at soy and wheat as we are looking to advance the growing needs in the market for biological best products with stable and repeatable performance. Looking at the quarter’s activities, I am very excited to note that we have very recently completed several key achievements in building the necessary infrastructure that will form the basis for our future product development pipeline for biostimulants. We completed the development of the computational microbial mining platform, which perform prioritization of microbial strains as well as steaming of strains as part of the optimization process.
We established a collection of over 10,000 microbial strains. And finally, our screening platforms for corn are now operational and work is underway to build additional screening platforms to support our plant work in soy and wheat. Based on the infrastructure we have built, we expect to complete by the end of 2016, the screening and the prioritization of over 500 candidate microbial strains based on their efficacy and stability to improve yield and abiotic stress tolerance for corn. Selected strains that have demonstrated positive results will then be advanced to field testing.
Moving to our crop protection hub, where our key activities focus on plant resistance to insects, disease and weeds. In this area of the business, we apply our predicted technology to two market segments, improved seed traits, innovative ag-chemical initially focusing on herbicide. In the market segment of improved seed traits, we’re currently focusing our activities to advance unmet needs for insect control and disease resistance.
First, looking at our insect control activities, where we’re aiming to develop seed traits displaying resistance to some of agriculture’s most devastating insects. On our last call, I know that we expected initial validation results, sometimes in 2016. And I’m very excited with our announcement this week that several of the genes identified as part of our multi-year collaboration with Marrone have shown toxic activity against target insects. These are initial but promising results and we’re now looking to further validate those indication in-planta. This validation test will take place in our R&D site in St. Louis, Missouri, in parallel to validation test to be conducted by Marrone.
In addition, we continue our internal activity of validating additional microbial genes identified as part of the first computational discovery round, we conducted last year. Here, we too expect to see initial validation result this year.
Moving to our various seed traits program for plant disease where we’re aiming to develop seed traits this can address key disease impacting to-date farmers yield performance. We’re progressing in accordance with our work plan across our programs. In our nematode program with Syngenta, we have initiated to transformation to soy having completed the necessary infrastructure and personal hire necessary for supporting the program. In relation to our soybean collaboration with Monsanto, as well as assume Soybean Rust collaboration with DuPont pioneer I am glad to say that these two are progressing with genes in different stages of validation in both Evogene and the partners pipelines.
Next, looking at our herbicide program, which is a reminder, is our initial activity in ag-chemicals. We’re starting 2016 with two very significant achievements. First, the discovery and successful in-planta validation of the first set of novel plant target for herbicides, which was announced in July of last year and based on this significant milestone the timing of multi-year collaboration agreement with BSF. I truly believe that the combined knowledge and expertise of our two companies in this $25 billion market segment could be game changer.
It bring together BSF’s extensive track record in bringing innovative herbicide solution to market and Evogene proprietary target based discovery approach combining biology and chemistry to form a very unique coalition in the development of breakthrough herbicide solutions.
Before I move to Evofuel, I wanted to elaborate on our expectations from the integration of the new disruptive genome editing technology with our core capabilities and ethics, and the potential effect of this new tool on the expansion of Evogene’s business offering for improved seed traits. As a reminder, genome editing is gaining momentum in multiple areas of research and development in different field of plant science.
This technological advancement, sometimes referred to as molecular scissors is a pack of genetic procedure in which DNA is deleted or replaced in the genome of an organizing in a very precise manner. By providing new venues for genomic manipulation within a crop genome editing brings significant opportunities for biotechnology crop trait improvement not available using previous technologies. This molecular technology may enable us to leverage our core capabilities in improved seed trait and may significantly broaden the applicability of our discovery and development infrastructure with respect to additional crops traits and geographies.
Combined with potentially lighter regulatory hurdle product based on genome editing might benefit from shorter time to market, lower development cost and higher probability for success. Looking ahead, I expect Evogene to evolve as a clean player in the application of this new technology further expanding our company’s value proposition.
Lastly, looking at Evofuel with the sowing season behind us, we’re progressing well with implementing multiple field trait sites in Brazil, Argentina and Mexico. This quarter, we entered into our first commercial agreement for initial sale of our Castor Fields, with Castor Fields, a Mexican corporation focused on growing castor in Mexico. Revenues with respect to these initial commercial sales are not significant. As I indicated on our last call, looking ahead, we expect to continue working with our existing partners and to pursue potential new collaborations.
With that said, let me turn the call over to Eyal Leibovitz who will review our financial results for the quarter.
Thank you, Ofer; and hi, everyone. Looking at our financial results for the first quarter; let me start with our most significant item in our financial statement our cash position. We continue to maintain a strong financial position ending the first quarter of 2016 with approximately $98.8 million in cash and equivalent, representing a decrease of $1.9 million for the quarter. We continue our disciplined spend management despite growing in investments across our growth areas an increase in self-funded activities. This allows us to reconfirm our net cash usage estimate for the full year to be in the range of $14 million to $16 million. This is assuming we maintain regular course of business and no new revenue sources such as new collaboration are obtained.
Moving to the statement of operation, currently our reported revenues are largely research revenue reflecting R&D cost reimbursement and the certain of our collaboration agreement. Looking longer term, our future revenues and profitability are expected to be largely related to milestone payments, royalty and other revenue sharing arrangement that arise from existing and future collaborations.
Specifically, revenue for the quarter was $2.0 million, compared with $2.7 million for the same quarter in 2015. This reflects the net increase in research and development cost reimbursement in accordance with the terms of our collaboration agreement. Since our U.S. IPO in late 2013, our strong balance sheet has allowed us to consider self financing or jointly financing with our partner’s certain activities under our collaboration that we see as financially lucrative and where evidence, knowledge and assets can be a game changer in product delivery.
This is evident in the new market segment we have entered into since our IPO, such as ag chemicals and ag biologicals. Although this area has resulted in less short term R&D revenues, than would otherwise be the case, our goal continues to be to maximize our long-term value, 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. The first line item is cost of revenues representing those R&D activities conducted in support of our on going collaboration and the second is R&D expenses with refers to expenses Evogene incurred as part of our self-funded research activities and infrastructure enhancement.
Total R&D type expenses continue to be by far our largest category of expense. Combining these two line items, the total R&D type expenses were $5.2 million for the quarter, compared with $5.4 million for the same quarter in 2015. The net increase is mainly due to changes in the nature and scope of activity in some of our projects offset by an increased investment in our growth area.
With that said, I would like to thank you for your time and open up the call for any questions you may have.
Thank you. Ladies and gentlemen at this time we will begin the question-and-answer session. [Operator Instructions] Our first question is from Chris Parkinson of Credit Suisse. Please go ahead.
Thank you very much. If you can discuss it can you just offer a little more detail on the progression with BASF to discover a new novel herbicide. Or just in general can you just kind of walk us through the cadence of the progress that you’ve made versus your initial actuations since you signed with them. Thank you.
Hi, Chirs. This is Ofer. To Monsanto, we can’t disclose much about the ongoing collaboration and I hope that you can understand and appreciate this. What I can refer to is that the first month which was very important was to identify the relevant target that the collaboration is going to focused on. And then the next milestone is that Evogene is going use its technology in order to identify relevant chemical library to screen on different weeds we aiming to kill them while they are doing a good specific target that we identify.
This activity is ongoing and we are expecting to deliver goods to assess according to the Evogene. I think that’s what I can disclose is that both parties are very excited and engage with this collaboration. And I’m sorry that I can’t disclose more than this. But we feel good about this.
That’s probably all I could understand anyway, so we’re good. Also can we – as we head into this summer planting season specifically in the Northern hemisphere, can you just take us on a quick walk around the world but mainly in the U.S. to refresh us on how many field trials you currently have going on and maybe just mention the two or three you are most excited about? And how this compares to how you saw yourself three years during the IPO process? Thank you.
This is Ofer once again. So I think that the majority of the gene since that Evogene genes are now undergo a validation is through our collaboration with Monsanto. We list that more than 1,000 genes of Evogene are in Monsanto nominate in Monsanto pipeline. And they are in Phase I undergo a target plant validation in corn – many corn and soybean. And I think we also mentioned in the press release that this collaboration is significant activity also for Monsanto.
So without getting into the numbers, I think that you can imagine that we are talking about a nice portion from this 1,000 that undergo every year validation in Monsanto pipeline. And what I was very happy – what we were happy to disclose and I mentioned in my part or discussion that in the beginning of the year we – its was the first time that we announced and of course after we received the approval of Monsanto, that there are good results on Evogene genes for specific to its attributes along the new approach to develop a product persuade. And this is a very important and positive indication on what the two companies are doing together.
Perfect, I’ll pass it along. Thank you.
The next question from Tyler Etten of Piper Jaffray. Please go ahead.
Hi, guys thanks for taking my questions. I was wondering if you could dig into the gene editing a little bit more, the growing trend towards research and development in gene editing disruptive towards your previous operations and the researching trades. And what sort of talks are you discussing or what stages of talks are you discussing with the potential partner in gene editing?
So from our perspective with the genome editing, we didn’t ask for something – this is the type of new technology coming to the market that can take Evogene completely to a new level of activity and value because what we are talking to you is one new technology that have scientist to made modification into the plant – to the genome could be, plant it could be human. In our case of course we are talking about plant and what it really interesting about the technology that you can conduct a specific modification in a specific gene and not like when we are talking about genetic modified crop where we are using a bacteria to insert a full gene, a full new genes into the plant DNA in a random plate.
So what – when people are talking about genome editing so the big – the big issue here is that the technology that allowed you to do the modification which this is great why because now there is very important question where to edit and what to edit, because you need to find what is the gene that you want to improve and what is the specific improvement you want to do.
And then you can use this technology in order to do this modification and in order to improve its rate, and this is exactly the Evogene always was focusing on, exactly like in ongoing ability today we are running with Monsanto, there is a technology that is called – you are using the bacteria where you transfer the genes into the DNA. So this is the enabler technology the Agrobacterium but you need to find what is the gene that you want to insert into the plant genome and Evogene was bringing to this collaboration, the technology that identify the specific gene, the specific sequence you were to insert into the plant gene.
Now exactly along this line there is a technology which is genome editing that helps scientists to do the manipulation and we are the company that have the know-how and understanding what is the manipulation you want to do. Now why we are so excited about it from mainly two reasons. The first one, this technology allowed you to do thing that it was complicated or so sometimes even impossible to do using the new – the old type of genetic modification using Agrobacterium. And in addition it seems that it might be more friends – more acceptable by the regulatory agency that mainly it won’t even configure in certain cases, genetic modified crop. This is will be the case so then it really open a new horizon for a biotechnology in – for agriculture and Evogene definitely is going to benefit from it.
We are now talking with some company in our field on how we can mainly work together in this area. The discussion of course are very in initial stage because this is now what we are just now discussing just really happening these days, you can see there was how many conference are taking place focusing on genome editing, almost every few days there was a new article about genome editing. So its really very interesting area, most of the discussion and article are focusing on the technology and less on what to edit and I think that Evogene can bring this piece to the puzzle of what to edit and they can leverage existing assets and know-how.
Maybe Tyler, one additional comment, hey, this is Assaf. You said whether its disruptive so I think industry leaders would also agree that not like maybe smartphones that are very disruptive to the center they were totally replacing previous phones here I think in industry leaders agree that its not as it going to replace GM but its going to complement GM with an additional technology that can do things differently. So its not as if a lot of the existing projects in the industry as well as those that we are collaborating on GM are not relevant they are still very relevant and are still fully ongoing but the genome editing allows us now to complemented with capability that were available previously.
Got it, that’s excellent color in explaining the developments in that area. And then shifting to Evofuel, could you just comment on how the rallying oil prices has changed your thinking about Evofuel and just kind of where if the timeline has changed in that segment at all, any comments would be helpful? Thanks.
Sure, this is Assaf again. First with the castor oil that we’ve been focusing on one of the big advantage of this crop that its not only relevant for a biofuels but it also has an existing market of industrial users, polymers, lubricants, pharmaceuticals that are using this castor oil because of its very unique properties. Now and that is a market segment that is still growing and there is a lot of interest in previously actually even before the decrease in the oil prices we said in the first years of commercialization until 2018 at least we believe that castor bean that we will be growing will focus on those existing markets for polymers and lubricants which are not affected by the oil prices.
Hence at least for the first year with respect to the scope and the ability to commercialize the decrease in oil prices is not that relevant. By then we'll see what is happening to the – will happen to the oil prices, still although they are decreasing, biodiesel and biofuel uses still existing especially in South America but also in the U.S. So I hope that answer your question, Tyler.
Yes, I think that clears it up. I’ll pass it on. Thanks guys.
[Operator Instructions] The next question is from [indiscernible]. Please go ahead.
Thanks for taking my call, a few questions. First, can you explain a little bit more on the initial sales to your Mexican client, understanding they're not material in revenue? Is that just a test plot? Is that a longer-term relationship?
Thanks for the question. This is Assaf. Jeff, I – first, yes, there's a lot of information which of course I can't disclose regarding the agreement, but I can saw is first its fully a commercial agreement, meaning the phase that we are selling to the Mexican group are used for growth, production of oil, and then commercialization. It's a first agreement for us. The Mexican group has taken a very big project of growth of caster and like us they see it as a strategic crop initially for the polymer and lubricate industries, but even perhaps later on beyond that. They have a fully integrated project there. We have a very good and close relationship with them.
They saw the potential of our varieties. This initial agreement is in the limited scope. We hope that over time we'll be able to – in other territories also in Brazil and Argentina over time be able to show additional commercialization with that. But again, this quantity that we've sold it's not an evaluation plot, it’s for commercial uses. And we hope to see more of that in the future.
Congratulations, that's a good step forward. I know it's early stage, but maybe you could comments, I know you've commented on this in the pasts with the merger of Syngenta, but early news of Bayer and Monsanto just generally a trend of M&A in that space and how that might affect some of your other collaborations?
Most of the companies are already now – are in the headlines like Syngenta, Dow and DuPont, Bayer, Monsanto, they’re all collaborate of Evogene and we are working with majority of them, and we have a very good relationship with those companies. I think that it is hard for us to comment on such a question. We don't see currently any effect on our ongoing activity and still I think it's in early stage to see how those things are going to involve, but it’s definitely very interesting time for the agriculture industry.
Okay, fair enough, maybe just a follow-up on that one. Previously you said Syngenta might actually open up markets. You do still have collaboration with Bayer and Monsanto and you highlighted Monsanto. I’m assuming the contracts don't necessarily have wording that would be substantial if those two collaborators emerge, correct?
We're not sure that we understand your question.
I guess that the previous agenda opened markets, this appears like it might consolidate clients today's announcement and potentially limits the scope of your collaboration.
The collaboration that we’re running with Monsanto is focusing on corn and soybean. The collaboration that we have with Bayer is on wheat. Again without getting into the details, I think it could be interesting if you will check – with the size of each company activity in that group, and I think that if this merger will take place, the activity of this – of Evogene can benefit – of this company with Evogene is not – should be limited because it's on different crop and not over that.
That helps, just a clarification on the wheat versus the corn. One last question, following a previous caller's question on the genome editing, my understanding is limited but with several different technologies and patentable technologies of doing the genome editing, I would assume with your understanding of plants that you might even have the capability to – in research and developments in your own technology for genome editing. But it sounds like from your answer to that caller's question that you were more inclined to collaborate with somebody who is developing that technology to highlight the box that you're in and where – and what to edit instead of focusing your R&D on developing a new technology. Did I understand that correctly?
You described it very well.
Okay. Sounds good, thanks again.
There are no further questions at this time. Before I ask Mr. Ofer Haviv to go ahead with his concluding 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 1-877-456-0009. In Israel, please call 03-925-5904. Internationally, please call 972-3-925-5904. Mr. Haviv, would you like to make your concluding statement?
Thank you. To conclude we’re starting 2016 confident with a positive indication we’re seeing across our operating hub. And I look forward to updating you on development next quarter. Thank you for taking the time for joining us today.
Thank you. This concludes Evogene’s first quarter 2016 results conference call. Thank you for your participation. You may go ahead and disconnect.
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