Evogene Ltd. (NYSE:EVGN) Q1 2018 Earnings Conference Call May 29, 2018 9:00 AM ET
Ofer Haviv - President, CEO
Alex Taskar - CFO
Eran Kosover - EVP & General Manager Ag-Chemicals
Geoff Gilbert - Inukshuk Investments, LLC
Ladies and gentlemen, thank you for standing by. Welcome to Evogene’s First Quarter 2018 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. For operator assistance during the conference, please press star, zero. As a reminder, this conference is being recorded May 29, 2018.
Before we begin, I'd like to caution that certain statements made during this earnings conference call by Evogene’s management will constitute forward-looking statements and 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 the 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 those 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'd now like to turn over the call to Ofer Haviv, Evogene’s CEO. Ofer, please go ahead.
Thank you and good day everyone. We appreciate you joining us today for the first quarter 2018 results conference call. With me today as usual is Alex Taskar, our CFO, and joining us for the first time is Eran Kosover, General Manager of the Ag-Chemicals division. Starting from this quarter, we are planning for each conference call to focus on a different division or subsidiary of Evogene to provide more color and details. After my overview of the Ag divisions and subsidiaries, Alex will discuss our financial results for the first quarter of 2018. Following his comments, Eran will give you the highlights and opportunities within the Ag-Chemicals division. We will then open the call for your questions.
As described within our previous call and in our CEO letter to the shareholders, Evogene's structure is built on three Ag-divisions and two subsidiaries, with the Computational Predictive Biology, CPB platform at its core. In my comments today, I will review the progress achieved in each division or subsidiary and summarize with the progress achieved in our CPB platform.
Let's start with our three Ag-divisions. The first one is our Ag-Seeds division, led by Dr. Arnon Heyman, focused on improving seed trait through the use of gene transformation and genome editing. The activities of this division are divided into three segments: increase yield and improve environmental threat tolerance, disease resistance, and insect control.
In our Disease Resistance segment, our focus for nematode resistance in soybean utilizing genome editing has advanced to the stage of introduction of the desired edit in soybean. This edit was firstly examined in tissue culture and according to the results achieved are expected to progress to soybean greenhouse trials in 2019.
In our Insect Control segment, we recently announced together with Marrone Bio-Innovations advancement to Phase I in our collaboration. The collaborative part of this cooperation has just ended, while best on its outcome Evogene is developing insect control seed trait and Marrone is developing bio-insecticides. Revenues will be shared from any product that may result from this collaboration.
In this announcement, we shared the progress of the first toxin genes against Hemipteran insects to Phase I, leading our internal insect control seed trait product program to include toxin genes in Phase I in all major insect orders: Coleoptera, Lepidoptera and Hemiptera. While additional genes continuing progress to Phase I.
Our Phase I activities includes trial crop validation in greenhouse and field trials with several genes going through transformation into corn and soybean with initial results expected at the end of 2018, beginning of 2019. I’m very pleased to announce that we have recently entered testing agreement with world's leading big companies on a portion of our leading insect control genes at the preliminary stage towards potential licensing agreements.
Moving now to our second division, Ag-Biologicals, led by Ido Dor, this division focus on two segments of microbial-based products, use improvement bio-stimulants and pest control bio-pesticide. The Ag-Biologicals market is a rapidly growing segment within the Ag industry with less regulatory restrictions and shorter time for development and introduction of new products.
The Ag-Biologicals division continues to develop its product candidate and protect its pipeline and in parallel to further drive product optimization and development utilizing the CPB platform. In the segment of bio-stimulants, we are now conducting third year corn field trial and for the first time field trials in the U.S as well, which we intend to harvest during the fourth quarter this year.
In our wheat program, we will begin the harvest of our second year field trial in the upcoming weeks and our corn bio-stimulant activity we are progressing with our collaboration with Corteva, the Ag company established after the DowDuPont merger in line with [indiscernible] for the joint development of novel corn bio-stimulant. In the segment of bio-pesticides, based on promising greenhouse results in our bio-fungicides for fusarium in corn and bio-insecticides for western corn rootworm, we are moving forward with development efforts to further assess performance across additional pests and environmental conditions.
I will now move on to our third division, Ag-Chemicals, led by Eran Kosover. This division focus on two product segments, herbicide and insecticide. This division has quickly developed robust product pipeline that already show promising results and have created high interest in our industry. As I mentioned in my introduction, Eran Kosover will give more color and details shortly after Alex's comments. Still, I would like to emphasize our announcement from today regarding our new collaboration with BASF in the segment of insecticide.
I am very proud of this achievement, not just because it is in addition to our existing collaboration with BASF in the segment of herbicides, but because we succeeded in achieving the first milestone in identifying with new sites-of-action for known protein targets which is another demonstration of the quality of our technology and capabilities.
Now I'd like to provide a short update with respect to our subsidiaries. Let's start with Evofuel, which is managed by Assaf Oron, focusing on the commercialization of castor seeds. We continue to see progress as planned mainly in solving the bottleneck of mechanical harvesting. I would like to mention that the global castor oil and derivative market is expected to reach US$2.3 billion by 2024 according to industry research. The oil derivative is used today in various industrial applications such as lubricant, surface coating, cosmetics, pharmaceuticals and more.
Our second subsidiary Biomica is managed by Dr. Elran Haber, focusing on the human microbiome and representing our first activity based on leveraging the use of the CPB platform in the area of human health. I’m very proud of the progress of this recently established subsidiary as can be seen in our recent press release in which we announced that Biomica focus with the own development of the therapeutics for antibiotic resistant bacteria, immuno-oncology and GI related disorders. Biomica is an excellent example of how we can leverage our unique and broadly applicable CPB platform to a variety of life-sciences and greatly accelerating the development of Biomica's product pipeline.
I would like to finish my comments with a short update on the CPB platform latest achievements. In the last quarter we focused on two main targets, finalizing the computational infrastructure for Biomica and developing microbial function criteria for the development of Ag-pesticide product.
To establish Biomica's infrastructure, over the past year significant effort and investments were made to develop proprietary predictive computational tool and [indiscernible] to analyze changes in the gut microbiome related to human health in order to develop novel therapeutics based on these understands. More specifically, the CPB is able to give high-resolution digital representation of which bacteria exists in the gut microbiome community and what function these community have in relation to human health. The digital representation is then analyzed with computational tools developed for this purpose.
An additional effort was focused on the Ag-Biological division, which dramatically increase our microbial data bases integrating insecticidal and herbicidal data as well as machine-learning model in order to find common criteria for microbial activity. The outcoming information regarding those criteria is supporting our discovery in optimization effort as the basis for the development of bio-pesticide based on our microbial proprietary collagen.
I believe we can summarize the competitive advantage of the CPB platform by saying that it allows Evogene to be called a biological [indiscernible] revealing the interconnectivity of multiple data sources, genes, proteins, microbial, clinical [ph] molecules and more allowing us to apply a new complexity of queries on the information leading to product development in new life-science field.
I would now like to turn the call over to Alex for his review of the financial results. Alex?
Thank you, Ofer. Let me begin by reviewing our balance sheet. Evogene continues to maintain a strong financial position with approximately $66 million in cash, cash related accounts and bank deposits as of March 31, 2018, which represents cash usage of approximately $5.8 million during the first quarter of 2018. The cash usage during the first quarter of 2018 includes prepaid expenses, and nonrecurring payments of approximately $1.6 million. In addition, we expect that in the following quarters that ongoing cash usage will decrease.
Assuming the currently expected cost of business, we estimate that our net cash usage for the full year 2018 will be in the range of $14 million to $16 million, not including other potential revenue streams.
Let’s now turn to the statement of operations. As we discussed in prior calls, Evogene's revenues to date have consisted primarily of research and development revenues reflecting R&D cost reimbursement under our various collaboration agreements. The majority of those agreements also provides for development milestone payments and royalties or other forms of revenue sharing from successfully developed products.
More specifically, revenues for the first quarter of 2018 were $0.4 million in comparison to $0.7 million reported for the first quarter of 2017. This approximately $0.3 million decrease and related decrease in cost of revenue mainly reflect a reduction in collaboration activities under our agreement in Monsanto. In addition to yield collaboration with Monsanto from gene discovery and validation which was largely done at Evogene, to pre-development efforts conducted by Monsanto.
Moving on, our research and development expenses continue to be our single largest category of expense. And [indiscernible] Ofer, during the first quarter of this year, we both continue to support our existing tailored product programs and expand new activities such as Biomica. However, despite these, our R&D expenses for the first quarter of 2018 decreased approximately $3.5 million compared to $4 million for the same quarter in 2017. These decrease in large part affect operating efficiencies achieved as a result of our new corporate structure that became effective at the beginning of this year.
Operating loss for the first quarter of 2018 was approximately $4.9 million in comparison to approximately $5.3 million in the first quarter of 2017. The decrease in operating loss was mainly due to decrease in R&D expenses as I described above, which was partially offset by a net increase in other expense capital.
The net financing expenses for the first quarter of 2018 was $0.4 million in comparison to a net financing income of $0.4 million in the comparable quarter 2017. This decrease is mainly due to unrealized revaluation of marketable securities following the increase in the U.S treasury bonds interest rate in the first quarter of 2018. So despite a decline in operating loss following the new corporate structure for the first quarter of 2018 increased to $5.4 million compared to $4.9 million in the first quarter of 2017 due to increase in the net financing expense.
I’d like now to turn the call over to Eran Kosover, who leads the Ag-Chemical division. Eran?
Thank you, Alex. I’m very pleased and honored to participate for the first time in Evogene's quarterly conference. My name Eran Kosover and I’ve been with Evogene for over seven years serving different business related positions. A year-ago, I received the reign to lead Evogene's Ag-Chemical division. The Ag-Chemical division aim to develop novel and sustainable chemistry for agricultural uses, currently herbicides for weed control and insecticides for insect control. These solutions are an integral and critical part of the farmers crop protection tool box. How critical crop protections is vital for securing key crop yield for feeding [ph] the world. Crop protection is responsible for up to 75% of key crop yield such as rice, corn and soybean. In plain words, this means that without herbicides and insecticides the world's growing population would lose significant amount of its food security.
According to market research, the crop protection market is over $50 billion to date and is still expected to grow and reach $70 billion in 2022. Currently these market faces two main challenges. The first challenge is resistance. Weeds, insects and fungi are catching our own developing resistance to these very popular and [indiscernible] over used chemicals. The second challenge is to bring to market a product with an improved safety profile in line with increasingly higher regulatory standards for new product. The challenge has impacted a number of new product launches. These are the challenges how are we planning to address.
Our goal is to develop novel and safe crop protection product by using Evogene's unique CPB platform that will develop over the last decade with an investment of tens of millions of dollars. Evogene's CPB platform provides unique connection and analysis capabilities in this area of chemical discovery, specifically the CPB platform has the ability to identify the connection of proteins to vital biological functionality and to identify the connection of inhibiting chemistries to these target proteins. We believe this unique capability will allow us to bring to market novel crop protection Ag-Chemical, for example herbicides with their active on the weed through a new mechanism with an improved safety profile thereby overcoming prevalent resistance issues.
I will now briefly describe our herbicides and insecticides product pipeline. Let's start with the Herbicide segment. We aim to develop non-selective and selective herbicide with a novel mode of action, which is crucial for addressing rising resistance. As you may have heard from Ofer in the past, the chemicals in the market are based on those of action launch for the first time developed 30 years ago. Our pipeline today includes over a dozen of different protein targets, which each predicted to represent a new mode of action. These targets consist of the targets as part of the BASF collaboration and additional target which are part of our internal pipeline. Our ongoing collaboration with BASF is progressing according to plan, though we cannot disclose additional details at this time.
Our internal novel herbicide pipeline includes 10 validated novel chemical compounds computationally predicted to inhibit novel Evogene discovered protein target. We achieved positive results [indiscernible] with several families of chemical compound displaying improved efficacy.
During 2018, these chemical compounds will continue to undergo additional optimization, and in parallel we will continue to establish biological proof [ph] that these chemical compounds did inhibit, they identified novel herbicide target representing the novel mode of action. These proteins are [indiscernible] and relevant chemistries are aimed to be developed into blockbuster herbicide product with a market size of over $1 billion.
In addition to novel herbicide, we’re also able to optimize non-commercial herbicide. These are herbicides known to the industry that require improvements of [indiscernible] such as safety profile, spectrum of activity, [indiscernible] and so on in order to improve commercial viability of the product. This is another area where our unique CPB platform comes into place, taking this approach to significantly shorter development time. Currently we are at the stage of a computational optimization for certain commercial active ingredient and expect to start synthesizing chemistries and screening them later this year.
Second segment of activity is insecticide. In this segment, we aim to develop novel insecticide, focusing a new type of action on known vital nerve and muscle protein in [indiscernible], which currently account for approximately 85% of the insecticide market. We have computationally identified several new site infection and these service the basis for our recently announced collaboration with BASF and an internal insecticide pipeline. In our newly initiated collaboration with BASF, as mentioned by Ofer, we’ve already reached the first milestone with a nomination of new type protection [ph] which are now entering the discovery phase of inhibiting chemical. The next steps will include a discovery of these chemicals by Evogene and that will then enter BASF's insecticide discovery platform. More in-depth information can be found in our recently issued joint press release with BASF.
I view this second collaboration with BASF as a vote of confidence in our innovative approach to chemical discovery. Such an insecticide product is targeted to be a blockbuster product with a potential market size of over $750 million. Looking forward, we expect that within two years we will be able to create significant assets in each of the aforementioned segments, using industry terminology we expect our efforts to result in a lead in our Herbicide segment and initially in our Insecticide segment. The implication of these would be a significant improvement in the probability of commercialization of such product candidate, resulting in millions of dollars in the short-term from licensing fees and R&D funding and much more upon commercialization. These, of course, will be in addition to milestone payments we will receive along the way.
Our activities are conducted with dedicated experienced teams with a group of scientific advisors who are world renowned experts with decades of experience from leading companies such as Bayer, Dupont, Syngenta and others. After giving you the overall understanding, I would like to thank you for your time and I hope I succeeded in presenting this exciting opportunity.
With that said, we'd like to open up the call for any questions you may have. Operator?
Thank you. [Operator Instructions] The first question is from [indiscernible] Please go ahead.
Q - Unidentified Analyst
Yes, thank you. Considering your current cash burn of $5 million a quarter, which is approximately $20 million a year or as you say $50 million a year, have you thought about raising some cash perhaps in equity issuing, in order not to wait for the last moment about three years when the cash runs out? Thank you.
[Technical difficulty] will be between $16 million to -- between $14 million to $16 million. And the thing that the first quarter the burn rate is quite significant because prepaid expenses and one-time payments that are not expected to took place once again in the next quarter. Still I would like to refer to your -- so with the bottom line, I think that we will end this year between $14 million to $16 million and not in the range of the $20 million as you pointed out. Still I would like to emphasize your question, I don’t think that we have in our plan for the next year or the next two years to raise money for Evogene. What could -- what I could envision is a situation that we are raising money for one of Evogene's subsidiary or maybe one of Evogene's division. This is something that might happen and of course it's only based on development valuation, which we’re expecting that reflect the progress and the amazing achievement that we see in each one of them. The reason to do something like this is -- will be mainly two reasons. The first one is to accelerate and expose the activity for this specific division and, yes, also to reduce the pressure on Evogene, the big company burn rate. But for Evogene and definitely not in the current price, we don’t see a situation to raise money. I hope this address your question.
Thank you. And another question, do you see any material income in the foreseeable future from some of your partners, something more than [indiscernible] $10,000 and more than $100,000 that’s more material?
So, again, I need to be very careful with what I can disclose, but the answer is in certain of the discussions we are managing today, we are talking about the type of collaboration that you might remember from the early years of Evogene -- and again we are talking about significant numbers in such discussions. The reason that I feel comfortable to raise it in this stage is because in general the Ag industry is moving from defense situation to more a offense situation in DowDuPont merger is already took place and Corteva is the new company coming from this merger, which is focusing on the Ag [indiscernible] and this company is looking for renovation. BASF is under the assumption that while we complicated position of Monsanto is buying its buyer the majority of [indiscernible] activity and they will look also for innovation [indiscernible] Monsanto will complete their -- the acquisition process. I think that they will also look for innovation, so I think that in the last few years the industry -- the Ag industry in general was in a significant defense mode and I think that now everybody will slowly but surely will move to the offense mode and I think that a company like Evogene can benefit from it like we saw in the past.
Okay. Thank you very much.
[Operator Instructions] The next question is from Geoff Gilbert of Inukshuk Investments. Please go ahead.
Good afternoon, gentlemen and congratulations on the newly announced collaboration with BASF.
I’m wondering if you could -- two things, one, reiterate a bit as you have described this in fairly good detail, but side by side describe the previous collaboration you have with BASF in comparison to the newly announced. And also whether or not just a follow-up to clarify whether or not the milestone payments you mentioned in the newly announced agreements will be reflected in the second quarter results?
Eran, would you like to take the lead on this question?
Yes, Ofer. So, first of all, the initial collaboration that we were ongoing with BASF its focusing on a number of herbicidal target. This collaboration is similar to some extend in the nature of the type of activity that will be conducted by Evogene and by BASF. I think in this case, we also made some initial significant progress before we entered into this collaboration, which puts us in a initial strong position for entering into this collaboration. With respect to revenues, we did not disclose any details, but we did achieve the milestone and there should be some reflection off the numbers.
I would like to add is that what we see is that and we’ve been exposed to the same trend in our past activity, but what we see now in the Ag-Chemical activity is that [indiscernible] collaboration agreement or discussion that we are conducting these days, we see an improve in terms and conditions that we can ask for mainly for two reasons. The first one is today we’re talking with the partner, we’re in a much more advanced stage in the development program. In the first collaboration agreement we mainly had any -- just the technological infrastructure, but today we’re -- when we’re talking with the partner, we already have this more molecules with indication on each activity in a greenhouse [indiscernible] and with a much, much more information on the target. So I think that the packages we’re offering to our partner is more advanced which reduce the risk and can allow us to ask for better terms. And I believe that if we will engage in around the molecules that they’re more in advanced stage and in our pipeline as you might see in the -- some of the slides that we published in our Web site, I think that it will engage around those targets and around those molecules I think that the terms would be much more meaningful for a company in the size of Evogene. So I’m really looking forward to seeing how we’re going to develop in this direction in the next collaboration hopefully to be announced.
Excellent. Thanks for the clarification. One more clarification on that point. Was there any point of or part of the first agreement that was rewritten or renegotiated or is it just an addition to the first collaboration?
So its two separate agreement. The first one is in -- the term and the content is suitable to the stage that where Evogene was when we engage into this agreement. The second agreement is reflecting the pace where Evogene is today, which is much, much more advanced and the term should be different.
There are no further questions at this time. Before I ask Mr. Ofer Haviv to go ahead with his closing statement, 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 03-925-5928. Internationally please call 972-3-925-5928. Mr. Haviv, would you like to make your concluding statement?
Thank you. I'd like to thank everyone that participate in the call today. Thank all and good day everyone.
Thank you. This concludes Evogene’s first quarter 2018 results conference call. Thank you for your participation. You may go ahead and disconnect.
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