Evogene Ltd. (EVGN) CEO Ofer Haviv on Q1 2019 Results - Earnings Call Transcript

May 28, 2019 4:28 PM ETEvogene Ltd. (EVGN)1 Comment
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Evogene Ltd. (NASDAQ:EVGN) Q1 2019 Earnings Conference Call May 28, 2019 9:00 AM ET

Company Participants

Ofer Haviv - CEO

Arnon Heyman - CEO, Canonic

Dorit Kreiner - CFO

Conference Call Participants

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Evogene's First Quarter 2019 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 May 28, 2019.

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 these 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 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 first quarter of 2019 conference call. Joining me today will be Ms. Dorit Kreiner, our CFO; and Dr. Arnon Heyman, CEO of Canonic, our subsidiary in the area of medical cannabis, which we established recently. My comments today will focus on how our strategy lends itself to value creation for Evogene shareholders. I would also review some key achievements during the past quarter.

Following my comments, Arnon will give an overview of our medical cannabis subsidiary, Canonic. His remarks today will be based on the Canonic company presentation. A link to this presentation has been provided in the quarterly press release and can be also found on Evogene's website under the investor relations section. After Arnon's comments, Dorit will discuss our financial results for the first quarter of 2019. We will then open the call for your questions. So let's begin.

Evogene's strategy is grounded on two important pillars; the first one, our unique technology, the CPB platform, provides significant value and competitive advantage for product development in various life science based markets. The second one, is that in order to maximize the commercial value of the CPB platform, we leverage it to relevant market segments with development roadblocks that can be addressed by our CPB platform. For new investors that have recently joined Evogene, I would like to give some information on the platform.

Evogene's CPB platform has been designed for in silico, computational, prediction and prioritization of genes, proteins, microbes and small molecules based on multiple attributes that will be key to successful development and commercialization of novel life science based products. Successfully addressing these multiple product attributes at the beginning of the discovery process, rather than one at a time during the development phase is expected to reduce the time and cost of product development, but much more importantly, increase the probability of success.

The two pillars I described earlier led us to establish our areas of activity supported by the following organizational structure; at the heart is Evogene as technology hub which holds the rights for the CPB platform, and is responsible for both, maintaining and expanding it. And then, a group of divisions and subsidiaries, each focused in different life science based markets that have an exclusive license for the use of the CPB platform for their fields of activity, providing their main competitive advantage for their product development pipeline. Currently, we implement the CPB platform in three general life science based markets; agriculture, human health, and life science based industrial applications.

In the field of agriculture, we have three divisions and subsidiaries; the first one, AgPlenus Ltd., formerly our ag-chemicals division, focusing on the development of novel herbicides and insecticide. The second, Lavie-bio Ltd., formerly our ag-biologicals division, focused on bio-stimulants and bio-pesticides. And the third one, our Ag-Seeds division, focusing on insect control seed traits, and yield and abiotic stress and disease resistance seed traits utilizing both, GMO and non-GMO approaches.

In the human health field, we have two subsidiaries; the first subsidiary, Biomica Ltd., with the mission of developing therapeutics based on microbes and small molecules in the areas of immuno-oncology, multi-drug resistant organisms, and GI-related disorders. The second subsidiary, Canonic Ltd., focusing on developing medical-grade cannabis products through a plant genomic approach. In the broad field of life science based industrial markets, our initial activity is through our subsidiary Casterra, which was formerly named Evofuel. Together with the announcement of our financial results today, we also announced that Evofuel was rebranded to better reflect the strategical change that the company underwent, focusing on castor oil producers for industrial use instead of on [ph] castor growers for the alternative fuel industry.

We believe Evogene's value will stem from the activities and the derived value of it's divisions and subsidiaries. Meaning, that when our divisions or subsidiaries achieve substantial milestones in their product development pipeline or announce a strategic collaboration agreement this should be reflected in their valuation, and of course in Evogene's valuation as well as a major shareholder. Moreover, since one of the tasks of our subsidiaries is to secure external financial resources in addition to the revenue they will generate through collaborations, third-party investments could provide color on our subsidiaries valuation as well. A key motivation in the establishment of our subsidiaries was to enable a more management focused and efficient path to product development.

An important parameter in the success of our subsidiaries is their leadership. Most of our CEO's have been with Evogene for several years, previously filling the position of general manager of our internal divisions that later on were the basis of our subsidiary. These are professionals with years of business experience in Evogene and outside of Evogene. Under the company's leadership, each company is paving it's independent path as can be seen in each company's presentation, available on our website under the investor relations section.

I would now like to go over some selected achievements during the first quarter of 2019. The first one; establishment of Lavie Bio, our subsidiary focused on ag-biologicals, aiming to improve food quality, health and sustainability. The second; establishment of Canonic, our subsidiary focused on developing next-generation medical cannabis products, on which Arnon will elaborate in a moment. The third, and as I mentioned, Evofuel was branded as Casterra to better reflect it's change in business focus from the alternative fuel industry to castor oil for industrial uses.

In terms of pipeline advancement, I would like to mention the following main achievements; Biomica announced the initiation of pre-clinical studies in it's immuno-oncology program aiming to augment current cancer therapies by adjusting patients' gut microbiome to improve response. In AgPlenus, a leading molecule family in it's herbicide pipeline demonstrated in-planta proof of new Mode-of-Action, and in addition, demonstrated activity on a panel of important weeds in greenhouse assays. In addition, still in AgPlenus, in it's insecticide pipeline we are happy to announce the computational identification of a new target representing a new mode-of-action in insect pests. Efforts are now focused on the computational prediction of molecule families that should inhibit this target.

I would now like to turn over the call to Arnon, to describe Canonic's activities. Arnon?

Arnon Heyman

Thank you, Ofer. I would like to begin by introducing myself. My name is Arnon Heyman and I serve as Canonic CEO, Evogene subsidiary focusing on medical cannabis products. I have been with Evogene for the last five years, previously serving as Vice President and General Manager of the Ag Seeds division. My background is in Biotechnology and I hold a PhD from the Hebrew University in Jerusalem.

Like Ofer mentioned at the beginning of his remarks, I would like to give an overview of our activity at Canonic. To do so, I would like to refer to Canonic's company presentation. Let's begin by turning to Slide 5, to our company mission statement; "To develop and bring to market medical grade cannabis through a revolutionary genomic approach". This genomic approach is powered by our exclusive access to Evogene's CPB platform and substantial genomic assets to Canonic. We believe that these assets and capabilities that we bring to the table uniquely position us to bring substantial added value to this market, as I will describe momentarily.

Moving on to Slide 6; the cannabis market. As you are probably aware, the cannabis market is growing at a fast pace. On the left side of the slide you can see the U.S. cannabis market forecast reaching a projected $25 billion market by 2025. On the right, you can see the vast medical application attributed to cannabis active compounds. And only some of these applications are supported by strong clinical data. The conclusion is clear, cannabis can bring significant value and relief to many medical ailments.

Now that we have understood the potential of the cannabis market, this brings me to the next slide; the key challenges we see in this market. The first challenge is metabolite yield; yield in cannabis refers to the active compounds or metabolites, found in the plant. Currently, low metabolite yield leads to higher production costs and subsequently higher costs for the patients. The second challenge is variety stability; current cannabis lines demonstrate high variability in active compound concentration and other desired traits. According to recent publications; when current products are taken to the lab to verify the label of concentration, we see significant variability, 50% of the products will have higher concentration, 30% will have lower one's, and only a handful of products contain accurate concentrations according to the label. This variability leads to inconsistent, unreliable products and a decline in consumer confidence in medical cannabis.

The third challenge is medical tailored products – finding the linkage between clinical effects and active compounds or metabolites found in the plant is a major gap in the industry today. The industry today faces difficulty in linking active compounds to clinical trial observations. Moreover, breeders over the years have pushed THC levels up for recreational use while ignoring other useful compounds.

Canonic is uniquely positioned to provide solutions to these challenges by using computational power to decode the cannabis genome.

Let's move on to Slide 9; while current breeding [ph] efforts by others are focused on a handful of genes and unintended results are common; by using the CPB unique platform we are able to see the whole genomic map including essential genes, metabolite-related genes, and proprietary trait-effecting genes. With this unique perspective, we are building the genomic pathways to solve specific challenges in a precise manner.

As you can see in Slide 12, we initiated the development of three product types, as follow; MetaYield products are being designed to increase metabolite yield, Unican products are to provide stable cannabis varieties, and our Precise product range is targeted at specific metabolite profiles. Our focus is on the three main medical indications treatment today; PTSD, post-traumatic syndrome, chronic pain and cancer covering 90% of current medical cannabis indications.

Now I would like to ask you to turn to Slide 14 for our milestone roadmap. This year we are establishing our growing and research facilities and expect to complete at least two cannabis growth cycles. Next year, we will demonstrate the first-trait improvement in a cannabis line and expect to complete three more growth cycles. In the following year, we anticipate seeing the first improved varieties and move fast into the final product formulation processes. We believe we have a significant competitive advantage in view of our existing assets and technology.

Let's turn to Slide 19 for an example of this; in this case, an asset for increased yield. Cannabis active compounds are produced in small hairs on the plant flower. These small hairs are named trichomes. Canonic has full and exclusive access, for cannabis, to IP-developed in Evogene for the increase of trichomes in plants. The pictures on the right demonstrate a tomato flower before and after the successful utilization of this IP. This clear increase of trichome density and amount can lead to yield increase in the cannabis plant as well.

To conclude I can say, as Canonic CEO, that our company is well positioned today with significant technological capabilities, proprietary know-how and a scientific approach unique to the cannabis market. I believe we will be able to advance rapidly to fulfill our product development goals and address the key market challenges. After Dorit's review of the financial results, I will be happy to answer any questions you may have.

And with that, I would now like to turn the call over to Dorit. Dorit?

Dorit Kreiner

Thank you, Arnon. I will begin by reviewing our balance sheet. Evogene continues to maintain a strong financial position with approximately $50 million in cash, cash-related accounts and bank deposits as of March 31, 2019. This represents cash usage of approximately $4.5 million during the first quarter of 2019. The cash usage during the first quarter of 2019 includes pre-paid expenses and non-recurring payments of approximately $1 million.

For the full year of 2019, we estimate that our net cash usage will be in the range of $16 million to $18 million, assuming that none of our subsidiaries secure external financial resources such as through collaborations or external fund raising, this forecast is derived from the advancement of the company's activities to later stages of product development which include field trials and pre-clinical studies provided by third-parties. This effect is moderated by operating efficiencies achieved with the new corporate structure. The company does not have bank debts.

Let's now turn to the statement of operations. As discussed in prior calls, Evogene's revenues to-date have consisted primarily of research and development revenues. These revenues represent R&D cost reimbursement and milestones under our various collaboration agreements, as reflected in the cost of revenues. The majority of these agreements also provide for development milestone payments and royalties or other forms of revenue sharing from successfully developed products.

Gross profit for the first quarter of 2019 was approximately $0.3 million in comparison to approximately $0.1 million for the first quarter of 2018. Moving on, the R&D expenses for the first quarter of 2019 remained stable at approximately $3.5 million in comparison to the first quarter of 2018. Operating loss for the first quarter of 2019 was approximately $4.7 million in comparison to approximately $4.9 million in the first quarter of 2018. The net financing income for the first quarter of 2019 was approximately $0.9 million in comparison to net financing expenses of approximately $0.4 million in the first quarter of 2018. This increase in the first quarter is due to the translation of Israeli Shekel nominated cash and marketable securities to U.S. dollars, revaluation of the Company's marketable securities and interest income on bank deposits. So, the loss for the first quarter of 2019 decreased to $3.8 million in comparison to a loss of $5.4 million during first quarter of 2018.

With that said, we would now like to open up the call for any questions you may have. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Zach [ph] of IV. Please go ahead.

Unidentified Analyst

Good afternoon. Can you extend a few minutes and talk about some of the applications and how you think about the former Evofuel business evolving in the industrial space as far as lubricants and other opportunities?

Ofer Haviv

Yes, I can add some color. Evogene activity is focusing today -- actually, I should say Casterra; this is the new company name starting from last week which reflects better activity of the company today and it's focused mainly on Argentina, Brazil, in these two territory where we are working with castor oil and manufacturing companies where we are building together with them the whole pipeline from seed to oil. And we also working very closely with the company that's actually buying the oil from this -- from the oil manufacturing company. I think that there is a nice progress in both areas, especially in Argentina -- and there was quite an important breakthrough in this activity last year that we announced when we succeed to develop together with a company called Pantini from Italy. It harvested [ph] with very nice results, less than 5% yield block to harvest the castor grain.

This year in Argentina, I think that we are already in a semi-commercial stage, more than 300 hector of growing castor seeds, more or less the same and size also in Brazil. And I hope that next year it will be much more significant, and it would the first year of [indiscernible] with nibble number.

Unidentified Analyst

So, I guess I'm pretty curious [ph]; once you get passed that point, I mean specifically are you thinking that you'll have some partners and how do you see the business evolving in terms of actual commercial applications?

Ofer Haviv

Okay. So in Argentina, we are planning to work with a company called Kazha [ph]. They will own a pressure factory and we will develop the seed, we are going to sell the seat to Kazha [ph] and they will grow it in Argentina in using local farmers or they might grow it on their own land. And we are going to receive a percentage -- we will receive a payment for the feed but more important, we are going to receive a percentage from the oil, sold value Kaizan [ph]. This is the structure that we are working on.

Operator

[Operator Instructions] The next question is from [indiscernible]. Please go ahead.

Unidentified Analyst

Another question related to your cannabis endeavor, and now -- why wouldn't you think of partnering that program now together in a substantial amount of money that could provide you some real backbone and give you the other subsidiaries and you will not to raise money for a long time and it's such a hard area right now and you wouldn't have to give away the store or give away a part of it; I'm thinking in relative to my investment in [indiscernible] where they never really gave relatively earlier stage molecule -- they never collaborated on one-another -- role on cash. So why are you following that same even though you have $50 million in cash -- why are you following that same formula which led to problems within?

Arnon Heyman

I would like to keep our answer to two; one is your question is about partnering, and the second about investment. I will answer about the partners in strategic key activity that we do and I will -- let also talk about future investment in our strategy in this field. So, yes, we are in contact with several strategic partners, both in Israel and abroad; I cannot go into too many details about those negotiations but I can say that since we have established Canonic and announced the fact that we are working in this field, so there is a Eugene Trust [ph] and some of our -- some of the partners that we talk with; we see several very, very interesting opportunities and I do believe that this is a very important path to take to partner and collaborate in this field.

As for the part of looking into investment in the near future, I would ask Ofer to answer this specific question.

Ofer Haviv

Yes, thank you. So, as you mentioned the good news is that due to our nice balance in -- the cash balance we have, there is no rush to raise money. And we are -- we decided that to invest the first foreign share from Evogene budget but we don't -- it doesn't mean that if we will receive an interesting proposal for equity investment in Canonic we will not consider this in a positive way. I'm not saying that we are now active in looking for reinvestments but you know, it's a very hot area, I think that there is more money than interest [indiscernible], and this is something that could happen sooner than what we expected. I can see Canonic looking in more aggressively for fund raising somewhere at the beginning -- at the first half of 2020, and the reason is that I was active in a position that we succeed to conduct at least three to four road cycle, and I think then there is evaluation that we could receive with -- address our expectations. So, bottom line -- yes, collaboration and access to funds towards this collaboration is something that we are already on it. And with the equity investments, we are not preferring it aggressively, and probably it will start mid-next year or maybe a little bit earlier, but if something will happen till then, we won't say no, it really depends on valuation in turn.

Unidentified Analyst

So that makes sense. Why this is -- I don't know if you can answer this but -- your -- presently, the share is -- it seems to be selling low than your cash value, or at least close to it. And why do you think it involve this news, particularly that the cannabis, the vision where you get a couple of days of very heavy volume -- there is absolutely no follow-through or no interest, no coverage by Wall Street; what is it that the company can do better will help get some recognitions because every right now is basically with all due respect looking at an univestible security unless we're an individual or some very tiny fund or some special fund or what not. No one is going to invest in a company -- and this market cap, and it's feelings to me that at these levels there is some disproportionate -- the relationship between what appears to be some strong values of the company and the value of the share seems to be disproportionately low, and how do you expect to address getting some -- either coverage or recognition or just some publicity that would establish you as our -- as bonafide company because when you're selling -- where you must excuse my bluntness but when you're selling at $1.70 and wherever it is, you're basically an option, it's not really the stocks -- or how do you expect to address this?

Ofer Haviv

So first, you can be -- I'm sure that you can earn -- you can get that it's not something that we are ignoring, and it's not something that we are discussing also at the Board level. The reason that for the current market situation; I'm not sure that I have a good explanation, I think that's mainly because we moved to this new structure that some [indiscernible] believe will generate a significant value to our shareholders in the next few years starting from mid-next year and I think that now when -- what we promised that we are going to conduct is really taking place, I really hope that the market will start to realize the valuation of each company by itself, and if you add the value of each company by it's itself, I think that you're getting the numbers that the current market -- a bid to my opinion is ridiculous. How we are going to handle the situation; so I think that there is two-way to [indiscernible]. The first one is hopefully, announcements that will start to come from our subsidiaries such as collaboration, space advancement and also, equity investments in some of our subsidiaries; and I hope that some of them will happen in the -- during this year, and we are working very hard in order to make it happen.

And the second one, I think that we need to work much, much harder on IR activity. I think that we need to come to the state much more often and to meet with the capital market, with the investors to present the new Evogene story because for many of the people, I think that the kill what they have [indiscernible] Evogene as a GM-seed company where we are completely different company today. So I think that when we share the new vision, target, current activity and potential value for the investment community, I really hope that things would change together with the press release we are expecting to see in the near future.

Unidentified Analyst

That sounds promising. I do think it would be beneficial to the company without saving the obvious that you have a good eye or firm, or PR firm to regret there -- most of them -- for his party name -- most of these firms are worthless, there are a few which really stay connected and I would be happy to recognize some -- my wife had some very good experience within the past and I hope that you don't follow, again, the same path that Compugen [ph] followed with their tense of getting some PR or whatever. So, I look forward to following the developments of the company and good work lead to with yielding game plan and onboarding for [indiscernible].

Ofer Haviv

Thank you for very much, and I really hope that from quarter-to-quarter we will all have bigger smiles on our face. So, and it means hard work and we are ready to do so.

Operator

There are no further questions at this time. Before I ask Mr. Ofer Haviv to go ahead with his closing statement, I would like to remind participants that a replay of this call is scheduled to begin two hours after the conference. In the U.S., please call, 1-888-326-9310. In Israel, please call 03-9255-904. Internationally, please call, 972-392-55904.

Mr. Haviv, would you like to make your concluding statement?

Ofer Haviv

Thank you. I would like to thank everyone that participated in the call today. I would like to end by saying that we appreciate the support of our loyal shareholders, and their continuing confidence in the Company. Thank you, and good day.

Operator

Thank you. This concludes Evogene's first quarter 2019 results conference call. Thank you for your participation. You may go ahead and disconnect.

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