Evogene Ltd. (EVGN) Q4 2017 Earnings Report, Transcript and Summary

Welcome to Evogene’s fourth quarter and full year 2017 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 February 28, 2018. 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 read Evogene’s filings with the U.S. Securities and Exchange Commission and read the note regarding forward-looking statements in their earnings releases, which states that statements made in those earnings releases and in a similar way on this earnings conference call that are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements made herein speak only as of the date of the announcement of results. Many of the factors that impact whether forward-looking statements will come true are beyond the control of Evogene and may cause actual results to differ materially from 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 would 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 our fourth quarter and full year 2017 results conference call. With me today is Alex Taskar, our CFO, who following my comments will discuss our financial results for the fourth quarter of 2017 and full year results. We will then open the call for your questions. During the past few years, we have been pleased to disclose various discoveries and product development achievements; however, in view of the fact that these disclosures related to a number of diverse market areas and the fact that each of these market areas usually would be the sole focus of a company of our size, it may have been difficult to put these achievements in perspective with respect to the overall progress of our company. In addition, this past year represented a very important inflection point for our company; therefore, I decided to issue together with today’s year-end 2017 financial report a letter summarizing our overall strategy and the road map we are pursuing. In my prepared remarks today, I will also focus on this since I believe it is critical in understanding and valuing the progress of our very unique company. As our long-term shareholders are aware, [indiscernible] our U.S. IPO in 2013, most of Evogene’s efforts were focused on long-term discovery programs for row crop seed traits in collaboration with world-leading seed companies, and on developing, expanding and enhancing our computational predictive biology, the CPB platform. These multiple collaborations resulted in over 1,000 Evogene gene discoveries being transferred to our partners under milestone and royalty-bearing agreements and in the establishment and widespread industry recognition of Evogene’s CPB platform as a unique, powerful and broadly applicable predictive discovery capability. Following our IPO in late 2013 while the ag industry focused on mergers and acquisitions, we significantly broadened the company’s commercial reach to additional fields in the ag world, such as ag-chemicals and ag-biologicals. In addition, Evogene continued to invest and expand its technological capabilities, including the integration of key downstream product development supporting technologies. In each market area, we increased our focus on short-term product development activities both in collaboration and in internally funded product development programs. Most importantly, in all of these efforts, the unique capabilities of our CPB platform allowed us to quickly demonstrate significant progress as we advanced key roadblocks to next-generation products. As I mentioned earlier, 2017 represented an important inflection point in our company’s development as we began to see the fruits of these efforts in the form of robust product pipelines in each of our focus areas in agriculture. To continue and accelerate our commercialization efforts, at the beginning of 2018 our company was reorganized into market segment-oriented divisions: ag seeds, ag-biological, and ag-chemicals, and subsidiaries Evofuel and Biomica with the CPB platform at Evogene’s core. Each of these divisions and subsidiaries is now operating under the direction of its own general manager and with its own business development staff. It is my goal for this reorganization to begin to establish each of Evogene’s divisions and subsidiaries as full standalone units targeting separate and distinct markets, and we are already seeing the advantage of our new structure as we aggressively pursue both internal programs and collaborations. In order to complete the progression into full standalone units, I would like to see in 2018 the general manager and their team of each division or subsidiary continue to push its assets along the product pipeline towards commercialization as well as form collaborations with industry leaders. This standalone structure, while making product development more efficient, should also make the individual value of each division clearer and easier to assess as each has comparable tier companies. It is important to recognize the value of the CPB platform as a technological enabler of each of our divisions and subsidiaries’ pipelines while those are responsible for advancing the business in each respective market utilizing the platform. CPB is an evolving technological platform with unique robustness and predictive capabilities continually enhanced both by the input of additional data and new computational tools. This has led to the continued strengthening of our competitive advantage, allowing us to initiate new activities with a significant head start. As I mentioned earlier, in each of our market segments, there are independent companies focusing solely on that segment, but of course without the benefit of our CPB capabilities. With that, I would like to move on to reviewing some of the progress achieved in 2017 in our three ag product divisions and our two subsidiaries, Evofuel and Biomica. Let’s start with our ag seeds division, led by Dr. Arnon Heyman. The main focus of this division is improved seed traits for yield and environmental stress improvement, disease resistance, and insect control through the use of gene transformation and more recently genome editing. In the yield and environmental stress segment of our ag seeds division, we continue with our ongoing multi-year collaboration with Monsanto. As we previously announced in 2017, Evogene had successfully completed the gene discovery phase and the collaboration is now focused on progressing selected gene candidates through additional testing in Monsanto’s product development pipeline. During the recently completed gene discovery phase of the collaboration, as we mentioned, Monsanto chose to nominate more than 1,000 genes to its product development pipeline, and a subset of those genes are now completing another year of validation testing. The second segment within our ag seeds division focuses on disease resistance. In 2017, we announced an important milestone in our Fusarium collaboration with Monsanto. Evogene’s genes showed resistance to Fusarium in model plants and the top prioritized genes are advancing to further validation in Monsanto’s corn pipeline. With regard to our ongoing collaboration with Rahan Meristem for the development of Black Sigatoka resistance - bananas, last year we achieved positive results in second year field trials which we are now also leveraging through genome editing. The last segment in ag seeds focuses on insect control. In this segment, we achieved significant progress in our Coleopteran and Lepidopteran programs in 2017. Several genes in this program advanced into Phase 1 and are currently going through transformation into corn and soy with initial results expected at the end of 2018, beginning of 2019. An important development in our ag seeds division was that for the first time in 2017, we began incorporating genome editing technology into our seed traits activity in addition to genomic modifications made through the insertion of a modified gene into the plant. At present, we are using genome editing technology internally in our yield and environmental stress resistance programs for soybean in which we already identified the required edits and are now moving forward towards performing the edits in soy. A second product program in which we are using genome editing technology internally is our disease program for nematode resistance in soy. Moving now to our ag-biological division, led by Mr. Ido Dor, this division focuses on the development of microbial-based yield improvement and pest control products. The ag-biologicals market is a rapidly growing segment within the ag industry with less regulatory restrictions. In 2017, we announced signing a collaboration with Dupont Pioneer to bring to market in a broad acre approach bio-stimulant coated corn seeds. This collaboration is based on the achievements of an internal product program for bio-stimulants which presented positive results in corn fields twice under drought conditions, as disclosed prior to the initiation of the collaboration. The next step on the collaboration will be field tests undertaken by Dupont Pioneer. In January 2018, we announced positive second year field trial results for Evogene’s bio-stimulant microbial seed treatment for the improvement of corn yield, which are under exclusive license to Dupont Pioneer. In these recent trials conducted by Evogene, the tested bio-stimulant seed treatments demonstrated up to 20% increase in corn yield under moderate drought conditions. In that same announcement, we also disclosed first year results in our internal bio-stimulant product program for wheat and are now in the second year of field trial validation. During 2017, we also announced that our ag-biological activities now include bio-pesticide product programs based on two different discovery approaches, the first one leveraging Evogene’s already validated microbes for the development of bio-insecticides and bio-fungicides, and the second one utilizing our CPB platform for the discovery of new microbes for the development of bio-fungicides. Furthermore, we significantly strengthened our infrastructure in this division with the incorporation of formulation and fermentation technologies dedicated to downstream product development A recent presentation of the ag-biologicals division with an in-depth explanation of its activities alongside a road map for the upcoming years is available on our website. Moving now to the last of our three agriculture operating divisions, ag-chemicals, led by Mr. Eran Kosover, this division focuses on the development of novel herbicides and insecticides utilizing a unique biology-driven chemistry approach. We see great potential in our initial area of focus, herbicides. As a novel mode of action, herbicide has not been introduced to the market in decades, and we believe our recent discoveries present an opportunity in that direction. Our second area of focus in ag-chemicals, insecticides, was initiated only in 2017 and already is showing significant progress in this very substantial area of unmet market need. Regarding our BASF collaboration focusing on novel herbicides, as previously disclosed, we have identified and validated a set of targets which are serving as the foundation for both this collaboration with BASF and for our internal pipeline, with both activities progressing according to plan. Additionally in 2017, we disclosed that we achieved progress in our internal novel herbicide pipeline. We are now optimizing 10 validated novel chemical compounds which were computationally predicted by our CPB to inhibit eight novel Evogene discovered herbicide targets in order to reach an optimal product candidate, referred in the industry as a lead. I’m happy to emphasize that a few days ago, we announced an additional important step in the advancement of this pipeline. We disclosed achieving positive results with several optimized families of chemical compounds displaying improved efficacy in greenhouse testing. Regarding our newly initiated internal insecticide product program, during 2017 we disclosed that we have decided to focus on novel candidates based on a new site of action and candidates based on optimization of an existing insecticide. Both paths focus on key nerve and muscle targets. We have already identified several targets to undergo analyses by our computational platform, and the next step will be discovery activities for relevant chemistries that inhibit activities in the identified target site of action in the insects. With respect to our subsidiary Evofuel, focusing on the commercialization of castor seeds, a key achievement during 2017 was a breakthrough in terms of mechanical harvesting capabilities. Also, we were pleased to disclose modest initial revenues from castor seed sales. Lack of efficient mechanical harvesting has been the major bottleneck in the commercialization of Evofuel castor seed varieties. Our results to date strongly suggest that this problem has now been solved for Evofuel varieties. In 2018, we expect to see additional progress with field testing in several countries, including Mexico, Brazil, Argentina, and the Dominican Republic. Regarding our subsidiary Biomica, this recently formed subsidiary focuses on the human microbiome and represents our first activity based on leveraging the use of the CPB platform in the area of human health. We are enthusiastic about our entrance into this segment. The CPB platform is uniquely designed to handle an enormous number of microbes, and Evogene has vast microbial research knowledge from our ag-biological division efforts. We announced earlier this year the appointment of Dr. Elran Haber as CEO of Biomica, who will lead the company together with the scientific guidance of its Chief Scientific Officer, Yehuda Ringel. Given the head start provided by Evogene’s existing capabilities, we look forward to providing further information on Biomica’s progress during the current year. In summary, I’m very proud of all of these achievements which, when considered in the perspective of our strategy and road map, clearly demonstrate that 2017 was an important inflection point in our development. Looking forward to 2018, I am certain the company will continue to develop and generate value. I would now like to turn the call over to Alex for his review of the financials. Alex?

Thank you, Ofer. Let me begin by reviewing our balance sheet. Evogene continues to maintain a strong financial position with approximately $71.8 million in cash, cash related accounts and bank deposits as of December 31, 2017, which represents cash usage of approximately $16.4 million during the full year of 2017 and approximately $12.1 million during the fourth quarter of 2017. With respect to cash usage [indiscernible] 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. To date, our reported revenues have consisted primarily of research and development revenues reflecting R&D cost reimbursement under our collaboration agreements. Looking forward, we expect the main contributor to revenues and profits will be management payments, royalties, and other forms of revenue sharing from our current and future collaborations. Specifically, total revenues for the full year of 2017 were $3.4 million in comparison to $6.5 million in the full year of 2016. Total revenues for the fourth quarter of 2017 were $0.7 million in comparison to total revenues of $1.2 million for the fourth quarter of 2016. The decline in revenue reflects the net decrease in research and development cost reimbursements in accordance with the work plans under Evogene’s various collaboration agreement. As noted in the past, this net decline is mainly due to the advancement of our collaboration agreement with Monsanto from gene discovery to pre-development efforts, resulting in a reduction of activities costs. Looking forward, we expect the revenue trend to continue. During the full year of 2017, we saw a negative impact on our expenses due to depreciation of the U.S. dollar in comparison to the Israeli shekel. Our expenses [indiscernible] are denominated in Israeli shekels while the reporting currency is U.S. dollars. Our cost of revenues mainly consists of collaboration-related R&D expenses. Cost of revenues for the full year of 2017 were $2.8 million in comparison to $5.6 million in the full year of 2016. Cost of revenues for the fourth quarter of 2017 were $0.6 million in comparison to $1.1 million in the fourth quarter of 2016. The decrease in cost of revenues relates mainly to the decrease in revenues from R&D cost reimbursement for such periods. Moving onto our R&D expenses, we continue our investment in our internal product programs. Research and development expenses for the full year of 2017 were $17 million in comparison to $16.4 million in the full year of 2016. During the fourth quarter of 2017, R&D expenses remained stable at $4.7 million in comparison to the fourth quarter of 2016. Operating loss for the full year of 2017 was $21.9 million in comparison to an operating loss of $21.1 million for the full year of 2016. Operating loss for the fourth quarter of 2017 was $6 million in comparison to $6.2 million for the fourth quarter of 2016. The increase in operating loss for the full year was mainly due to a decrease in revenues and an increase in R&D expenses. The net financing income for the full year of 2017 was $1.1 million in comparison to $1.5 million in the corresponding period. This decrease is due to the relatively high capital gain derived mainly from the company’s marketable securities in the first half of 2016. Net loss for the full year of 2017 was $20.8 million in comparison to $19.6 million in the full year of 2016. The increase in net loss was primarily due to a decrease in revenues and an increase in R&D expenses, and decrease in net financing income. Net loss for the fourth quarter of 2017 was $6.2 million compared to the net loss of $6.6 million in the comparable quarter of 2016. The decrease in loss was due to a decrease in expenses and a decrease in the net financing expenses. With that said, we would like now to open up the call for any questions you may have. Operator?

[Operator instructions] The first question is from Tyler Etten of Piper Jaffray. Please go ahead.

Thanks, good morning, and thanks for taking my question. On the novel mode of action herbicide program, has this development been faster or better than you previously expected, and what sort of timeline are we looking at in terms of when we will do field trials or potential commercialization of these products?

Hi, this is Ofer speaking. Yesterday we announced that we achieved a significant milestone in this product program when we identified eight chemical libraries that they were all based on initial positive results. In this family, what you can see is the diverse efficacy level of these molecules, and some of them even show higher performance compared to the original positive compounds that we discovered earlier. This is a very strong indication that we are in the right direction, and since all of them are predicted to address a new mode of action, so I think that each one of them has the opportunity to move to the next phase as a commercial product. What we are expecting see during this year is that we will continue to do additional optimization process, which means that maybe we’ll do another cycle of identifying more libraries of molecules around the--with the higher efficacy, compounds from each family with the purpose to be able close to the end of this year to move to the next phase, which this will be hopefully the beginning of field trials of these molecules, which means we’re starting the regulatory process for these molecules. So I think that the year 2018 is quite an important year for this program and hopefully we’ll be able to update on additional progress which could be even more significant by the end of this year.

Got it, thanks. Then last call, you had spoken about some increased activities from companies already consolidated, and that there might be some sort of partnership in the first half of this year. Are you still seeing the increased level of interest from consolidated players, and is there still potential for a new partnership agreement in the first half of the year?

The answer is yes. We still have expectations that some of the negotiations that we initiated last year will materialize into agreements. I can say that in each area of our ag activity today, there is discussion in different levels - some of them are more advanced, some of them more in early stage. This I think reflects the general positive atmosphere we started seeing in the ag industry, at least for certain of the companies. They are past the critical point of mergers, acquisitions, whatever, and they are now starting to work on their strategy and they are eager to bring innovation into their pipelines. I think Evogene is in a great position to capture and to address some of these needs. Maybe it’s worth it for me to emphasize that these take longer than what we expected in some cases mainly because the legal departments are really, really busy, but hopefully we’ll succeed to see an report on some positive events during the first half of this year. It’s taken longer than what we expected, but I’m still optimistic and positive as I was in previous analyst calls.

Great, thank you.

If there are any additional questions, please press star, one. If you wish to cancel your request, please press star, two. Please stand by while we poll for more questions. 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 03-925-5901. Internationally please call 972-3-925-5901. Mr. Haviv, would you like to make your concluding statement?

Thank you. I would like to take the opportunity to thank all the shareholders for their continued support of Evogene and hope that the summary of our corporate strategy and road map that I provided in my prepared remarks today was helpful. We greatly appreciate the trust you have placed in us and look forward to reporting our continuing progress during the year. Thank you very much.

Thank you. This concludes Evogene’s fourth quarter 2017 results conference call. Thank you for your participation. You may go ahead and disconnect.