Arcadia Biosciences Inc (RKDA) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Arcadia Biosciences Q4 2015 Financial Results and Business Highlights Conference Call. (Operator instruction) As a reminder to our audience, this conference is being recorded.

Now I will hand the conference over to Steve Brandwein, Interim CFO. Sir, you have the floor.

Thank you very much, Brian, and good afternoon, everyone, and welcome to Arcadia Biosciences Fourth Quarter Earnings Call. I'm joined this afternoon by Roger Salameh, our Interim President and CEO.

We are going to cover two areas in today's call. First, I'll review fourth quarter and full year financial results, and then Roger will provide an update on the critical work that continues to advance our pipeline. We'll conclude the call, of course, with your questions.

This call is being webcast and you can refer to our press release and slide at arcadiabio.com.

Before we start, if I could ask you to refer to Slide 2, I'll remind you that we'll be making forward-looking statements on this call based on current expectations and currently available information. However, since these statements are based on factors that involve risks and uncertainties, the company's actual performance and results may differ materially from those described or implied today. You can review our safe harbor language in both our most recently filed 10-Q and again on Slide 2 of this presentation.

So let's turn then to our financial results and a summary of that is provided on Slide 3. The factors driving performance for the quarter and the year are very similar. Simply put, when you compare the differences from year to year, lower revenues, primarily due to a lack of a major financial milestone in 2015, were nearly offset by lower operating expenses. As a result, the loss from operations was only modestly higher by 3% to $15.6 million. The change in operating expenses benefited from a lower level of noncash inventory reserve for our GLA safflower oil product, and I'll explain this a little bit further in a moment.

The same revenue and expense dynamics were in place in the fourth quarter, but the effect is amplified when you look at the quarter in isolation. When lower milestone revenue was coupled with the inventory reserve and a full quarter of higher public company cost, the loss from operations increased to $4.1 million from $1.6 million last year.

Now as we've previously discussed, the exact timing of milestones is somewhat unpredictable and can slip from one year to the next given the timing of field trials and other factors that affect product development, and that certainly was the case in 2015.

If you turn to Slide 4, let me point to a few other factors affecting revenues. We're pleased with the annual revenue growth from our SONOVA GLA safflower oil. This is a result of increased sales in the nutritional supplements market coupled with additional launches of the product in other applications. Even though we added to the inventory reserve in 2015, we're optimistic about the potential for the product to be sold into new larger-volume markets.

As we've mentioned in prior quarters, revenue from contracts and grants has been mixed. And as we successfully completed certain work or changes of scope of work of other projects that effectively reduce some revenue in 2015, we've added some significant contract research programs and ramped up others but not at a sufficient level to fully offset the overall decline for the year. On a full year basis, the 48% drop in license revenue is driven primarily by the lack of a major financial milestone in 2015.

Now against the backdrop of lower revenues, the increased cost of being a public company and additional cost -- excuse me, additional cash and noncash expenses were offset by lower R&D cost as we show on Slide 5. The lower R&D cost were primarily a function of the completion of grant contracts, which as I just mentioned, corresponds with lower grant revenue.

The larger shift in operating expenses was the difference in cost of product revenues for our SONOVA GLA safflower oil. This was driven by the noncash reserve adjustments of roughly $600,000 in 2015 and $1.7 million in 2014. Again, sales of GLA are headed in the right direction, but some pending regulatory submissions make it prudent for us to add to the reserve in the fourth quarter of 2015.

Specifically, we've applied to the U.S. FDA for the use of GLA in pet food, and we're in the process of filing for GRAS status. GRAS refers to the product being generally recognized as safe in all uses. When received, these approvals will create new higher-volume opportunities for the GLA business, and we should see increased revenues.

From a cash burn perspective, I want to underscore that we continue to manage our operating expenses with tight controls and discretionary spending. Our ongoing level of expense provides the needed investment in our pipeline and product development and includes the additional cost associated with being a public company.

I also want to point out that we refinanced our high interest debt at the end of 2015. While this resulted in prepayment fees in the fourth quarter, this consolidation and repayment of prior debt will reduce our interest expense by more than $1 million in 2016 and 2017.

As an accounting reminder, we also have a number of noncash adjustments between operating loss and net loss attributable to common stockholders in our 2015 results. These relate to the elimination of financing-related derivatives, the accretion of a debt discount and redemption rates associated with our Series D preferred shares that converted to common shares with the IPO.

Now as we look forward in 2016 and beyond, product and contract revenues are likely to experience modest growth. The larger driver of near-term revenue will be our ability to report on financial milestones in line with our technical and regulatory advancements. While we're diligently pursuing these milestones, we'll continue to keep a tight rein on costs. This means ensuring that our R&D resources are being deployed against the most promising product candidates and keeping SG&A cost in line even as we absorb a full year of public company expenses.

So with that, I'd like to now turn the call over to Roger, who will elaborate on the work underway to continue to advance our product portfolio.

Thank you, Steve, and thanks to everyone who's joining us on the call today.

Before I begin, I'd like to acknowledge the decades of work by our former CEO, Eric Rey, in building this company and bringing it to the public market. I am personally honored to have worked closely with Eric for much of my professional career, and all of us at Arcadia are privileged to carry his vision forward.

So let me start by addressing the issue of senior leadership transition. As you know, we've undertaken formal searches for a permanent CEO and CFO, and those searches are progressing well. But I want to assure you that while that process is underway, our experienced executive team is entirely committed to advancing our pipeline to deliver on shareholder value. Our mission is unchanged. We continue to execute on that mission.

All told, 2015 was an exceptional year at Arcadia on multiple fronts. Slide 6 summarizes the key regulatory, commercial and intellectual property advancements we have made since our IPO in May of last year. All are important and a credit to our teams and our collaborators. But if I were to single out one achievement, they would have to be the approval of our stress tolerance trait for soybeans in Argentina through our Verdeca joint venture. That approval sets the foundation for a rapid product launch and forms the basis of a promising soybean portfolio.

That portfolio expanded in 2015 with breeding collaborations with TMG, a leading Brazilian soybean company; as well as two regional Argentine breeding partners; and a strategic collaboration with Dow AgroSciences to develop industry-leading yield and crop protection traits and trade status. Separately, in late 2015, we entered into an alliance with Dow AgroSciences to advance yield and crop protection traits in corn. In effect, the soybean and corn collaborations with Dow will enable us to provide one of the most complete yield solutions on the farm.

The [depth] and consistency of our technical achievements was impressive as well with excellent results from our Nitrogen Use Efficiency trait in rice, as shown on Slide 7. I would be hard-pressed to name another trait that is demonstrating double-digit yields over multiple years in multiple locations in all the major types of rice.

To give you some perspective on what this means, a 10% yield increase in rice creates $75 of added value per acre on the farm. This trait will drive transformational change for hundreds and millions of small-scale rice farmers for whom rice is not just a cash crop but also a source of food security.

And just yesterday, we announced another advancement in our rice portfolio with our Salinity Tolerance trait. Based on double-digit yield increases in initial field trials, our partner, Mahyco, is advancing the lead lines into their trait introgression program in preparation for commercial launch. This is a significant step in the advancement of this trade, which addresses an opportunity of about $27 billion of lost yield on the farm. I wanted to highlight these achievements in 2015 because they set the stage for the work that is in front of us.

On Slide 8, I have summarized four takeaways that I would like for you to have as part of our conversation today. One, our R&D pipeline is robust, and with the recently announced Dow form collaboration, it has become even more so. We're investing and promising leads that are in advanced stages of development and progressing existing ones to commercial launch. Two, we're maintaining a culture of fiscal prudence while focusing on the most promising candidates in our pipeline. We regularly evaluate our pipeline to prioritize the opportunities with the highest potential value, and I'll speak to some examples of this process in a moment. Three, the regulatory, product and commercial development with our partners to advance high-potential, late-phase products into the marketplace continues on track. And four, we continue to build momentum in the field that will result in milestone payments as we progress toward regulatory and commercial advancements.

So with that in mind, if you would turn to Slide 9, you'll see our updated pipeline chart. Let me start with the projects that are highlighted in gray that we've decided not to pursue further. You'll see that we removed five product candidates in canola and barley. This decision was based on the revenue potential for those traits and crops versus other options that are available to us. These choices do not reflect a lack of technical success for these programs. We discontinued those programs in order to drive greater focus and resourcing on large acre, higher-value crops such as corn, rice, wheat and soybeans.

Next, I will draw your attention to the projects highlighted in orange that represent expansions to and advancements in the pipeline. You'll see that we have added three products to our corn portfolio as a direct function of our new collaboration with the Dow AgroSciences. These are yield and stress traits that are now been evaluated and advanced in Phase II. We've also added two new soybean products to the pipeline, both are non-GM solutions based on our TILLING platform. One addresses oil quality and is being worked on in partnership with TMG. The other addresses oil yield through a collaboration with Phytola, the leader in oilseed research. As with other soybean projects, these are being advanced through our Verdeca joint venture.

As I mentioned earlier, our soybean portfolio is led by our HB4 Stress Tolerance trait, where significant pre-commercial activity is currently underway. This can be found on Slide 10. With Argentine regulatory approval now in hand, the next step in the process is to gain approvals in key import geographies with china being the most important, followed closely by the EU. We're also working on approvals on other key production countries, such as the U.S., Brazil and Uruguay.

In parallel, our commercial partners are advancing the HB4 trait in their breeding programs. This work by us and our partners is critical as we intend to merge the two work streams together to support the fastest possible commercial launch.

Let me now turn to our wheat platform, which is highlighted on Slide 11. Arcadia's wheat pipeline is one of the most diverse and promising in the industry. That diversity from yield on the farm, to better processing quality, to better nutrition for consumers has key stakeholders in wheat very excited about this pipeline. Wheat is one of the crops that we believe will benefit from additional focus and resourcing at Arcadia.

So let me start with the productivity traits, where our lead Nitrogen Use Efficiency wheat events are now being advanced in breeding programs. At the same time, we are consolidating data and supporting material to make early regulatory submissions. Again, as with soybeans, we are driving both sets of activities simultaneously to support aggressive launch time lines. We see commercialization of NUE wheat as an important development for a crop that historically has been underserved by technology. As one grower told me recently, we can't be the neglected stepchild to corn any longer.

Staying with yields for the moment, our non-GM herbicide tolerant wheat lines are in field evaluations right now. And commercial discussions are ongoing with multiple-channeled partners to advance this product. And we have several additional non-GM candidates in the pipeline addressing yield that will also move to field evaluation this year and next.

Our non-GM quality wheat products are advancing as well. We have several product and commercial development collaborations underway in our resistance starch wheat program. And on the breeding side, trait and progression is ongoing. This, of course, is a key step to moving this trait into commercial varieties and scaling up production to meet the volume demand of our processing and consumer packaged goods partners.

As I mentioned earlier, in December of last year, we announced a strategic collaboration with Dow AgroSciences to develop and commercialize yield and crop protection traits in corn. Slide 12 highlights the benefits of that partnership. Of course, both partners were advanced in working corn prior to this agreement, which jump-started and leveraged our joint effort. For example, in 2015 alone, we completed multi-location trials of six yield and stress candidates, which resulted in a phase advancement of three candidates.

Our initial research and fieldwork is focused on nitrogen, Water Use Efficiency and drought tolerance, as shown on Slide 13. Additional multi-location field tests in the U.S. will start this spring to further advance this joint pipeline. We're extremely excited about the potential for this collaboration to make a major difference in profitability for corn growers. This now allows us to drive a pipeline that addresses a $260 billion corn market.

Slide 14 is a reminder of the Arcadia business model. As you know, our strategy is based on open collaborations and partnerships, which we believe is one of our core strengths as a company. The Dow collaboration is an excellent example of the power of this model. Our key strategic focus is to create a body of evidence that builds the momentum to make regulatory submissions and to put our traits in the hands of seed breeders. As long as we continue to execute on that strategy, we are confident that our near-term revenue base will grow, and we are actively engaged with our partners on the shared priority.

I hope that your takeaway today is that while we faced some recent challenges, we adapted quickly and adjusted priorities as needed. Even as we go through a management transition, we continue to make focused strategic decisions to leverage our robust product pipeline. We're advancing products in the field with our partners. We're making regulatory submissions to support commercial efforts, and we're driving revenue growth while containing costs. As I said earlier, our mission is unchanged, more focused on execution.

So with that, I'd like to turn the call over to your questions now.

(Operator instruction) Our first question comes from the line of Chris Parkinson with Credit Suisse. Your line is now open. Please go ahead.

This is Graham Wells on for Chris. Thanks for your time this afternoon. I just want -- I have a couple of questions for you. First up, I was just wondering if you could talk just a little bit more about how things are developing with your Water Use Efficiency traits in Argentina and kind of guide us through, as we go through 2016 and into 2017, how we should think about the time lines there?

Sure. It's a very good question. So I'll start high level and get into some details. So as you know, a prerequisite, so we have the Argentine approval, key production territories for soybeans are mostly in the Americas, North and South America, Brazil, Argentina and the U.S. being the largest.

So now that we have the Argentine approval, it actually gives us, frankly, license. It allows us to make the first regulatory submission in China, China being the largest import jurisdiction, followed closely by the EU. And then in parallel -- and this is really important to understand, it's not we're not doing these things in sequence.

In parallel, we are making regulatory submissions for -- in production countries and import countries elsewhere. The most important other two production countries are the U.S. and Brazil.

The U.S., we expect to do in 2016. If all goes according to plan, we'd do the same for China in 2016, and then we'll take other countries on as they come. But the important piece on this is to keep in mind is that I have mentioned that we're doing some things in parallel. We're certainly doing the regulatory submissions, some of the regulatory submissions in parallel, but a really important piece is that we started breeding on -- into a lead germplasma in HB4 more than three years ago. And that is an aggressive time line, and that is an aggressive strategy. We and our partners in South America are completely comfortable with that approach.

What we want to do is we want to dovetail, if you will, or merge the regulatory achievement with the breeding achievements, so that we can come to market as quickly as possible. That is a big piece that I think is -- might slightly be different from how other people are doing it, but our partners are excited and want to do that with us.

Awesome. That's great. Thanks. And then I was also wondering if you have any views on the potential for India to reevaluate its current stance on GM technology and licensing fees, kind of how you see the regulatory environment playing out there.

Yes. It's an interesting issue. So it's difficult for me to decipher what the Indian government might be doing at this present moment, and frankly, what other companies might be doing at the present moment.

Let me tell you what we're doing and how our local partner, for example, in this case, Mahyco, feels about it. So if you go back to the kinds of traits that we're developing that are driving $75 per acre in additional value on the farm. These things are addressing drought, heat, nutrient deficiency in the soil. These are yield traits. These are the traits that growers need and want and will want now and in the future.

While we talked to our partner and we talked to their growers, we don't see any sign that the demand for those types of products is going to go away. And frankly, and this is my personal view, but I've been in the industry for quite some time, I've been in Arcadia since 2003. Frankly, I think it's going to be difficult for someone to be able to argue to a grower, who's just effectively doubled their yields or triple their yields from a year before that they can't have access to that technology.

So I think we see the momentum for those types of traits as increasing. And one other point I would make, and I actually probably should have mentioned this earlier, is that India is one of our rice territories. We expect to leverage our technologies in rice in Asia more broadly and some pieces of the South American market.

Perfect. Thanks for that. And then just a question on -- your guys' R&D portfolio. During the presentation, you highlighted a lot of great stuff there, particularly with new items you have in your corn portfolio, soy, wheat. I was wondering if there any traits in particular that we, as investors, and the market should take a particular interest in following, anything that you're really excited about over the next 12 to 24 months.

Sure. I'm excited about all of them, that's why we take the portfolio approach. But I think over the next 12 to 24 months, traits, staying with the traits for the moment, you should be thinking about HB4 Stress Tolerance in soybeans, Nitrogen Use Efficiency in rice and wheat, and salt tolerance in rice. Those are from the productivity side. Those are, I think, the most exciting traits.

From the product quality side, one trait that we probably haven't talked about much but is an important one, and I think could be pretty significant value driver for the company is resistance starch wheat.

And one of the things that I'm particularly excited about with that trait trade is it's a non-GM product that's really about human nutrition. We're in advanced stages of breeding and field development. And the pathway to commercialization, frankly, is about being in competitive breeding programs and just scaling up volume to meet our customers' demand.

Right. And then lastly, I have one more question. This one is more broadly speaking just about the marketplace in general. We were just wondering if you have any views just on recent ag consolidation, whether that presents any opportunities for Arcadia? And then also if you can just clarify again for us kind of how you view your own R&D platform and how it differentiates it from the rest of the marketplace?

So the -- I think it's a two-part question. So one of the things that I like about the Arcadia portfolio, and frankly, not just about the traits that we're addressing, but where we are in the development of those traits. I know that there are a lot of folks working in basic research in the same area, but as a yield company, and we are primarily a yield company, I think that we have -- we stand in a unique position, frankly, to be able to offer others in the industry, some of them are peers and competitors at the same time, these types of yield traits because, as you know, because I know you and others follow the industry, those focus have focused -- those folks have focused more on the crop protection side. So I think that gives us an opportunity to, frankly, leverage our traits with multiple partners.

Our last question comes from the line of Tyler Etten with Piper Jaffray. Your line is now open. Please go ahead.

Hi, guys. Thanks for taking my questions. First, I wanted to look into -- I know you guys don't provide official guidance, but if you expect (inaudible - microphone inaccessible) the licensing revenue into 2016 or if we should expect that to be more status quo to 2015?

Yes. This is Steve. So let me jump in on that. You know, Tyler, you know that, as we've said and you're aware of this, that our milestones are what drive a significant piece of our licensing revenue. And as we've said all along, those are very difficult for us to project.

So there are certainly a number of candidates that could potentially achieve a financial milestone this year. But at this point, there isn't anything that I could say absolutely will. So I would say that you have to keep that in mind as you think about what our licensing revenue is for the next year, for the next several years.

So Tyler, I think Steve is absolutely correct on that. If I can just add a little bit of color on some of that. There are really four key milestones, four types of milestones for us, field efficacy, and that can take -- defined differently for different traits and crops; regulatory submission; regulatory approval; and commercial launch.

Of those four, field efficacy is the one that, frankly, is the most fluid. And what I would ask you to think about, rather than focus on a specific milestone, think about a set of milestones and announcements, and sometimes they may not be financial milestones, that build momentum for us to be able to accelerate product development towards that commercial launch.

And that is a structure for most of our licenses. The only one that doesn't have, frankly, commercial -- that has that commercial structure is the HB4 soybean business because we and the Bioceres partners decided from day one to defer on the financial milestones, pre-commercial financial milestones, because frankly, we'd like to grab a bigger piece of the value from the bag of seeds sold on the farm. So rather than focus on a specific one or two milestones, think about sort of a momentum that builds as we accelerate towards commercial launch.

Okay. That's good information, very helpful. Now can we talk a little bit more about the cost management for the next year, particularly the operating expenses? I believe you said they would be down modestly year-over-year, but I wasn't 100% sure on that. And then if you could talk about your expected cash burn for the year as well.

Yes, certainly. So as you know, if you look at 2014 and 2015, you see there were not a lot of anomalies as we finished up with 2014 and of course completed the IPO in 2015. There were certain one-time expenses.

Where we're at right now and the way that I would sort of characterize it is we're at the level of operating expenses that we need, and we expect that to continue at a comparable level. We're not anticipating any major additional anomalies. So I think it's reasonable to look at 2015 as sort of an indicator and for modeling purposes. For instance, I think you could look at that and sort of use that as sort of the basis.

We're not anticipating that there's going to be a material change. And in fact, I've talked to this before, we have the infrastructure that we need right now. So we're not going to be adding massive facilities. We don't need any of that.

And the other thing that I think is extremely important to keep in mind, as our products progress, a lot of the spend now happens by our partners. So we work very closely with them. We obviously have great transparency, so we get to assist and participate. But frankly, a lot of the money is coming out of their pocket right now, which is very good for our burn.

Okay, great. Now for some of these approvals, I know you guys are working with numerous amounts of companies -- or countries to get approvals, but I didn't hear any specifics around Brazil. Given the uncertainty with the government situation in that country, could you provide any update on what's going on there?

Sure. I'll provide what update I can. So consider for the moment that our model -- and if you go back to our business model, our model is about partnering and leveraging other people's assets.

So what I would say, and this really doesn't even specifically apply to Brazil, but Brazil is a good example, that's one that's right here because we have a product that's going to market, is think about a strategy, where we, along with a Brazilian partner, could go to the regulatory authorities and position the product, frankly, with a local partner.

That is our strategy, as -- being that Brazil is the second-largest soybean production area in the world. It's certainly in our radar. We have a plan for it. It is not necessarily a 2016 submission, but I wouldn't say it's very far behind that.

Keep in mind that our view on this on HB4 just for the moment, Argentina is the first -- potentially could be the first country of launch, primarily because we got HB4 with a local partner. We got HB4 approved in Argentina in record time, I think roughly half the time that anybody else has had a product approved in Argentina.

So for better or for worse, it's our strategy to collaborate locally and frankly leverage other people's connections and assets to get what we need to get done. Touching little bit on what Steve said, we're not about building large organizations and large overhead to drive a regulatory strategy from North America. It's all about being local and all about being partnered locally.

And I guess just to build off that a little bit, if you could provide any information about how the efforts with Bioceres is going, just because the soybeans are an important part of your guys' pipeline and that Bioceres has been so helpful in the partnership with you. Just any sort of color would be great.

Sure. So, you know, I started the conversation by saying one of the things that I'm most proud of for 2015 was the Argentina approvals. And I think a significant piece of credit goes to our partners down in Argentina.

The regulatory and product development teams in both organizations worked feverishly and continue to work on driving those regulatory submissions and analyzing the data from the field. We have teams that talk almost daily and formal teams that meet every week and -- or more. And I think the relationship is excellent.

It's just -- I mean, it just goes back to our model. It's about partnering. It's about leveraging other people's assets and expertise. And frankly, if one would have talked to the Bioceres people, they are leveraging our assets and expertise. So why double up the effort when you can do it, focus on what you do best.

Excellent, and that's great. Just a couple more housekeeping ones from me, and then I'll jump off. Any update -- or is there any change with the Dow gene stacking partnership now that -- with the Dow-DuPont merger going on? And then my second question would be just what kind of -- what inning are we in for the CEO and CFO search?

So it's difficult for me to talk about a transaction between someone like Dow and DuPont. But what I would say is that both parties, us and Dow, have provisions in our agreements around change of control. So I'm not at all concerned about that.

I think really fundamentally, at the end of the day, if we and Dow, in our joint development effort, have traits that deliver value on the farm, those traits will make it to market. And frankly, if Dow -- if the transaction between Dow and DuPont were to happen, from just from a pure intrinsic market share perspective, the corn market share within that entity jumps, so I see that as a positive development.

But let me be clear about that, one element on that, our strategy continues to be on as many acres as possible, so to be on Dow acres and DuPont acres and Montana acres and everybody in between and Beck's acres. So that's a broad-based license strategy that's embedded in everything that we do. So I think your other question was on the CEO, CFO search.

Yes. Just what kind of phase are we in, in terms of inning of that search.

Yes. So we initiated that search, I think, shortly after the announcement on the CEO transition. I think it's progressing well. It's difficult for me to speak about it in very specific terms. We have, as one would expect, and I personally am not surprised about this at all because I think Arcadia is an excellent company, we're getting very good candidates coming across the screen, and the process is going as well as one can expect.

OK. Great. Thanks, guys. I appreciate [for] taking my questions.

Thank you.

Thank you. There are no further questions. I would now turn the call back to Roger Salameh, Interim President and CEO, for closing comments.

Thank you. Again, our thanks to everyone participating in the call today. I hope that what we've conveyed to you is that the critical work to support and advance our pipeline is progressing according to plan. We're staying tightly focused on where best to deploy capital against that pipeline and ensuring that we allocate resources against the highest value products. We're taking a portfolio approach that fully exploits our GM and non-GM platforms to extract maximum value from different segments of the supply chain. And we're doing these things in a collaborative framework that leverages the assets and capabilities of our partners to achieve the fastest commercial launch and create the highest possible shareholder value.

With that, thank you, and I look forward to speaking with you in the future.

Ladies and gentleman, this does conclude today's program, and you may all disconnect.