ImmuCell Corporation (ICCC) Earnings Call Transcript & Summary

Hello Joe. Perhaps you're muted? Morning, everyone. My apologies for that technical hiccup. I'm not certain what went wrong. Joe was connected just a moment ago. I'll simply go through his introduction very quickly and then proceed directly to matters at hand. So, before we begin this conversation, we want to include a warning about forward-looking statements. Those listening should be aware that remarks given by management throughout this call contain forward-looking statements subject to risks and uncertainties that might lead actual outcomes to vary materially from what is discussed today. Further details about such risks and uncertainties can be found in the cautionary note on forward-looking statements, or Safe Harbor statement, within the company's press release and its Form 10-Q, obtainable from the SEC or through the Investors section on the company's website; so, to introduce myself, I'll dive straight in. My name is Michael Brigham, and I serve as President and CEO of ImmuCell Corporation. I appreciate all of you for spending your time to be part of today's call. I truly am grateful. As you're likely aware, yesterday evening we submitted our Form 10-Q covering the three-month and six-month periods that concluded on June 30, 2020, and released a press release outlining several key results. I'll go over much of the information you can find in the Q and the press release, but I want to emphasize a few items I consider to be among the more significant disclosures. To start, as you probably know, we put out a preliminary press release addressing only our topline sales figures on July 7. That was done to provide investors a very prompt view of this essential metric for our operations. Those preliminary figures remain unchanged. Product sales rose 9% during the quarter versus the same quarter a year earlier. Product sales increased 11% across the six months that ended June 30, 2020, compared with the same period the previous year. And product sales climbed 19% over the trailing 12-month period that ended June 30, 2020, versus the trailing 12 months that ended June 30, 2019. As of June 30, we held a backlog of orders valued at roughly $945,000. That's a decrease from approximately $1.4 million as of March 31. We're working toward finishing the $3.5 million investment aimed at boosting our production capacity. The initial phase of this project has been completed. We've relocated our capsule assembly operations away from 56 Evergreen and into the refurbished area at 175 Industrial. Commercial production is currently running quite smoothly at 175. Phase two involves installing additional freeze-drying capacity at 56. The third and last phase consists of transferring gel formulation operations from 56 over to 175, followed by doubling our liquid processing operations at 56. We remain on schedule to finish the final two phases of this investment prior to year-end. Now let's turn to gross margin. A thorough breakdown of gross margin is available on page 28 in the MD&A portion of the Form 10-Q. In every period we reported, gross margin dollars rose. Even so, gross margin expressed as a percentage of sales declined for both the quarter and the six-month period when measured against those same periods a year earlier. Two main factors explain this higher percentage of sales: gel tubes and biology. To begin with, producing gel tubes costs more than making a legacy capsule format does, yet our sales volume for them is substantial. Next, because we are expanding colostrum collection to boost production, we must work with new cows that have not yet been exposed to our proprietary vaccines. As these cows go through our program a second time, the biological yield ought to rise; therefore we do anticipate improving this gross margin percentage eventually, though our top priority at present is raising the overall dollar amount of gross margin. Our largest operating expense line item remains product development expenses. Looking at how non-cash expenses affect us matters, in my view. During the six-month period ended June 30, 2020, depreciation along with stock-based compensation made up roughly 39% of our product development expenses. A large share of the depreciation charges stems from the drug substance facility we built along with the associated production equipment for Re-Tain. Clearly, the effort to bring Re-Tain to market carries a high cost; we remain on plan to submit our second phase submission of the CMC Technical Section to the FDA in the fourth quarter of this year, and that submission will face a six-month review by the FDA. At this stage of our development, I pay more attention to cash flows than to our GAAP net loss. A view of how all non-cash expenses affect our financial results appears on page 4 of last night's press release. Understanding our cash flows requires considering this metric, which is important, yet the statement of cash flows on page 4 of the 10-Q stands as the most important measure. Finally, a few words about the COVID-19 pandemic. This situation is hard on everyone and tragic for many. So far, we are doing okay. The infection rate data for Maine is fairly low. The pandemic has not cost us significant production time. Still, everything is different. Pushing First Defense production forward, our dedicated production team has been flexible and creative. At a time when travel and farm visits have shrunk and nearly every tradeshow has been canceled, our sales team has managed to pivot, staying safe and succeeding. We feel grateful to be ahead of last year's sales pace, yet we are not hitting our budgetary objectives. To wrap up, I once again encourage you to review the Form 10-Q and the press release we filed last night; please also look at our updated corporate presentation slide deck. An August update was posted to our website just last night. In my view, it offers a really solid overview of what we do, what we're aiming for, and where our finances stand right now. Go to the Investors part of the site, then click Corporate Presentation. That said, I'm glad to answer whatever you'd like to ask. Operator, please open the lines.

Michael, good morning. Congratulations on the quarter, and I appreciate you fielding my questions. To start, after such an extraordinary first half, could you describe the overall financial condition of your customers?

Yeah. Nathan, thank you. Morning to you. What a wild ride this has been. Perhaps the easiest measure to watch would be the milk price — Class III milk price — which swings enormously. As some of you might recall, producers were discarding milk back in March. There was just nowhere for it to go. Nowhere to transport it. Farms were dumping it. The milk price I monitor fell to an extremely low point, roughly $13, $12, across the April, May stretch, and it has climbed back quite dramatically in May and June. For July, the price is $24.54. I've got a chart that goes all the way back to 1980. Only one price has been higher, and that's September 2014's peak, which beat it by $0.06. In other words, it's an all-time high. So milk pricing is robust, and that serves as a leading signal of solid economics on the dairy; that said, I'd add a note of caution, since I believe it's elevated right now and will probably stay changeable. So thus far, things look good. My sense is we got past the toughest part of March and April. July appears excellent; however, the volatility does worry me. We'll see how August and September and the rest of the year play out; still, right now, things are pretty darn good.

All right. Thanks. That's useful. Moving on, could we look at the product side, comparing the commercial-stage offering, First Defense, with Re-Tain, which we expect down the road. Perhaps you could lay out how those two markets stack up against each other regarding their magnitude, plus any commentary contrasting them?

Sure. Let's start by describing what each product is. First Defense targets the calf, while Re-Tain targets the cow. First Defense is something we've marketed for a long time to stop scours, meaning diarrhea, in the just-born animal. I believe I've characterized that market fairly thoroughly, and I'd point you to a slide in our deck, since we tend to view it through two lenses. If you want the exact reference, check slides 16, 17, and 18 in the deck, where we track our performance across two markets. The first consists of products administered to the calf itself. Other products also go to the baby, and we're expanding in that space. The second consists of vaccines administered to the mother, expecting her to generate superior colostrum for feeding the babies. We also compete there, since we recognize those vaccines vary considerably. How those vaccines respond will differ. Colostrum quality will differ too. We understand that as well as anyone, perhaps better, given that's what we produce. Each batch we manufacture varies. Naturally, we compensate for that through our fill rate, so a calf receiving our product gets a consistent dose. Anyway, those are the two markets we're up against, and there's substantial opportunity since the dam-level vaccine segment is far larger than the calf-level one.

Thanks. That's great. And I suppose I have just one additional item. When we consider the model, assuming Re-Tain eventually reaches the market, in what ways might featuring that product within the portfolio affect perhaps the seasonality seen in your P&L, as well as margins?

Yeah. Thanks. I somewhat missed the latter portion of what you asked. So Re-Tain targets the cow. It's an extremely novel therapy for mastitis, subclinical mastitis. Novel since it isn't a conventional antibiotic. Novel since it will be the initial and sole offering capable of being administered with no requirement to discard milk. Put differently, whenever antibiotics are being used, the milk must be thrown out owing to residue present in it. Our offering is going to carry a zero milk discard claim. Thus a fresh entrant there, representing a different approach to managing mastitis. But regarding seasonality, First Defense is highly seasonal. Our beef operation is seasonal to an extreme degree. Every one of those calves arrives early in the year, let's say February, March, April. And concerning mastitis on the Re-Tain side, it will be more — mastitis exists all year round; it isn't seasonal, unlike a beef calving season. Therefore Re-Tain is going to provide us with a flat or steady sales pattern across the year.

Alright. Appreciate it, Michael. I appreciate you fielding my questions.

You're welcome, Nathan. Happy to help.

Morning, Michael. How are you holding up with this COVID situation? I hope all is well on your end.

I'm doing fine. Thanks.

Regarding Re-Tain, the product we're planning to file around December — is that the final date for sending Re-Tain to the FDA? Is that our current expectation?

Correct. That's certainly what we're aiming for right now. It can be done. I suppose something unexpected could pop up along the way at this last stage. But at this point, every bit of work involving ImmuCell and the contractor, all of our activity here, is pointed toward filing in the fourth quarter. As you're aware, Sam, of the five technical sections, we've got to have four finished; this one is the fifth. Once we file it, a six-month review follows; at that point we'll truly understand our position regarding launch timing, since they'll either respond with complete and we can launch, or they'll respond with questions and we'll need to resubmit for an additional six months. And we have to begin with that fourth quarter submission.

All right. At the outset, when Lonza filed with the FDA and received the zero discard, are we making 10 times? Or by what percentage are we sending in more material compared to what we first gave the FDA?

Yeah. Sam, I am somewhat puzzled. Lonza, honestly, they were part of things as a possible drug substance manufacturer a number of years back, but nothing was ever submitted through Lonza. My guess is you may mean the last section, which is called CMC, Chemistry, Manufacturing and Controls. That has been divided into two parts for us. An initial phase and a subsequent phase. Is that — ?

Yes. From what I understand, you initially filed with the FDA, and their response was affirmative. The zero discard requirement was satisfied, and at this point a bigger volume must be submitted for production. So I'm simply attempting to figure out, how much bigger does that production need to be? And as a general matter, will you have someone present at the ImmuCell facility prior to making your submission, forming a judgment that the zero discard standard is met, before that submission goes to the FDA?

Yes. Really, I believe these need to be pulled apart, since they're two separate questions. Take human food safety. It's one among the four technical sections that were finished. That is what supported the zero milk discard claim. So it has been finished for some time; as you say, that rested on modest volumes. All work prior to the CMC relied on research scale. Human food safety was wrapped up in the third quarter of 2018. So each of the four technical sections involved modest volumes. With the fifth technical section, essentially the FDA is telling you, hey, do it again, produce the identical product, except at commercial scale. That has been the entire aim. Enormous capital went into the facility, the drug substance facility, for that fifth technical section; so for that initial phase filing, we went forward and filed in drug substance and said, hey, take a look at it; their reply was that it was incomplete; there were some questions; incomplete was anticipated on our side since drug product hadn't been seen by them. Still, it set us moving along the CMC submission path; so at the point we file the second phase drug substance and drug product, the Nisin and the Nisin-filled in a syringe, we will be answering their questions regarding the drug substance first phase filing, and we will be finishing that submission using drug product manufactured at commercial scale.

Alright, that's really encouraging. Now, one additional point about Tri-Shield First Defense. There was a backlog, we brought it down, and now we're just waiting to make more once the facility becomes available. So when do we think that facility will be ready? Also, how much extra output can we manage right now, since we could boost sales even after cutting the backlog, so we'd be able to handle all of it — I believe it's 27 million or 18 million, whichever figure it is at present — and then ramp up production and ideally sell more overseas? That's what I'm asking regarding Tri-Shield First Defense?

Yes. You're moving toward that three-stage investment I mentioned. The initial phase involved moving that assembly, capsule assembly, out of 56 Evergreen, since we had to free up room at this site for more freeze-drying capacity. So goal one is finished. We've created the space, as of now. We're in the last steps of getting that new freeze-dryer fully built, shipped, installed, validated, and operational within the coming months. All of the second and third phase, and as quickly as possible, gets done as quickly as possible during this year. The freeze-dryer comes first. And that's essential. What we must do is move more product through the freeze-dryer; so it occurs here at the close of Q3, start of Q4, we obtain everything we're after; we secure that extra freeze-dryer capacity, up 50%; we secure the extra liquid processing capacity, up 100%. So that's where this investment is accelerating. It was always the catalyst across those three steps, and we're driving them, the earlier the better. That's how we clear the backlog. That's how we reverse our fortunes.

Michael, this really does sound thrilling. I can't wait to see every one of our milestones reached — for ImmuCell to hit those milestones — and I'm anticipating our payoff when everything is said and done. Best of luck, Michael.

I hear you. Thank you for sticking with us, Sam. That means a lot. Thank you.

Morning, and thanks for letting me ask. My question concerns testing for subclinical mastitis. Please tell me if I've got this wrong, but detecting subclinical mastitis requires running a test for it. So my question has two parts. First, what share of farmers currently do test for subclinical mastitis? Second, among those who don't, would there be a learning curve involved in figuring out how to test for it? Or does that fall to the vets? If you could expand on all of that, thank you.

Yeah, that's an excellent question, and a really significant one, since I realize it will shape the launch rate for this product, given that we're moving into what amounts to a new way of thinking. So you're correct. Many of these cows — the producers are aware they're ill. They're walking around ill. Somatic cell counts are high, and that is measurable, yet they ignore it. The reason is the milk can still be sold. So what we need to accomplish is step in and assist the producers in locating these cows and demonstrating the benefit. The primary reason they get ignored — and again, producers know these animals are ill, but as long as the milk can be sold, they simply ignore it and the cows walk around ill. We'll step in, help them, and explain, here's the benefit. You've been ignoring that cow because you knew treating her meant you'd have to dump the milk. Now stop ignoring it. It harms the animal, harms your milk production, harms your milk quality and quantity. Treat her, since you no longer have to dump that milk. So one of the biggest objectives for the launch is that we're creating a new market. So a great deal of education is going to be needed here. And I was just attempting to reference one item in the Q for you. A somewhat more detailed answer. Give me one second. So there's a risk factor, so to speak, page 38, 39. I believe it's quite relevant to what you asked. These are the things we need to overcome. Sorry, I cited the wrong spot — I'm struggling to locate it. I can follow up on that. I don't need to hold up other people. But here we go, sorry, at last it isn't 38, it's 37. Uncertainty of market size and product sales estimates. I mean, that's our response to your question; that's what we have to do. We have to build awareness and build demand for this new way, this new treatment paradigm.

So when you gave your answer, perhaps I missed it — are you stating that testing for subclinical mastitis isn't something they're required to do?

It isn't mandatory. Clearly, we're going to demonstrate the advantages of doing it. Every one of them tracks somatic cell count, so an indication is visible. Culturing can happen whenever you choose. Demand has to be built for culturing, for greater use of cultures and greater use of somatic cells, and for not turning a blind eye to those sick cows. So it's possible. The reason it isn't happening is, at this moment, what would you do with the result? Sure, a result could come back. She's infected subclinically. But treatment isn't something I'm going to provide here. The milk has to be sold. So that's the paradigm shift.

All right, that clears things up for me. I appreciate it.

Thank you, Tom.

Thanks. Hello there. Good morning, Michael. And like always, thank you for every bit of time you give us to assist in grasping the process, the products, and all the rest. You truly are exceptionally great at breaking things down, allowing us time for questions, and I'm grateful for that. I have just two things I'd like to ask. First, I merely wanted to build on that earlier question regarding testing and education. Then second, I was hoping you could tell me a bit about how the Nisin products for mastitis get labeled. On the testing side, are the test kits ours? Or do they come from a third party? And what's your plan to put those test kits in their hands — if it isn't our product, how do you intend to get that kit to the farmer at a fair price while teaching them how to run the test? Is there a partner making these, or is it a distributor?

Yes. That's the concept. Thanks. It comes from a third party. That isn't our line of business; they do sell the CMT, meaning the California Mastitis Test. Basically, it assists you in figuring out which of the four quarters is infected. The culturing, though, gets handled by vets. Your milking system handles the somatic cell count. Such tests are available. A few separate vendors hold most of that market. And we're going to assist them in moving more of what they make.

Right. So what I'm getting at is a veterinarian needs to visit the farm. You can't handle it on your own at all? A vet visit is required.

Correct. Certain culturing can be performed on the farm. Certain testing can also take place there. A portion of samples get shipped to the lab. So you get a combination; but yes, when it comes to somatic cells, that's entirely done on-farm. It comes straight off the milk line.

What sort of duration are we looking at for a cow to be on our product prior to getting better? I get it — since there's no discard, that isn't truly a concern in those terms. However, when a cow has mastitis, milk output drops fairly significantly; so I'm curious how much time is needed for that to climb back up?

The therapy consists of 3 milkings back-to-back. Certain operations milk 3 times each day. That means their dosing wraps up within a single day, and they'll observe that improvement across the following several milkings. So it happens fairly fast. Still, you must complete 3 milkings in a row. When you're on a twice-daily milking schedule, that works out to 1.5 days. That covers the course of therapy. And the rebound — the healing or the fix — comes immediately following that third dose.

All right. And compared with the antibiotic option, that's roughly 14 days?

Or does that one also — Michael Brigham: No, a response will show up fast, but you'll observe a discard window of somewhere between 24 and 96 hours. Therefore, when Re-Tain is set against standard antibiotics, the comparison we'll draw isn't really about response rate, in my view, but about how long discarding lasts. So a response might be happening, yet it makes no difference whether she's healthy following that final antibiotic infusion. You're still discarding for as long as 96 hours.

Also, whenever you say "up to," what decides if that means 80 hours or 96? Is continued testing for antibiotics in the milk something you must do?

A label and restrictions come with every product. So this is specific to each product. I have a nice slide covering that, if that's alright, since we attempted to address this question somewhat within the deck. Should you get the opportunity to check slide 25, we've sort of set out a few of the products along with some of the discards.