ImmuCell Corporation (ICCC) Earnings Call Transcript & Summary

Thanks, Tom, and good morning, everyone — welcome. As Tom mentioned, I'm Joe Diaz, and I'm with Lytham Partners. Our firm serves as the investor relations consultant for ImmuCell. We appreciate each of you being here today as we go over the unaudited financial results for the first — pardon me — the fourth quarter, plus the complete year that closed on December 31, 2021. Before we get into it, I want to begin with a caution about forward-looking statements. Those listening should keep in mind that remarks from management over the course of this call contain forward-looking statements, which carry risks and uncertainties that might lead actual results to vary materially from what we talk about today. You can find more details on those risks and uncertainties in the cautionary note on forward-looking statements — commonly called the safe harbor statement — included in last night's release and in the company's periodic filings with the Securities and Exchange Commission. Having said that, I'll now hand things over to Michael Brigham, ImmuCell Corporation's President and CEO, and once he's finished, we'll take your questions. Michael?

Joe, thanks, and good morning everyone. It's a privilege to be able to provide an update on the situation at ImmuCell; at present, several critical issues sit before us requiring our attention. At the very top of that list: expanding our product sales and increasing our manufacturing capacity to keep pace with growing demand. I would also rank obtaining the FDA's final regulatory approval for Re-Tain among the most urgent items we face right now. I'm looking forward to having our VP of Manufacturing Operations and our VP of Sales and Marketing — two key individuals who are doing an outstanding job tackling these issues on our behalf — join later in this call so you can hear from them directly. First off, let me walk you through the figures quickly. The unaudited financials were released last night in our press release. Because that document is already in your hands, I'll skip going over each individual line item to save time, though I do want to touch on a few key points. You're probably aware that back on January 5, we put out a release with our preliminary top line sales numbers; these optional disclosures have been something we do to provide investors an early, timely view of what I consider the single most important gauge of how we're doing operationally and financially — namely, product sales, near the beginning of the reporting cycle. Nothing has changed from that earlier disclosure, which was very strong. To restate that, revenue from products rose 45% in Q4 of 2021, and for the twelve months ending December 31, '21, it climbed 25%, measured against the same periods a year earlier. Gross margin, expressed as a share of sales, came in at 47% for the fourth quarter of 2021, an improvement over the 43% recorded in the fourth quarter of 2020. Across the entirety of both years — the one concluding December 31, '21 and the one before it — our gross margin percentage stood at 45%. Thanks to stronger revenue and a better gross margin, we posted $74,000 in net income for the fourth quarter of 2021. That also helped us shrink our net loss for the year ended December 31, 2021 to $78,000, compared with a net loss of just over $1 million for the year ended December 31, 2020. EBITDA — earnings before interest, taxes, depreciation and amortization — rose to $2.7 million for the year ended December 31, 2021, versus $1.9 million for the year ended December 31, 2020. You should look at these non-GAAP financial measures alongside our statement of cash flows, which is presented in accordance with GAAP. Regarding where things stand with Re-Tain, I'm happy to share that we've sent the FDA our second submission, responding to their earlier feedback and questions about the chemistry, manufacturing and controls, or CMC, technical section — a necessary piece for our New Animal Drug Application, or NADA, to be approved. Putting this complicated submission together took enormous work from our regulatory, manufacturing and quality teams. We'll find out this August if the FDA approves our NADA or responds with further questions. When it comes to product development, our aim is to show that Nisin A, our peptide antimicrobial, can make a meaningful contribution to treating subclinical mastitis in the dairy industry as it exists today, and that it provides a viable substitute for conventional antibiotics. Since every intramammary drug currently on the market carries labor demands — milk must be thrown out, and meat has to be withheld while treatment is underway and for some time afterward — dairy producers today typically choose not to treat ill cows that are still giving milk that can be sold. By eliminating that financial disincentive against treating subclinical mastitis, Re-Tain delivers an animal welfare gain, letting sick cattle receive treatment without facing milk discard or meat withhold penalties. Beyond better animal welfare, Re-Tain also strengthens food safety and sustainability, since the peptide antimicrobial it uses has no role in human medicine. That matters, given that antibiotic resistance is believed to stem from excessive use of traditional antibiotics, and it remains a public health worry. Apart from the Re-Tain program, the most thrilling thing happening at ImmuCell these days is likely the expansion in both manufacturing capability and customer demand for the First Defense line. I've invited Betsy Williams, our VP of Manufacturing Operations, along with Bobbi Jo Brockmann, our VP of Sales and Marketing, to discuss this exciting effort. Betsy, please go ahead and kick things off; not so long ago, the roughly $16.5 million per year of production capacity we had before was sufficient to satisfy demand; yet starting March 31, 2020, at the close of each quarter we've been carrying an order backlog. Could you walk us through the capacity expansion work finished during the last 2 years, which let us lift output to nearly $23 million on an annualized basis in the fourth quarter of 2021?

Absolutely, glad to do that. To begin with the initial stages of how we make our products, we significantly increased both the count of program farms and the total number of program cows supplying the colostrum we collect. That move essentially doubled the capacity we have at this point in production. To keep pace with that expansion, the ImmuCell vaccine team increased the capacity of their manufacturing equipment so it could handle the doubling of program cows. On top of that, they achieved many successful process improvements aimed at maximizing yield. And I'm pleased to report that we now hold a very robust colostrum inventory to fuel ongoing growth efforts. Turning to liquid processing, which is the following stage, the liquid processing capacity at ImmuCell doubled thanks to the installation of a second way concentrate, or as we refer to it, cheese equipment train. After that comes lyophilization, meaning freeze drying the liquid into powder, and in 2021 we brought in a third freeze dryer, which raised our capacity by 50%; and as we head into 2022, we intend to install a fourth freeze dryer, which would double the total capacity that existed in early 2021. So you might ask yourself, where does all this new equipment go within our main building? The answer is, it doesn't fit there. Instead, we grew our facilities by leasing and renovating a building roughly a block from our headquarters. This building, specially renovated for our process, is now the place where we turn the freeze dried powder from Building 56 into finished product — that's First Defense, capsule and bolus product, plus Dual-Force and Tri-Shield gel products; we laid out dedicated rooms, or suites, for each product type and brought in new and redundant equipment to support our continued growth. The building in fact offers space to expand further for formulation and filling operations down the road. The renovation of the building, the dedicated footprint for finished goods production and the higher capacity equipment together really deliver efficient, streamlined product and process flows along with good regulatory compliance; so speaking for manufacturing, we genuinely appreciate these investments in our facilities to satisfy the increased demand and to stay well aligned with current good manufacturing practices.

Thanks, Betsy. It's genuinely encouraging to witness output rising while customer interest grows at this point. Because of the demand growth we're observing, I realize all of us feel that a figure of $23 million each year falls short. Output has to run substantially ahead of sales, plus we require safety stock; we must clear the backlog and remain in front of demand moving forward. Could you please describe the current new initiatives in progress aimed at lifting our yearly production capacity to roughly $35 million per year by the close of 2022?

Absolutely. As I mentioned earlier, our 2022 growth stage will involve putting a fourth lyophilizer freeze dryer into Building 56. That piece is truly critical and will bring about a 33% boost in capacity; in addition, we're going to add a high-speed automated filler designed specifically for gel product, which comes with labeling capability, and this will cut down our cycle time for gel filling operations while allowing extra production capacity. That new equipment should be up and running by the end of 2022.

All right, thanks, Betsy. I appreciate you walking us through everything you handle on the First Defense front, plus the fact that you're simultaneously pushing ahead with all the Re-Tain regulatory efforts. Naturally, we wouldn't be putting in this time and money at all if customer demand for First Defense weren't on the rise. Bobbi, can you walk us through what you and the sales team are doing to build and keep up that level of demand for First Defense?

Okay, let me begin by saying something I think should be clear to everybody listening in: what we offer isn't some copycat item. First Defense is genuinely one of a kind—no other USDA-licensed scour prevention products out there rely on polyclonal antibodies the way ours do. What this approach does is free producers from depending on inconsistent vaccine reactions to produce antibodies, and instead gives each calf the same protection through a precise dose of instant immunity. That means we're safeguarding the individual animal while also cutting down on pathogen shedding and the spread of disease throughout the entire herd. This isn't us parsing words just to claim a marketing edge. What we have to offer really is distinct, and that speaks to the resolve shown by the teams behind our product development and manufacturing. We chose a path that the big pharma players tend to avoid. Because of that, potential buyers have to be aware that we're traveling it. As one of our fastest-growing territory managers, Mr. Dale Miller, puts it: "If you can't see them, you're not going to sell them." ImmuCell sat on this distinctive technology for quite a few years, yet it wasn't until 2010 that we began investing more aggressively in sales and marketing. We remain very much the David going up against pharmaceutical Goliaths, but our commercial group has expanded from 1 to 8 territory managers, plus a Marketing Director, a technical service veterinarian, and myself. That adds up to 11 of us out in the market daily. Certainly, some territories could be divided to boost coverage, but beginning in 2015, that team expansion built cumulative momentum, and we're watching it turn into more prospects being reached. Of course, that reach still has to carry through the sales process far enough to produce repeat customers—I'm likely just saying what's plain to see. Still, I'm glad to report that it has happened. We now have additional customers, and they're purchasing our products that bring in more revenue. Getting those deals closed, mind you, requires time and ability, since our sticker price runs 3x what competitors charge. Even so, our sharper marketing messaging and occasionally unconventional approaches, spearheaded by Ms. Cathy Becker, have generated a ripple effect that's won us a seat at the table alongside traditional vaccines; this sophisticated yet sensible marketing shortens the time needed to close. My thinking is that happens because customers regard what we say—that verified antibodies outperform an inconsistent vaccine response—as more believable when marketing has already worked its way into that customer's mind before the in-person sales conversations occur. So our goal is for every region to outgrow the competition, and collectively, that has produced steady gains in market share. So I'm pleased to report that marketing and sales are genuinely pulling the rope in the same direction. I'd also like to address our supply problems. Normally, shortages in supply destroy sales momentum. Yet the approach we've taken to navigate our shortages appears to be paying off for us. Over the past 26 months, we've been deliberately steering product toward those we call our make or breakup customers. That takes teamwork with distribution and tight inventory control across the whole chain, right down to the farm. Our entire commercial group shifted to this service-minded approach, and it has generated goodwill that is now coming back to us. The encouraging talks we're having at the farm level indicate the strategy is delivering. To close, I'd note that we still have considerable domestic market share to capture, and we're opening up some new markets abroad. The future for the First Defense line looks promising, even with the hurdle we might face in managing any consequences of the extended order backlog. I'll also touch briefly on how our team is shaping the commercial strategy for Re-Tain. Dr. Raffael Lichdi is a valuable new addition to my group on that front. We know well how to sell First Defense. That sales and marketing formula, I mean, has been honed over the years; right now we're figuring out what that sales formula could look like for Re-Tain. Once approval comes, we'll get the chance to put that formula to the test; we then listen to the market and tweet the recipe. Put simply, that's how our commercial team plans to build a value proposition and sales approach for Re-Tain that is as strong as what we have for the First Defense line.

Okay, Bobbi, that was genuinely useful. I appreciate you taking the time to walk us through all the essential work you handle for this company so well. To wrap up today's call, I'd ask everyone to take a look at the press release we filed yesterday evening. Our audited annual report on Form 10-K should be filed by the close of March. Beyond that, please check out the corporate presentation slide deck — an updated version for February went up on our site just last night. In my view, it offers a solid overview of where our business is headed and what we're aiming for, along with where our financials stand right now; so head to the Investors section on the website and select the corporate presentation. Having said all that, I'm ready to answer whatever you'd like to ask. Operator, please go ahead and open the lines.

It's genuinely great to have Betsy and Bobbi join us on this call. I really appreciate the detail you both provided. During the previous call, as I recall, the capacity expansion plan for First Defense went from 23% to 30%. And at this point you're mentioning $35 million. Could you walk us through what changed? Is there further investment involved? Or do you see certain process improvements that would allow you to reach $35 million?

Absolutely. George, I appreciate you tracking it so closely. And Betsy actually pointed out the trick — the more the better. We're simply looking for every efficiency available to us. But that gel automation, the gel filling automation, truly is that final incremental gain that sort of lifts us somewhat above what we originally anticipated. But — so by and large, the plan remains the same, though the gel filler does provide that additional bump, that additional $5 million beyond the earlier plan, but...

Coupled with the full year of lyo 4.

Exactly.

Yes, those 2.

Right. The progress here happens in very small steps. As we always do, I look at the quarterly figures and turn them into annualized ones. We discuss an annual view, but naturally, whenever new equipment arrives, it lands in a specific quarter, so we don't reap the advantage across the entire fiscal year. Still, yes — the plan is largely the same, and it's about executing and executing as efficiently as we possibly can, and automating gel is going to be a tremendous aid; at this production volume, it's genuinely essential.

Alright, that all makes sense. Then looking at it from a capital expenditures angle, for both First Defense and Re-Tain, what kind of spending do you anticipate is needed to reach $35 million in capacity for First Defense, and simply to launch Re-Tain at its initial capacity level?

Correct. So I — in our September 30 Q filings, where I broke down every project, we laid out the A to F budget for each one, along with the status of each. That remains very much intact, very much on track; so I would point you back to that. To be sure, we will refresh that with some up-to-date detailed figures in the 10-K at the end of March, but there are no new projects. So those remain the same projects, the same budgets. And a comparable response applies for Re-Tain. The significant money went into the development. One project Betsy is overseeing involves that $4 million investment to bring the aseptic filling from a CMO or outside contractor in-house. But once again, that appeared in the September 30. I don't anticipate any major revisions to the 12/31 disclosures; so steady as we go, those CapEx projects are funded, and going forward, no big changes.

All right, great. So perhaps one fast thing for Bobbi. Your team has performed wonderfully; however, I suppose they must be pretty stretched, since you handle an enormous area with 8 territory managers. Do you intend to bring on more people, or not?

Correct. Our territories are indeed large. The way we handle them, I believe, might be somewhat of an edge over competitors; we rely on solid market share information; this lets us concentrate on places where rival products are densely present, rather than feeling we must reach each remote spot in the territory, correct? That's roughly how we've coped using fewer sales reps. We definitely have regions, as I sort of noted, where we'd like to divide territories and improve coverage. Yet right now, that's basically paused; production has to catch up with demand prior to us making any such investments. So the plan exists, and we're prepared to put it into action, though we want to ensure we maximize and sell as much as possible with our current team before adding any new staff.

On that point, George, Bobbi, and I see things the same way. In other words, bringing on more people is an option, yet we've already brought some people aboard to reach the position we're aiming for at present, and any additional growth of the team will track alongside revenue and cash flow, and then paying for it; so...