ImmuCell Corporation (ICCC) Earnings Call Transcript & Summary

Appreciate that, Andrea. Hello everybody, and thanks for being with us on this call today. I'm Joe Diaz, calling in from Lytham Partners. Our company serves as the investor relations consultant for ImmuCell. We're grateful that all of you took the time to participate as we go over the unaudited financial figures for the first quarter that closed on March 31, 2022. Before we get into things, I want to start with a warning about forward-looking statements. Those listening should keep in mind that anything management says on this call will contain forward-looking statements, and those come with risks and uncertainties that might make actual outcomes vary significantly from what gets talked about today. You can find more details about such risks and uncertainties in the cautionary note on forward-looking statements, or the safe harbor statement, that came with yesterday evening's press release, along with our Form 10-Q covering the quarter that finished March 31, 2022, as well as in the company's other periodic filings with the SEC. Having said that, I'll now hand things over to Michael Brigham, who serves as President and CEO of ImmuCell Corporation, and following that, we'll take your questions. Michael?

Alright, thank you, Joe, and good morning to everybody. There's plenty of exciting news to cover today, so let's dive right in. Last night's press release lays out the unaudited financial results. Because you already have that information in hand, I won't spend your time walking through every line item, but I do want to touch on a few key points. Our push to expand production capacity so we can meet the growing demand for First Defense is delivering results. Sales have risen substantially, and we're making significant progress whittling down the order backlog. As many of you are aware, back on April 11, we put out a press release with our preliminary top-line sales figures. These optional announcements have been our way of giving investors a very prompt view of product sales, which I consider the single most important gauge of how our operations and financial performance are doing early in a reporting period. I have nothing to change regarding that very strong prior disclosure. To repeat, product sales climbed 46% in Q1 of 2022 and rose 45% for the twelve-month period ended March 31, 2022, versus the comparable periods a year earlier. That works out to a $6.6 million sales increase for the twelve-month period ended March 31, 2022, against the prior twelve-month period ended March 31, 2021. We're starting to reap the rewards of our strategic choices to put more money into sales and marketing expenses and to broaden our product line; this sales growth is occurring even as we keep working through a backlog of orders. Before we rolled out the newest extension of the First Defense product line in late 2017, specifically First Defense Tri-Shield, yearly production capacity of roughly 16.5 million was enough to fill sales promptly with no order backlog. But Tri-Shield's introduction changed everything for us. We've been putting millions of dollars into capital expenditures to boost our production capacity. This type of major investment in real estate, manpower, and equipment inevitably takes time, no matter how much urgency and energy our team brings to it. The aim of the first phase of our production capacity expansion, which kicked off during 2019, was to raise our yearly production capacity from 16.5 million to 23 million. We've hit that target, with annualized production output coming in at right around 22.9 million during Q4 of 2021 and roughly 23.8 million during Q1 of 2022. With our sales of approximately $21.1 million during the twelve months ended March 31, 2022, and an order backlog still outstanding as of March 31, I'm confident we made the correct call during Q2 of 2021 to launch an additional capital investment aimed at lifting our yearly production capacity to about 35 million by the end of this year. That work is proceeding as planned. Gross margin as a percentage of sales rose to 52% during Q1 of 2022, up from 39% during Q1 of 2021. For the six months that concluded on March 31, 2022, our gross margin percentage stood at 49.5%, while across the twelve months ending on that same date it came in at 48%. Thanks to stronger sales volume and a better gross margin, we were able to post net income of $736,000 in Q1 of 2022, which contrasts with a net loss of $441,000 in Q1 of 2021. EBITDA — that's earnings before interest, taxes, depreciation, and amortization — rose to $1,434,000 in Q1 of 2022, up from $258,000 in Q1 of 2021. When looking at these non-GAAP measures, you should keep in mind our statement of cash flows, which is presented in accordance with GAAP. Beyond expanding First Defense production capacity, another objective that could transform our company is securing FDA approval for Re-Tain. We expect a response from the FDA in Q3 of 2022 regarding our second submission of the final one among five significant technical sections for Re-Tain. That particular section goes by the name Chemistry, Manufacturing, and Controls, and approval of it would bring our new animal drug application to completion. What the FDA says back to us will decide whether we can kick off market launch early in Q4 of 2022. Meanwhile, we are addressing observations that came out of a recent pre-approval inspection by the FDA. When it comes to Re-Tain, our product development aim is to show that Nisin A, our polypeptide antimicrobial, can make a meaningful contribution to treating subclinical mastitis within the dairy industry of today, and that it can serve as a viable substitute for conventional antibiotics. Since every intramammary drug currently on the market carries labor demands — milk must be thrown out and meat must be held back for some period after treatment — dairy producers commonly choose not to treat animals that are ill but still giving salable milk. By eliminating that economic disincentive that discourages treating subclinical mastitis, Re-Tain delivers an animal welfare gain, letting sick cows receive treatment free of milk discard or meat withhold penalties. Along with better animal welfare, Re-Tain boosts food safety and sustainability through the use of Nisin, which has no role in human medicine. That matters because excessive reliance on traditional antibiotics is believed to drive antibiotic resistance, a public health concern that continues today; and that covers where things stand with First Defense and Re-Tain. Now I'd like to turn back to how these product initiatives first got started. To help with that, I'm delighted to welcome Dr. Joseph H. Crabb. Joe served as our former Chief Scientific Officer and VP of Product Development, and he currently works in a consultancy capacity for ImmuCell. Thanks for being here, Joe. I have just two questions for you. The USDA gave First Defense its first approval back in 1991. Please take us back to that period. What led you to the idea of purifying antibodies from milk in order to create a scours prevention product for newborn calves?

All right. Thank you very much, Michael, and Joe, plus everybody else. I'm grateful for this chance to talk a bit. Now, the concept didn't originate with me, yet in the end, I was the one who created the First Defense product. You see, it begins with how ruminants and primates differ, strange as that may sound. A human baby obtains nearly its entire immune protection during its earliest days through its mother's placenta. IgG crosses the placenta into the infant. When it comes to ruminants, a calf gets every bit of its maternal antibodies not via the placenta, but through its mother's milk, or colostrum. Fine. Within the dairy business, it has long been recognized as excellent practice to give your calves 1 gallon of colostrum that is high in purity and quality, since it holds many antibodies for that growing calf. Plenty of literature during the 1980s dealt with employing bovine colostrum to cure or ward off gastrointestinal sicknesses. During the 1970s, research by Norden, Mebus, and others, mostly at the University of Nebraska, pinpointed multiple virus types responsible for gastrointestinal trouble in calves. Norden proved the worth of vaccinating the dam. Put differently, give the vaccine to the mother so that she may pass specific immunity along to the calf she is carrying. At approximately that moment in the late 1980s, ImmuCell was. I joined the company since my background covered vaccines along with antibody purification. We collaborated with Mead Johnson, a maker of infant formula, investigating how bovine anti-rotavirus antibodies might be added into particular formulas meant for human babies. Although that effort never progressed very far, we kept the animal health rights to the technology, and we started working on First Defense. Our thinking was this: if a convenient dosage form of these antibodies, potent against gastrointestinal pathogens, could be produced, we might wind up with a solid product for easily stopping this illness in calves; we concentrated on creating subunit or otherwise novel vaccines, and we likewise concentrated on antibody purification technology, enabling us to raise antibody levels in colostrum enough that we could provide a protective dose that works against multiple pathogens inside one orally administered capsule. We also discovered that freeze-drying, our primary technique for drying these purified antibodies, proved to be the gentlest means of preserving the antibodies; that was essentially where the First Defense franchise began.

That's pretty fascinating, Joe. Every time you talk, I pick up something I didn't know before. What a great bit of history. I appreciate you walking us through it. Now let me move on to Re-Tain. As everyone knows, Re-Tain faces a far longer road with the FDA than the one we went through with the USDA on First Defense. So bring us back to the 2000s. What drew you to Nisin, and how did you develop the purification technology needed to produce a pharmaceutical drug preparation of Nisin at commercial scale?

Okay, thank you very much. Moving on from that point — following a number of years spent developing human-use versions of these bovine antibodies at ImmuCell, including applications like traveler's diarrhea, Clostridium difficile, and Cryptosporidium, much of which received funding via SBIR grants from the NIH. Then, during the late nineties, we chose a strategic path of concentrating solely on animal health uses, so we could narrow our focus and succeed with animal health products. Mastitis stood out as our clear target since it represents the biggest market within animal health. Each year in the U.S., it accounts for roughly $2 billion in losses. My own interest in bacteriocins as possible treatments for mastitis grew out of reading some of the literature along with the efforts of Phil Sears, who was at Cornell back then and afterward at MSU, plus some groundbreaking work by a company named Applied Microbiology, which turned into Ambi and in the end became Nutrition 21. Following conversations with Ambi, we managed to obtain the animal health rights for their Nisin technology. Our first step involved buying their existing commercial product. This was a Nisin-based pre-milking teat wipe known as Wipe Out. The thinking behind this was that we could demonstrate proof of concept that Nisin works against mastitis pathogens by gaining some hands-on experience with this teat wipe. We also picked up know-how in Nisin manufacturing. Although Wipe Out ultimately proved to be a solid product, it was never truly able to compete on a cost basis against the iodine and chlorhexidine-based products already being sold. We managed to build on the Nisin technology and create Re-Tain; in the process, we came up with an innovative purification technique that yielded pharmaceutical-grade Nisin, meaning 95% pure Nisin. Because Nisin had been utilized for a great many years by the food industry as a preservative, in a far cruder form, we believed our route through the FDA to develop this product for mastitis as an intramammary would be smoother given its lengthy history of safe use in food; that turned out not to be entirely accurate; we wound up following essentially the standard drug pathway for Re-Tain. Fortunately, as you know, we succeeded in getting the zero milk discard, which is a key distinction between Re-Tain and the other intramammaries, which mostly rely on antibiotics. With luck, over the next few months, we'll achieve the goal and get the product launched. Is there anything further I can add there, Michael?

Alright, it's truly a pleasure to be on this call. In just a handful of minutes, you covered roughly 30 years, and I've walked that same path alongside you, so hearing such a tight recap was genuinely wonderful. My hope is that our investors found it both interesting and useful. I appreciate you providing that, Joe — thank you very much. Let's keep an eye on the time and wrap up this conference call, or at least the presentation segment of it. Please take a moment to go through the press release along with the quarterly report on Form 10-Q that we submitted yesterday evening; in addition, I'd ask you to check out our corporate presentation slide deck. An update for May was posted to our website just last night. In my view, it offers a strong overview of our business strategy and objectives, plus our latest financial results. Simply navigate to the investors section on our website and select the corporate presentation; having said that, I'm ready and glad to answer your questions. Let's have the operator open the lines. Thank you, Andrea.

Hi there, Michael and Joe — morning to both of you, glad to be on the line. I appreciate you making room in your schedule, and congratulations on such a strong quarter. Michael, I've got a few things I'd like to ask. I was going through your 10-K just a few days ago. A tremendous amount of money has been poured into what Joe described to us as this fantastic story involving nisin, and the path you've taken to reach this point. If the product wins approval, the company has put forward a possible figure of $1 million in Re-Tain sales for 2023, and then perhaps an additional $1 million for 2024. For a business that devoted so much cash and so many years to developing what could be a blockbuster product, that strikes me as possibly quite a modest sales figure. Could you walk us through how you arrived at those projected revenues, and explain what the genuine revenue opportunity for Re-Tain actually looks like?

Yes. Appreciate it, John. Glad to be talking with you. A controlled launch is what we call this approach to bringing the product to market. You can pick between two paths; one option is sending the product into distribution the same way we handle First Defense, basically shipping it to the warehouses and having the reps carry it out to the farm. That carries substantial risk when you're dealing with an innovative product such as Re-Tain. We've chosen instead to go with this controlled launch approach, accepting that revenue won't spike like a hockey stick during, let's say, the initial 18 months, and instead putting our emphasis and priority on excellent customer experiences with that earliest group of customers receiving the product, so we can guarantee it's given properly, the dose is right, it's reaching the correct cows, and we've handled industry risks like a hot milk tank or a faulted cheese tank very carefully. As you know, nisin gets used the right way to steer clear of some of those risks. While getting into the capacity does take a bit of patience, we've constructed a production capacity of 10 million. Going after that through a mass market distribution launch within the first year or so strikes me as too risky. The sales team is getting prepared quite effectively. You've noticed the recent hires of Dr. Lichdi and Dr. Wustenberg. These are people who will assist Bobby and Kathy and the team in running this controlled launch and locking in the product's long-term benefit, even at the cost of possibly a faster, larger launch during year one. It's something of a trade-off, but I believe the long-term payoff is wise, and we get this product launched properly and used properly for maximum benefit across years two, three and four. I'm eager for the day when we can say that 10 million in capacity from today's plant isn't sufficient and expansion is needed; we can walk down that road together. Does that address your question, John?

To me, that comes across as a deliberate, staged rollout — one meant to ensure customers grasp how the product functions and then, you know, to plant it in the market. A question about, you know, the strong profitability in the business that you're now posting with reduced development costs for Re-Tain. As you launch, assuming you do launch Re-Tain and it gets approved, could you tell us about ramping up personnel to back Re-Tain while we're moderating, you know, sales? Do you hold any expectations that, and also, you know, growing your business on the First Defense franchise, you know, being capable of reaching $30+ million in sales potential, do you foresee that you're going to have to add a great deal of, you know, CapEx or any, a sizable workforce to support the business, or are you fairly at ease with the higher sales growth using the present staff and infrastructure that you have today?

Yes, John, that's an excellent question to follow up with, since it genuinely clarifies our approach to this controlled launch. Having First Defense and the expansion it's delivering puts us in a lucky position. It gives us part of that patience required for carrying out this controlled launch of Re-Tain. Staffing is indeed going up. Our CapEx is quite clearly spelled out. No surprises come to mind; we understand exactly what must be done to finish this expansion of First Defense, and the 10-Q details it project by project, along with disclosure of what those projects cost compared with the cash we have on hand. For the first time in ImmuCell's history, we have headroom, something I've never seen during my time with the company. We were constantly struggling with insufficient cash. First Defense, I believe, is clearly described in the queue; regarding Re-Tain, staffing is going to rise, though not dramatically. Currently we have roughly 67 staff members, a bit below 70. I can easily envision reaching 80 as we move into 2023. That's no massive jump in headcount. The CapEx has been budgeted and is understood, and we have the cash on hand to pay for it. I'd characterize it as moderate on the personnel side, yet we certainly require some additional hires. CapEx is in solid condition.

Michael, if I could squeeze in one final item — and I do appreciate the responses to what's been asked. Could you walk us through the back-to-two-parts piece? Regarding Re-Tain, is there a need on our side to educate or instruct the farmers, plus those folks in the dairy sector who will be applying Re-Tain, on how the product should be used? Or is this something they already have awareness of and already understand how to use and apply?

Yeah, that's a really fair point. Great question. The second one. It's a typical intramammary infusion. You've got a tube, a liquid that goes in via the teat opening, exactly the same as the other mastitis products available. In terms of how it's used, there's no training required for the customer and nothing unfamiliar. That's exactly what they already do with the intramammary tubes being sold right now.

All right. So for my final question — and I think it's in the K, though I clearly missed it — could you walk us through First Defense? It's been amazing. The growth has really been outstanding. Can you discuss what keeps competitors out, the patents, the IP involved? It looks like you have something unique there that's bringing in a lot of cash. My guess is that would draw interest from other players.

Yes. Well, that is an excellent question. After letting Joe walk through the background, much of that technology dates back a long way, so nothing there carries a patent. What we depend on entirely is the intellectual property tied to how we manufacture, just as Joe laid out, starting with the proprietary vaccines utilized during production and extending to our operations and the expansion taking place right here in Portland on the purification side. Joe also brought up certain technologies related to freeze-drying. Simply the specifics of the way those antibodies get purified until they reach a compact deliverable dose of, let's say, 4 to 5 grams — that is difficult. It requires a great deal of management at the farm level. When it comes to running the vaccine program, the hyper immunization vaccine program, the collection, the shipment back to Maine, and afterward the processing done here — which we are, you know, essentially duplicating or increasing further — our farm team stands apart in what it can accomplish. This is process know-how. You will not find a blockbuster-style patent like the kind common to a typical pharma drug, yet a typical pharma company is not what we are.

Alright, thanks. I’ll let others pose a few questions. Best wishes to you, and you’re doing a fantastic job there, Michael.

Hey, great, Joe. John, excuse me. Great to catch up. Thank you, John.

Thanks. Building on what the last person asked about First Defense and the fact that you're ramping up how much you can produce, what's your strategy from here over the coming 2 years? Do you feel sure that demand in that market will keep expanding, and that adding more capacity is a sensible move?