ImmuCell Corp (ICCC) 2017 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the ImmuCell Corporation Reports Third Quarter Fiscal Year 2017 Financial Results Conference Call. (Operator Instructions) Please also note, today's event is being recorded.

At this time, I'd like to turn the conference call over to Mr. Joe Diaz with Lytham Partners. Sir, please go ahead.

Thank you, Jamie, and thanks all of you for joining us to review the unaudited financial results of ImmuCell Corporation for the third quarter of 2017, which ended on September 30, 2017. My name is Joe Diaz with Lytham Partners. We're the Investor Relations consultant firm for ImmuCell.

With us on the call representing the company today are Michael F. Brigham, President and CEO; Bobbi Jo Brockmann, Vice President of Sales and Marketing; and Elizabeth L. Williams, Vice President of Manufacturing and Operations.

Before Michael gets started, let me say that statements made by the management team of ImmuCell during the course of this conference call that are not historical facts are considered to be forward-looking statements that are subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. Words such as believe, expect, anticipate, intend, estimate, will and other similar words or statements of expectation identify forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties detailed from time to time in the company's filings with the Securities and Exchange Commission. Investors are cautioned that forward-looking statements made during the course of this call are based on management's analysis as of today and the actual results could differ materially from the statements made. The company undertakes no obligation to publicly release the results of any revision to these forward-looking statements. A more complete safe harbor statement was included in today's press release and the Form 10-Q that will be filed by the company today.

With that said, let me turn the call over to Michael Brigham, President and CEO of ImmuCell Corporation. After which, we will open up the call for your questions. Michael?

Thanks, Joe. I thank all of you on the line for taking the time to join today's call. The full details to our quarterly financial results are available in the press release that was filed earlier today and the Form 10-Q that will be filed very shortly. I would like to focus my comments on the sales results and also touch on gross margin, product development expenses and net income.

I've asked Bobbi Brockmann and Betsy Williams to join the call to speak about our new product launch at our Nisin production facility.

So sales were just over $2 million in the quarter and just under $7.3 million for the 9 months year-to-date. These sales levels are similar to the sales recorded during the same period during 2016. I believe it is important to consider the impact of an order backlog and a discontinued product to better understand our sales results.

A prolonged period of order backlog, which began in early 2015 and extended through the middle of 2016 disrupted our normal shipping patterns. The order backlog was reduced to $365,000 as of June 30, 2016, which backlog was subsequently cleared during the third quarter of last year. Since then, we've had sufficient inventory to ship in accordance to the demand of our distributors.

Secondly, during the first quarter of 2017, we discontinued the manufacturing sale of our topical wipes product line. Sales during the first 9 months of 2017 included just $97,000 of this product line compared to $271,000 during the first 9 months of 2016. Excluding the shipments of orders that were in backlog as of December 31, 2015, and sales of the discontinued product, our sales during the first 9 months of 2017 would have increased by 8% in comparison to the period -- same period during 2016. It'll be good to have the impact of the backlog and a discontinued product removed from our period-to-period comparisons going forward so that we can look at the sales results on a more of an apples-to-apples basis.

The First Defense product line comprised 94% and 93% of our total sales during the 9-month period ending September 30, 2017, and 2016, respectively. And the same percentage is held for the 12-month periods ended December 30, 2017 and 2016, respectively. My point is that this is the product to watch to monitor the health of our core business. Sales of the First Defense product line increased by 7% and 1% during the 3-month and 9-month periods ended September 30, 2017, in comparison to the same period at September 30, 2016, before any adjustments for the backlog of orders discussed above. We do expect to report positive sales growth during the fourth quarter of 2017 in comparison to both the fourth quarter of 2016 and in comparison to the third quarter of 2017.

You may have seen our press release of earlier today announcing USDA approval of our First Defense Tri-Shield. This is a significant achievement for the company, and I would like to take this opportunity to congratulate our product development, regulatory and manufacturing teams for their great work in making this happen. Dr. John Zinckgraf, our Director of Product Development and lead on this project is with me here in Portland. Well done, John.

Thank you, Mike.

So with that, I would like to now ask Bobbi to speak about our new product and the Beyond Vaccination marketing strategy.

Thanks, Mike, and I echo that congratulations as well. So this additional USDA claim on our label means we are the only calf-level product that can protect against the 3 most common scour, also known as diarrhea, pathogens for newborn calves. So we're the only one. Over the years, we've been chipping away at the market share of our largest calf-level competitor, that being CALF-GUARD. CALF-GUARD is the volume leader in this calf-level category. And until now, CALF-GUARD was the only product that had a rotavirus claim. They have this along with the coronavirus claim. But now with our First Defense Tri-Shield product, we have all three: E. coli, corona and rotavirus. So we should be able to displace the CALF-GUARD at a more rapid rate.

The broad set of claims also opens the door for us to compete in a larger product category, this being the dam-level scour preventative market. This category is comprised of vaccines given to the cow for no other reason but to protect the calf from scours. These vaccines are designed to increase the antibody concentration in colostrum for these calf scour pathogens. Then through that consumption of colostrum, the calf receives immunity. Until now, these vaccines have been the most often used tool in the toolbox. That's why this dam-level category is the largest. But with Tri-Shield, we're doing what the producer is trained to accomplish with the commercial vaccine, which is increase the specific antibody concentration, but we're removing all variability. So unlike traditional dam-level scour vaccine, we can ensure every calf receives a guaranteed level of protected antibodies. Our product is also a whole lot easier to administer than dam-level vaccines. This enables the producers to avoid the tricky timing required for vaccine efficacy and the associated risks of adverse reaction to those vaccines.

Also, when using a dam-level vaccine, a producer needs to spend that money before they know if they have a live born valuable calf. Tri-Shield has given up birth, so the investment is much more targeted. We are certainly taking on some big competitors in a product category they focused a lot of time on this dam-level scour preventive market. We know we are poking the bear. This is truly a David and Goliath story, but you just heard all the reasons why Tri-Shield is better than traditional dam-level scour vaccine. So our Beyond Vaccination message serves as a really solid platform. And so far, it's been quite well received.

So those are the points that I thought you all might be interested in. At this stage, I'll turn it back over to Michael.

That's great. Thanks, Bobbi. This is really exciting, and I know our sales team has been anticipating this new product launch with great excitement.

So let me come back to the financial results just a bit. Gross margin was lower than usual during the third quarter of 2017. We experienced a decrease in the biological yield during the quarter that we understand, and we are already seeing improved yields during the fourth quarter of 2017.

Product development expenses were higher during both the third quarter of 2017 and during the first 9 months of the year in comparison to the periods during 2016. The increase in these controllable expenses was necessary to advance the development of our 2 new products. So largely, as a result of the increases in cost of goods sold and product development expenses, we reported a loss during the third quarter of 2017, which reduced our net income to just over breakeven for the first 9 months of the year.

As many of you know, we initiated construction of our $21 million pharmaceutical facility to produce Nisin during the third quarter of 2016. As of September 30, 2017, we have invested approximately $14.6 million in this project, leaving approximately $6.2 million to go. To finance this, we had approximately $2.3 million in cash on hand as of September 30, 2017, and have access to up to $4.3 million in available bank debt. Our groundbreaking product innovation is unlike all other antibiotic treatments on the market today. Our goal is to revolutionize the way mastitis is treated by making the treatment of subclinical infections economically feasible by not requiring a milk discard or meat withhold during or for a period of time after treatment. No other product on the market can offer this value proposition.

Nisin, the active ingredient, is a bacteriocin that's not used in human medicines and would not contribute to the growing concern that widespread use of antibiotics encourages growth of antibiotic resistant bacteria or superbugs.

So with that background, I would ask now Betsy to speak about the current status of the project and the ribbon-cutting ceremony we held just last week.

Thank you, Michael. Yes, the Certificate of Occupancy was issued on October 30, 2017, by the City of Portland. This really is almost precisely 13 months after groundbreaking in late 2016 -- late September 2016 and certainly represents an outstanding job by our construction company, Consigli, and our design firm, Stantec, along with all of their subcontractors.

So to recognize this key milestone, as Michael indicated, we did host the ribbon-cutting ceremony of the new facility on November 8. This included officials from the Portland City council as well as their economic development council, the State Agricultural Commissioner, some key vendors for us as well as many employees from Consigli, from local companies and a number of our employees here on site.

So the Certificate of Occupancy really is a key milestone. It enables us, as ImmuCell colleagues, to start to occupy the facility and initiate progress, the equipment qualification work, which is necessary before we make the first full-scale drug substance batches in first quarter 2018. Now this drug substance initial batches drive the subsequent regulatory filing timings. In other words, the Phase I drug substance filing is targeted for mid-2018, followed by Phase II, which would be responsive to any queries from the Drug Substance section, plus the drug product dossier that would comprise Phase II. Phase II is planned for filing in early 2019. So you can see these are very key milestones in the regulatory filing. All of this assumes 6 months for each phase filing followed by a 60-day administrative review. All of this is a -- represents a time line, which could lead to potential approval by the end of 2019 and then subsequent market launch. So we're well on our way, tipping away at the key milestones to get to approval and very, very proud of the team here that executed on that.

Thanks, Betsy. It is really is a great project on a -- great progress on a huge project. So with that said, let's have the operator open up the lines for your questions.

(Operator Instructions) And our first question today comes from John Lipman from Craig-Hallum.

Quick question for you. If you could just talk about Mast Out for a second. The filing scheduled that you have in a couple of different phases. Could you talk about -- what is the work in these dossiers that you're putting together? And more specifically, the data that the product works, that the Nisin works, could you talk about the clinical trials that you've already completed? Are there new clinical trials that you're going to do in treating calves for mastitis? Or that's all done already?

Great. Yes, great question, John. Thanks. I'm going to turn part of that over to Betsy as far as the specifics on the submission, which is called the Chemistry, Manufacturing and Controls Technical Section. So really, it's all about manufacturing, and I'll let Betsy explain what goes into those submissions. Because what's behind us, the total of 5 Technical Sections, 3 of them are complete. In other words, the FDA has issued a Technical Section Complete Letter on environmental impact, on target animal safety and perhaps most importantly, effectiveness. So that's where all the animal studies were conducted, and those Technical Sections are complete. There is a fourth one called human food safety. The important piece of that Technical Section was the granting of what we call the zero milk discard. Nisin is safe to consume. The FDA has agreed that it can have a label claim of zero milk discard. We did not want to go forward with investment like this without knowing that we have efficacy in the animal on a competitive product label and a differentiating competitive advantage being zero milk discard. That Technical Section is not yet quite complete. It will -- we expect it will be complete in the second quarter of next year. The last step there is a laboratory method technology transfer from our labs to the FDA's labs. So that's under way. It's inside of the critical path time line, which, again, I'll turn to Betsy for a little detail on the CMC Technical Section.

Yes. The drug substance section that will represent a lot of the detail about our process here in Portland from an overview of the process, the critical quality aspects of the process, our in-process controls, our finished goods specification, a lot about our manufacturing facility, equipment, room classifications, the level of clean room status, et cetera. And the section also includes analytical procedures that are used for in-process and in finished good testing. That will be the essence of the drug substance filing. It's a very detailed package. And that section could culminate in a FDA inspection of our facility here in Portland. That's typically done, and they will have not seen the facility up until that point. So that's Phase I, and anticipated to be submitted mid-2018. The second phase involves responses to any queries that FDA surfaces as a result of the filing. So it gives us a chance to respond, provide additional control data, et cetera. We don't anticipate any additional batches per se, but it will also include the drug product sterility insurance, processes and description and controls and testing, et cetera. So it's -- by Phase II, we will have a very comprehensive submission, including drug substance plus drug product. And that's anticipated to be filed in early first quarter 2019. And again, that drug product facility, Norbrook, would be subject to an inspection if FDA deemed that appropriate. They are currently FDA-approved for a similar dosage form.

So John, these reviews are subject to a statutory review time of 6 months. So the time I lay out more or less like this, we finished all the work of installing qualifying equipment. We make these batches around the middle of '18. We make that first submission, and we sit for 6 months. That's not going to be longer, it's not going to be shorter and we're pretty sure it's going to take 2 submissions. So there'll be a few months in between the first and second to respond to their questions like Betsy detailed, then you have another submission. It's another 6 months. And then she mentioned that last 60 days. When you add all that up, if things go well, if we stick to that time line, we're out to the end of 2019 for product license.

Great, great, great. And just one other question, congrats, I saw that you got USDA approval for Tri-Shield? Could you talk to us about your marketing plan for Tri-Shield? And when we're done telling us about the marketing plan for Tri-Shield, if you wouldn't mind, is there any marketing plan or changes you'll need to make to your sales force for Mast Out as well? And then I'll stop, and I'll get back in queue.

All right. Thanks, John. Yes, so the marketing plan to-date has been hold back the sales team because the sales team is ready to roll, but they have no product to sell. We can't ship a dose until we got the license from the USDA. But now with this license, we roll out a launch that I'll turn over to Bobbi just to explain a little bit more about what's Beyond Vaccination, what she's doing with the sales team to launch now that we have the approval to ship and sell.

Yes. So it's one thing to actually ship product, and our goal was to make sure that as soon as we had approval, our market was ready to place orders. And so we've been spending the last couple of months working with distribution to get the product entered into their system, convince them to take the market -- the product into their system, number one. Then get it set up in their system. And there's been a number of our distributors that have worked with us to the extent where they were actually booking pre-orders. So obviously, we can't ship products, so they couldn't ship products. But they we're taking orders, and so end-users, credit cards, for example, wouldn't be charged until we ship the product. And so I feel like the distribution chain is very well prepared. We have -- so we're ready to go there. And then I discussed the Beyond Vaccination message a little bit. That is really the platform anchoring this product because it allows us to go after our primary calf-level competition, but it also opens up that bigger pie, right, that dam-level vaccine market because now we have all 3 claims, so we can better complete with those dam-level products and also have those claims. But we are doing it on a platform where there's a whole lot of good reasons why people should challenge the conventional way, the traditional way, which are these dam-level scholar vaccines. And so we're breaking tradition and going after that market as well. So it is a bit of a paradigm shift, not as much of a paradigm shift as the mastitis product will be, but it's a good launch pad to get us even deeper relationships with those largest dairies so that we're ready for when the Mast Out product is available.

Yes. Thanks, Bobbi. John, just to touch on the next level, I think you referred at the end there. So the more successful this launch is and the more we grow sales, the more we can afford more sales reps, and our team is challenged with large territories. So each time we're able to break a territory down, we can be more and more effective in that territory. So we would expect some incremental growth in the sales team as we go over the next couple of years. And at the end of the day, David is not going to become Goliath overnight. We are still going to be competing against the big guys that are always going to have more reps than we do in every ZIP Code, in every county. But it wasn't too long ago that we had just 1 or 2 salespeople covering the whole country, and we've had this incremental growth up to 6 regional reps of sales and marketing employee and then Bobbi running the show. So incremental growth as we can pay for it and get ready for a launch of a bigger product opportunity 2 years out.

(Operator Instructions) Our next question comes from Sam Rebotsky from SER Asset Management.

Now the First Defense and the Tri-Shield, are they -- do you sell both products going forward? Or does the Tri-Shield have the First Defense product in it?

Yes. So we're not going to take anything away from our customer. So if our customers are happy with the product that they're using today, we're going to keep that available. So that means we'll have a bivalent product available in a capsule. We'll have a bivalent product available in a gel tube. If they do want to step up and subscribe to the Beyond Vaccination program, that will be the trivalent product in the gel tube only because that many antibodies just will not fit inside of a capsule.

Okay. So that's a combination of both products? Or does the former need to have both products? I don't understand.

No, no, it will be a single dose. All of them will be single dose. The producer would decide, do I want a dose in a capsule, do I want a single dose bivalent in a gel tube, do I want a single dose trivalent in a gel tube.

Okay, that sounds good. Now I assume since you have advanced orders or at least the distributors had the advanced orders, is there a total dollar amount that you could sort of -- do you have inventory? Or you're not allowed to produce the inventory until the USDA gave you approval? And how long would you be able to produce an inventory to ship now?

So we're going to just build inventory according to sales. So we took a risk and built some for launch that will ship in the coming days, final packaging and whatnot takes place and it ships. And then we're just going to just -- we're going to be monitoring sales and allocating our production process between the bivalent line and the trivalent line. So really, we launch right away in the coming days and we just have to see the results. We're going to -- we know we're going to see some drop in bivalent sales as the customer converts. We may see some first-time sales on a trivalent customer. We got to be ready for all formats and respond to customer demand.

And now that you have the Tri-Shield, what -- do you think we'd be able to get overseas shipments into countries that you weren't able to sell the First Defense previously? Is there more of -- have you gotten any advanced signs of that?

Honestly, not really, Sam. I mean, it will be helpful for sure. Rotavirus is an important pathogen in those territories. But the barrier is not having rotavirus. The barrier is the regulatory approval. So we will continue whether it's bivalent or trivalent having to get that. Regulatory import-export hurdle cross, but there'll be more interest and certainly have in that road -- with something that was missing from some international customer demand.

Okay. I had previously spoke to you about the size of the global market for Nisin, and this publication statistics MRC had a number even though it's not the purified Nisin that you're going to make. They had indicated that the size of the market is $420.8 million in 2016 and $618.6 million, they're projecting for 2023. And their point is that meat, the rising consumption of meat across many nations and applications of meat protection from being contaminated. And maybe at some point in time, this size of the market when you finally get approval for the Mast Out, somehow there will be a way to get more Mast Out because the size of the Nisin market is pretty large.

Yes, Sam, I'd like to -- I'm not familiar with that source. I'd like to catch up to that and have our team take a look at it. But I'm going to take a guess here, I mean, what I know is that's not an animal health drug application of Nisin. I think what they must be referring to is the other huge market, which is food preservation. So yes, the same Nisin, not aware of it being used as meat preservative, more as a sort of a processed dairy food preservation agent. So a very different -- same Nisin, but a very different level of purity. So that food presentation was never going to get approved. That food grade Nisin used for food preservation will never get approved, but what we're trying to do, all this work and all this money has been spent to make a high pharmaceutical-grade purity. So similar and interesting about -- I don't know enough about the comment really, it's somewhat (inaudible).

I will fax this to you or get this to you and...

;

Yes, I'm curious, I'm curious. We'll look at it. It's good. It's good news that we have -- I think we're opening a new market, but it's good to know that there's -- the market is large as you suggest on these other applications. It doesn't surprise me. Nisin's very broad spectrum, very effective, very active, and that's a heck of a lot of sales in a much lower price point application if we are talking about that food preservation.

(Operator Instructions) Our next question comes from Tony Polak from Aegis Capital.

Could you give us an idea on the pricing on the Tri-Shield versus the existing first events product?

Yes. So it is going to be more expensive to buy. It's going to be more expensive to make because essentially, 2 doses in 1. We continue to have the same production string for E. coli and corona. And then we had a whole new production string for rotavirus to combine the 3 in 1, 2. But Bobbi, do you want to jump in on the distributor pricing?

Yes, no problem. Well, how about I can put it into perspective on retail pricing. It might be more real. So our producer is going to pay $2 more, $2 to $2.50 more for the Tri-Shield product than for the current product, if they were to get our current product in the gel tube. The gel tube format, as Mike had indicated, is more expensive to produce versus the capsule, but we just can't fit the needed amount of rotavirus antibody into that capsule. So the new product going forward will only be available in a gel tube. So that added packaging along with the added value of the rotavirus claim would be about, like I said, $2, $2.50, depending on the region, more per calf. Now comparatively speaking, our competition, some of them are dirt cheap and some of them are slight bit higher than that. So I think when we compare the value for the price, we're actually priced pretty well at that $10.99 retail.

Right, okay. And can you give us an idea of the market size in terms of -- is there a product out there that takes care of this problem, the rotavirus? Or is that just used when necessary? I mean, is it -- I don't understand the market there.

I think we can put it in a ballpark, Tony. Kind of speak to what Bobbi is excited about is the dam-level market. We see the calf-level market at about $17 million a year. And then as Bobbi mentioned, the dam-level is bigger. It's about twice that. So there's going to be people that will stick with their vaccine and never move over, and just give us a bigger, bigger target, something like about double the calf-level market.

Right. And is there any statistics on how much you're saving the industry if they went -- let's say, they went fully from a $17 million market to a $34 million market. So if it is just fixed on that.

Well, Bobbi and the team, and she may want to comment on this too. But it is almost a case-by-case. They're going out with distributors and leveraging that distributor, meeting with big producers and running that ROI on a farm-our-farm basis where you can show them, here's your totally loaded cost of vaccine with all its associated costs and here's the total cost of ours. And we're not going to win every calculation, but there are -- there's plenty of opportunity where we can show that positive ROI versus the direct delivery to the viable calf versus the vaccine to all the cows. Did I get that close, Bobbi, or...

Yes. Spot on, actually. There are so many factors that it is a case-by-case scenario. And we do just pencil out the true cost of a dam-level scour program, and that takes into account percent of first calf heifers on the farm, how many DOAs, or dead on arrival calves the farm has, the response rate they think they're getting from a dam-level vaccine, which industry would say, at best, is 80% response rate. And then the percent heifer crop, and of course, that's different if they're using sex semen or not using sex semen. So there's a lot of factors. That calculation though has been very positive because it really shed some light on what the true cost per live born valued animal is on this farm, these different farms, and it puts us on some pretty positive light when you're comparing price points.

Great. And can you operate at -- if you got orders for double your sales, could that be accomplished right away or within a few months? In other words, if the product really took off?

All right. The big investment we made to double capacity was completed early '16. We don't expect this to explode overnight, but we've got the capacity available for -- just about double what we're doing today. We will be watching these sales reports over -- week by week, over the next few months just to see what to put in those projections, production, scheduled projections for 2018.

Okay. Could you address why the cost of goods sold went up so much this quarter versus last year?

Yes. Frustrating for sure, kind of a -- we weren't expecting, but really largely due to biological yields. It's interesting as, Bobbi goes out and sells the Beyond Vaccination program, one of the things she's talking about is the response to vaccine, which is variable. That's a good sales pitch. That's not such a good production pitch, but it's true on both ends. So we do see biological yields go up and down. We saw quite a bit down here in the third quarter as you've seen. As I did mention, I think we've been able to understand it and fix it, and we've looked at the fourth quarter and the early batches are already coming back to the right place. So I don't see it as a long extended problem, but it definitely hit the third quarter. It kind of double down on a quarter in which we had planned not so much production because we were good with inventory and we took people and allocated that labor over to the Nisin project. So when you're a little light on output or throughput and you get yield on the same quarter, we had -- I guess, the good news is, is about as bad as it's ever been, it's 47% and then we see a fix in the -- going to the fourth quarter hit.

And ladies and gentlemen, that will conclude today's question-and-answer session. This time, I'd like to turn the conference call back over to Joe Diaz for any closing remarks.

Thank you, Jamie. And again, I'd like to thank all of you for participating on today's call. We will look forward to talking with you again at the conclusion of the current quarter, and hope you have a great day and a great week ahead of you. Thank you.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.