ImmuCell Corp (ICCC) 2020 Q2 法說會逐字稿

Good morning, everyone, and welcome to the ImmuCell Corporation Reports Second Quarter Fiscal Year 2020 Financial Results Conference Call.

(Operator Instructions) Please also note that this event is being recorded.

And at this time, I'd like to turn the conference call over to Joe Diaz of Lytham Partners.

Sir, please go ahead.

And ladies and gentlemen, I believe that we're having some technical difficulties here with Mr. Diaz' line.

One moment while we rejoin him in the line.

(technical Difficulties]

And ladies and gentlemen, we have Michael Brigham on the line, and I will be turning the floor over to him.

Please go ahead, sir.

Hey, good morning, everybody.

Sorry about that glitch.

I'm not sure what happened.

I had Joe on the line a minute ago.

I'll just read this intro real quick and get right down to the business here.

So we just want to preface this discussion with a caution regarding forward-looking statements.

Listeners are reminded that statements made by management during the course of this call include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today.

Additional information regarding these risks and uncertainties is available under the cautionary note regarding forward-looking statements or safe harbor statement in the company's press release and its Form 10-Q, which can be obtained from the SEC or by visiting the Investors section of the company's website.

So with that, introducing myself, I'll jump right in.

I am Michael Brigham, President and CEO of ImmuCell Corporation.

I thank you all for taking the time to join today's call.

I do appreciate that.

As you may know, last night, we filed our Form 10-Q for the 3-month and 6-month periods ended June 30, 2020, and issued a press release summarizing some of the key results.

I'm not going to rehash a lot of the detail that can pick up from the Q and the press release, but I would like to highlight a few of what I see as the more important disclosures.

First, as you may know, we issued a preliminary press release covering our top line sales results only on July 7. We are doing that to give investors a very timely look at this critical measure of our operations.

There has been no change to those preliminary numbers.

Product sales were up 9% in the quarter over same quarter prior year.

Product sales were up 11% for the 6 months ended June 30, 2020, in comparison to same period prior year, and product sales were up 19% for the trailing 12-month period ended June 30, 2020, in comparison to the trailing 12 months ended June 30, 2019.

We had a backlog of orders worth about $945,000 as of June 30.

That is down from about $1.4 million as of March 31.

We are working to complete the $3.5 million investment to increase our production capacity.

The first phase of the project is complete.

We have moved our capsule assembly operations out of 56 Evergreen into their renovated space at 175 Industrial.

That commercial production is now going very well at 175.

The second phase is installation of the increased freeze drying capacity at 56.

The third and final phase is moving the gel formulation operations out of 56 and over to 175 and then doubling our liquid processing operations at 56.

We are on track to complete the latter 2 phases of this investment before year-end.

Let's move to gross margin.

You can find a detailed analysis of gross margin on Page 28 of the MD&A section of the Form 10-Q.

Gross margin dollars are up in all periods reported.

However, gross margin as a percent of sales was down for both the quarter and the 6-month period in comparison to the same periods during the prior year.

The 2 leading causes for this increasing percentage of sales are gel tubes and biology.

First, gel tubes are more expensive to make than a legacy capsule format, but we are selling a lot of them.

Second, as we increase colostrum collection to grow production, we need to work with new cows that have not seen our proprietary vaccines yet.

The biological yield should increase as these cows come through our program the second time.

So we do expect to improve this gross margin percentage over time.

But our first priority right now is increasing the total dollar amount of gross margin.

Product development expenses continue to be our largest operating expense line item.

I think it's important to look at the impact of noncash expenses.

Depreciation and stock-based compensation comprise about 39% of our product development expenses during the 6-month period ended June 30, 2020.

Most of the depreciation charges result from the drug substance facility we constructed and the related production equipment for Re-Tain.

Obviously, the initiative to bring Re-Tain to market is very expensive.

We are proceeding on plan to make our second phase submission of the CMC Technical Section to the FDA during the fourth quarter of this year, which will be subject to a 6-month review by the FDA.

I do focus more on cash flows and our GAAP net loss at this stage in our development.

Page 4 of last night's press release provides a look at the impact of all noncash expenses on our financial results.

This is an important metric to consider in understanding our cash flows, but the most important measure is the statement of cash flows on Page 4 of the 10-Q.

Lastly, let me comment on the COVID-19 pandemic.

This situation is tough on everybody and tragic for many.

We are doing okay so far.

Maine has some pretty low infection rate data.

We have not lost significant time and production due to the pandemic, but everything is different.

Our dedicated production team has been flexible and creative, pushing First Defense production forward.

Our sales team has been able to pivot to stay safe and be successful at a time of reduced travel and farm visits, when almost all trade shows have been canceled.

We are grateful to be ahead of last year's sales pace, but we are not achieving our budgetary objectives.

So in conclusion, I encourage you again to review the Form 10-Q and the press release that we filed last night.

Also, please take a look at our updated corporate presentation slide deck.

An August update was just posted to our website last night.

I believe it provides a very good summary of our business and objectives as well as our current financial results.

See the Investors section of our website and click on Corporate Presentation.

With that said, I will be happy to take your questions.

Let's have the operator open up the lines.

(Operator Instructions) And our first question today comes from Nathan Weinstein from Aegis Capital.

Congrats on the quarter.

So just firstly here, coming through an unprecedented first half, can you talk about the general financial health of your customers?

Yes.

Thanks, Nathan.

It's a crazy ride.

I think maybe the simplest metric to follow is milk price, Class III milk price, it's extremely volatile.

So some may know back in March, producers were dumping milk.

There was simply no place to put it.

No place to move it.

It was being dumped on farms.

That milk price that I track dropped down to a really low level of like $13, $12 during the April, May period and has rebounded very significantly here in May and June.

The July price, $24.54.

I have a chart that tracks this back to 1980.

It's the second highest price, only lower than September 14, high by $0.06.

I mean it's an all-time high.

So the milk price is strong, and that's a leading indicator for good economics on the dairy, but I caution because I think it's high now, and it's likely to continue to be variable.

So far, so good.

I think we came through the worst.

The March, April, July looks great.

But I am concerned about the volatility.

Let's see what August, September, balance of the year does.

But at the moment, pretty darn good.

Great.

Okay.

That's helpful.

And next, if we could just turn to the product side between the commercial stage product, the First Defense, and then thinking about Re-Tain, which we're anticipating in the future.

And can you maybe just compare and contrast those markets in terms of their size and any discussion just comparing them, please?

Yes.

So First Defense -- so let's define the 2 products maybe.

First Defense, for the calf, Re-Tain, for the cow.

First Defense, the product we've been selling for years, preventing scours or diarrhea in the newborn.

So that market, I've defined, I think, pretty well, and I want to refer over to a slide in our deck because we've kind of looked at that market in 2 ways.

So if people have a chance to look for the specific answer, 17 -- 16, 17, 18 in the slide deck, how are we doing against 2 markets.

One, the products that are given to the calf.

So there are other products that are given to the baby.

We're growing there.

And then the products are -- there are vaccines given to the mother with the expectation that she'll produce better colostrum to be fed to the babies.

Now we compete in that area too because we know those vaccines are really variable.

The response to those vaccines is going to be variable.

The quality of the colostrum is going to be variable.

We know that as well or better than most because that's our production.

Every batch we make is variable.

Of course, we equalize for that in our fill rate.

So the calf getting our product gets a measured dose.

But yes, those are the 2 markets we compete with, and we've got a lot of opportunity that dam-level vaccine is much bigger than the calf level.

Great.

And I guess just one more for me.

If we're thinking about the model, if and when Re-Tain comes to market, how could the presence of that product in your portfolio impact maybe seasonality in your P&L and also margins?

Yes.

I kind of dropped the second half of your question.

So Re-Tain then is for the cow.

This is a very novel treatment for mastitis, subclinical mastitis.

Novel because it's not a traditional antibiotic, novel because it's going to be the first and only product that can be delivered without a milk discard requirement.

In other words, when you're using antibiotics, you got to dump the milk because of the residue in the milk.

Our product will have a zero milk discard claim.

So a new entry there into a different way of treating mastitis.

But to seasonality, First Defense is very seasonal.

Our beef business is extremely seasonal.

All those calves are born early in the year, say, February, March, April.

In the -- on the mastitis, on the Re-Tain side, it is going to be more -- we have mastitis present throughout the year.

It's not -- there's not a seasonal -- like a beef-calving season.

So that Re-Tain will give us a level or sales profile through the year.

Our next question comes from Sam Rebotsky from SER Asset Management.

How are you -- is -- getting through this COVID?

Hope everything is going well there.

On the Re-Tain, which we expect to submit, it's basically in -- the December, is that the latest we'll submit the Re-Tain to the FDA?

Is that what our expectation is at the moment?

Yes.

That definitely is our goal at this point, it's achievable.

I mean we could have a surprise or along this final path here, but now all efforts between ImmuCell and our contractor, everything we're doing here is geared towards fourth quarter submission.

As you know, Sam, that's -- that we need to get it in.

Of the 5 technical sections, 4 are complete.

This is the fifth.

We get it in.

It goes for a 6-month review, and then we'll really know where we are as far as timing of launch because they're either going to come back with a complete and we can launch or they're going to come back with questions, we'll have to resubmit for another 6 months.

And we got to start (inaudible) in the fourth quarter submission.

Okay.

Initially, when Lonza submitted the FDA and got the 0 discard, to what -- are we producing 10x?

Or what kind of percentage of times more material are we submitting than we initially submitted to the FDA?

Yes.

Sam, I'm a little confused.

Lonza really -- I mean, they were involved as a potential drug substance manufacturer many years ago, but no submissions were ever made with Lonza.

I'm guessing you might be referring to our -- with this final section called CMC, chemistry, manufacturing and controls.

We have broken that down into 2 parts, a first phase and a second phase.

Is that the...

Yes.

My understanding is you first submitted to the FDA, and they said, "Yes, you met the 0 discard." And now you have to submit a larger quantity for production.

And I'm just trying to determine how much larger is the production.

And generally speaking, you will have somebody on the ImmuCell site before you submit and make a judgment that it meets the 0 discard before you submit it to the FDA?

Yes.

It's really 2 -- I think we need to separate.

It's 2 different questions.

So human food safety, 1 of the completed 4 technical sections, that drove the zero milk discard claim.

So that's been complete for a while.

That was -- you're right, based on small quantities.

Everything up until the CMC was based on sort of research scale.

Human food safety completed there in the third quarter of '18.

So all 4 technical sections were small quantities.

The fifth technical section is basically the FDA saying, "Hey, do the same -- make the same product, but make it at commercial scale." That's been the whole objective.

That's the huge investment in the facility, the drug substance facility for the fifth technical section.

So that first phase submission, we went ahead and submitted in drug substance and said, "Hey, have a look at that." They came back incomplete.

They had some questions.

We expected incomplete because they hadn't seen drug product.

But it got us moving down the path of CMC, the submission.

So when we submit the second phase drug substance and drug product, the Nisin and the Nisin filled in the syringe, we will be responding to their questions to the drug substance first phase submission, and we'll be completing the submission with drug product produced at commercial scale.

Okay.

That sounds very exciting.

Now one more thing relative to Tri-Shield First Defense.

We had a backlog, and we've reduced the backlog, and we're waiting to produce more when the facility is available.

When does that -- when do we expect that facility to be available?

And how much more production can we do currently as we could increase sales, even though we reduced the backlog.

And so we could meet all the -- I think it's the $27 million or 18 -- the number currently, and then increase production and hopefully sell more internationally.

So that's my question relative to the Tri-Shield First Defense.

Yes.

You're getting sort of to that 3-stage investment that I described.

So the first phase was getting that assembly -- capsule assembly out of 56 Evergreen because we needed to create space in this facility for the additional freeze drying capacity.

So objective 1 is complete.

We've made the space.

As we speak, we're in the final stages of getting that new freeze dryer final construction, ship, install, validated, up and running in the next few months.

Everything in the second and third phase ends as soon as possible -- is completed as soon as possible in this year.

Freeze dryer will come first, and that is critical.

What we need to do is push more product through the freeze dryer.

So it happens here in the end of third, beginning of fourth.

We get everything we wanted.

We get the additional freeze dryer capacity up 50%.

We can get the additional liquid processing capacity up 100%.

So that's where that investment is wrapping up.

It just was all -- it's triggered in those 3 steps, and they're -- we're pushing them.

The sooner, the better.

That's how we get out of backlog.

That's how we turn the corner.

(Operator Instructions) Our next question comes from [Tom Fox].

It's about subclinical mastitis testing.

Correct me if I'm wrong here, but in order to detect subclinical mastitis, you need to test for it.

So I have a 2-part question.

One, what percentage of farmers actually test for subclinical mastitis?

And two, of the ones that don't, would there be a learning curve to learn how to test for it?

Or is it something that the vets do?

If you can just elaborate on all that.

Yes.

It's a great question.

It's a really important question because it's going to define the launch rate here of this product because we are entering into a sort of a new way of thinking.

So you're right, a lot of these cows, these producers know that they're sick.

They're walking around sick, high somatic cell counts.

That's measurable, but they ignore it because the milk is still salable.

So our objective, our -- what we need to do is come in and find -- help the producers find these cows and show the benefit.

The reason -- the main reason they're being ignored -- I mean, again, the producer knows they're sick, but if you can sell the milk, would just ignore it and they walk around sick.

We'll come in and help them and say, "Here's the benefit.

You've been ignoring that cow because you knew if you treated her, you have to dump the milk.

Now don't ignore it.

It's bad for the animal.

It's bad for your milk production, bad for your milk quality, quantity.

Treat her because you no longer have to dump that milk." So it's -- that's -- that is one of the biggest objectives for the launch, is we're creating a new market.

So we got -- there's a lot of education that's going to need to go on there.

And I was just trying to reference 1 thing in the Q for you.

Just a little more detailed answer.

Bear with me 1 second.

So there's a risk factor, if you will, Page 38, 39, that I think is very relevant to your question.

These are the things that we need to overcome.

Sorry, I made the wrong reference, just struggling to find it.

I can follow up that.

I don't need to hold up other people, but here we go.

Sorry -- oh, there, finally.

It's not 38, 37: uncertainty of market size and product sales estimates.

I mean that's our answer to your question.

That's what we have to do.

We have to create awareness and create a demand for this new treatment paradigm.

So are you saying that they do not -- maybe I didn't catch this when you answered it, but are you saying that they do not have to test for subclinical mastitis?

They don't have to.

Obviously, we will be showing the benefits to why you should.

They all have somatic cell count measures.

So they can see an indication.

You can culture anytime you want.

We have to create the demand for culture and using more cultures and using more somatic cells and not ignoring these cell -- these are cows.

So it can be done.

It's just not done because what are you going to do with the result right now?

They could get a result, "Yes, she's subclinically infected, but I'm not going to treat her.

I know I need to sell the milk." So that's the paradigm shift.

(Operator Instructions) And our next question comes from Brad McCurtain from Maine Securities.

As always, thank you for the -- all of the time you spend with us to help understand the process and the products and everything else.

You're really, really wonderful at explaining these, giving us time to ask questions.

I appreciate it.

Just -- I have 2 questions.

One, I just wanted to follow up on the prior question about the testing and education.

And then secondly, I wanted to ask you a little bit about the labeling process for the Nisin product for mastitis.

On the testing situation, do we have our own test kits?

Or is that a third party for them?

And what's -- how do you plan to get the test kits into the -- if it's not our product, how do you plan to get that test kit into the farmers' hands at a reasonable price and educate them on how to do the testing?

Do you have a partner out there who manufactures these?

Or is it a distributor?

And...

Brad, yes.

Thanks.

It's third party.

That is not our business.

We do sell this CMT, this California Mastitis Test.

It basically helps you identify which quarter of the 4 are infected.

But the culturing is done by vets.

The somatic cell count is done by your milking system.

These tests exist.

There's a couple of different vendors that kind of dominate the space, and we're going to help them sell more of their product.

Sure.

So I mean, it involves a vet having come out.

It's nothing you can do yourself.

A vet has to come out...

There are -- yes, there are some on-farm culturing.

There's an on-farm testing that can be done.

Some are sent back to the labs.

So it's a mix.

But yes, the somatic cells is all on-farm, it's right off the milk line.

And what's the time frame that a cow will be using your product before it is recovered?

I realize, with 0 discard, it's not really an issue in terms of that.

But the milk production goes down quite a bit when a cow has mastitis.

And so I'm wondering how long it takes to build that back up again.

Well, the treatment is 3 successive milkings.

So some farms are doing 3 milkings a day, so they're done treating in 1 day, and they're going to see that recovery over the next few milking.

So it's pretty quick, but you got to get through 3 successive milkings.

If they're milking twice a day, it's 1.5 days.

And that's the treatment period, and the response or the heal or the correction is right after that third treatment.

Okay.

Versus the antibiotic alternative is, what, a couple of weeks?

Or is that also...

Yes.

No, you're going to see a response quick, but you're going to see discard anywhere from 24 to 96 hours.

So I think when we compare Re-Tain to traditional antibiotics, we will be comparing -- not so much, I don't think the response rate, but the discard period.

So you may be getting a response, but it doesn't matter.

If she's healthy after that last infusing of an antibiotic, you still are discarding for up to 96 hours.

And what -- when you use the term "up to," what determines whether it's 80 hours or 96?

Do you have to keep testing for antibiotics in the milk or...

No.

Each product is issued with a label and label restriction.

So it's product-by-product specific.

Got a good slide on that, if you don't mind, Brad, because we just tried to answer that question a little bit in the deck.

If you have a chance, look at Slide 25 because I kind of laid out some of the products and some of the discards.

But it's probably by label, by product.

Okay.

And then the other question I wanted to ask is the labeling process.

Has that begun yet with FDA?

Yes.

Yes.

Sorry.

And my reference should have been to Slide 26 on the discard periods.

So yes, that's established.

That was established in those other 4 technical sections.

So they've issued a draft label.

It still needs to be finalized.

But what we needed to know to proceed with the drug substance investment is that our label was set and agreed as far as the breadth of claims and as far as the zero milk discard.

So those 4 technical sections sort of established that.

And then it's about manufacturing, and they will come back in the end and detail the final label.

But we've established what is critical, is the bugs that will be labeled and the zero milk discard, that will be labeled.

Okay.

Is that something that can be made public?

Yes, it is.

The label is?

Yes.

Where would I find that?

Right in my Q.

In the current Q?

Yes.

As far as -- yes, those 2 key things, bear with me 1 second.

So, Brad, I'm going to need to find it.

But yes, we call out the effectiveness -- sorry, Page 29, there's a review of the 5 technical sections, and the label of the bugs was established under my #3.

And the zero milk discard was established under my #4, on Page 29.

Okay.

Okay.

And are you taking this through yourself, you and Joe?

Or do you have outside help helping you with this or...

My role is limited.

I encourage the experts.

This submission is led by Quality, Gustavo Scaffa, led by production VP, Betsy Williams, and like you mentioned, Joe Crabb and our Director of PD as well, John Zinckgraf.

I'd say the 4 of them are the leads.

We do access consultants, but we drive the process.

We drive -- we make all the submissions, correct.

Okay.

Okay.

So do you have a timetable at all then for this educational piece that you referenced on the prior question, when you plan to start that?

Because right now, we're kind of looking at June 30, 2020 -- 2021 as being our date when, hopefully, we can start going forward for commercial sales.

Yes.

You've got to be ready for that.

It will be a little -- 6 months is the review period, then there still is more to do after that.

There's a 60-day administrative review once you get the complete letter.

So looking into July or shortly thereafter.

We got to jump in.

It's -- you start that prelaunch marketing into the beginning of '21 and hope that it's needed for that first-time complete.

If not, you're 6 months ahead, you started the education and you're not able to sell something for another submission, for another 6 months of review period.

But yes, present, it moves forward here at the end of this year, beginning of next year, our sales team begins to multitask, yes, on First Defense and Re-Tain.

Yes.

And at what point do you begin manufacturing?

Well, we are.

So we have to be manufacturing to complete the submission.

So we are manufacturing today to complete that drug product submission.

And then it ramps up into '21 as you begin to build product for launch.

Right.

So...

But that's (inaudible) on.

Our plan is operating commercially -- right now, not at full capacity, but yes.

Yes.

But that's mostly for submissions, correct?

It's not -- you're not...

Some of that product, we hope, depending on timing and shelf life and expiration.

But some of that would be salable.

Wouldn't be salable until approval, but it would meet all the requirements.

So we hope some of that will be our initial launch quantities.

Yes.

Shelf life is how long from manufacturing date?

Shelf life?

Yes.

From manufacturing date.

Yes.

24 right now.

I mean that has to be reviewed and finalized and approved, but we hope it's up to 24.

24 months?

24 months, sorry.

Thank you.

Yes.

Okay.

Okay.

Sounds good.

But do you plan to scale up on manufacturing prior to approval or not until you get approval?

Yes.

In to -- we start scaling up next year.

I mean we're not going to go to full capacity, but this will be a scaled up process.

So we will be prepared on the optimistic of a third quarter '21 launch with some product.

So you're thinking you'll start scaling up manufacturing in the second quarter or not until you get approval?

Or I'm just trying to...

Yes.

So we -- I mean, we're manufacturing today.

And we'll continue to manufacture right through to launch.

It will just be at an increasing rate.

But yes, it's a question of your -- the plant is running.

And the question is do you -- how many times per month do you run it.

And ladies and gentlemen, with that, we've reached the end of today's question-and-answer session.

I would like to turn the conference call back over to Joe Diaz for any closing remarks.

Thank you, Jamie, and thanks to all of you for participating in today's call.

We look forward to talking with you again to review the results for the third quarter of 2020 during the week of November 9. Have a great end of the week, stay safe and be well.

Thank you.

Have a good day.

And ladies and gentlemen, with that, we'll conclude today's conference call.

We do thank you for attending.

You may now disconnect your lines.