ImmuCell Corporation (ICCC) Q1 2016 Earnings Report, Transcript and Summary

Good day and welcome to the ImmuCell Corporation First Quarter Fiscal Year 2016 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask question. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Joe Diaz of Lytham Partners. Mr. Diaz the floor is yours sir.

Thank you, Mike, and thanks to all of you for joining us today to review the financial results of ImmuCell Corporation for the first quarter of 2016, which ended on March 31, 2016. As the conference call operator indicated, my name is Joe Diaz. I'm with Lytham Partners and we're the Investor Relations consulting firm for ImmuCell. With us on the call representing the company today is Michael Brigham, President and Chief Executive Officer, and Elizabeth Williams, Vice President of Manufacturing Operations. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session. If anyone participating on today's call does not have the full text of today's press release, you can retrieve it through various financial sites on the internet or by request to the company. Before we begin with prepared remarks, we submit for the record the following Safe Harbor statement. Statements made by the management of ImmuCell during the course of this conference call that are not historical facts are considered to be forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. Words such as believe, expect, anticipate, estimate, will, and other similar words or statements of expectation identify those forward-looking statements. Such statements involve risks and uncertainties, including but not limited to, those risks and uncertainties detailed from time to time in filings the company submits to the Securities and Exchange Commission. Investors are cautioned that forward-looking statements made during the course of this conference call are based on management's current expectations and involve risks and uncertainties that could cause actual results to differ materially from the statements made. The company disclaims any obligations to update forward-looking statements. A more complete Safe Harbor statement was included in the May 04 press release announcing this conference call and with today's press release as well. With that, let me turn the call over to Michael Brigham, President and CEO of ImmuCell Corporation. Michael?

Thank you, Joe, and thanks to all of you participating on today’s call. We greatly appreciate your time and interest in the company. I have a few prepared remarks and observations before turning to the Q&A. First quarter 2016 sales of 3 million were within 115,000 of the all-time sales mark of 3.1 million set during the first quarter of 2015, and we ended the just completed quarter with a significant backlog of orders. Our sales team continues to operate at a very high level, getting us off to a great start to the year. We provide significant disclosures about the company in our financial results and our SEC filings. Today’s press release and our quarterly report on Form 10-Q which is also been filed today, provides significant details about the company and our financial results. I encourage to review these reports for the full details, but I will touch on four highlights here. First, let’s talk about the first quarter 2016, all the following numbers compare the three month period ended March 31, 2106 to the three month period ended March 31, 2015. Product sales decreased by 3.7% or $115,000 to 3 million from the all-time higher sales record of 3.1 million set during the first quarter of 2015. In addition to these sales at our door, we also had a backlog of orders aggregating approximately 1.7 million as of March 31, 2016. We had pent up demand for our product and we have responded to the resulting backlog of orders by increasing our production capacity. The investment to increase our First Defense liquid processing capacity by 50% was completed during the fourth quarter of 2015 and the investments increased our freeze-drying capacity by a 100% was completed by the end of the first quarter 2016. A benefit from this capacity expansion will be fully realized going forward as we filled the backlog of orders and meet the growing sales demand. Gross margin decreased by 5% or 93,000 to 1.8 million equaling 59% in product sales, product development expenses decreased by 9% or 28,000 to 302,000. Net income was 452,000 compared to 479,000. Earnings per diluted share decreased from $0.11 to $0.15. Second, let’s talk about the 12 month period ended March 31, 2016, all following numbers compare the trailing 12 months ended March 31, 2016 to the 12 month period ended March 31, 2015. Product sales increased by 17% or 1.5 million to 10.1 million. As I noted, in addition to the sales at our door, we also had a backlog of orders aggregating approximately 1.7 million as of March 31, 2016. We are proud of this significant sales growth and our products expansion efforts to meet this demand. Gross margin increased by 20% or 1 million to 6.2 million equaling 61% in product sales. Product development expenses decreased by 37% or 708,000 to 1.2 million. Net income increased by 861,000 to 1.2 million. Earnings per share increased by $0.25 to $0.35. Third, I’d like to comment on the market dynamics and the drivers to this improved financial performance. Above all we are benefiting from an increase in demand for First Defense and the resulting increase in gross margin from these growing sales, despite an 8% decline in sales of this product line during the first quarter of 2016 in comparison to the first quarter of 2015, which was largely caused by our production capacity not being able to meet the growing sales demand. Our competitive product experienced interruption of its supply to the market during 2015, but this product was back on the market throughout the first quarter of 2016. Milk prices measuring per 100 pounds of Class 3 milk dropped from the recent high of $22.34 for 2014 to $15.80 for 2015 and further to $13.75 for the first quarter of 2016. The milk-to-feed price ratio dropped from a recent high at 2.54 for 2014 to 2.12 for 2015 and it’s held at that level during the first quarter of 2016. The value of a bull calf has decreased from the unusually high level during 2015 of about $300 to $400 to approximately $900 to $300 currently. I believe our sales and marketing team is doing an excellent job in the field to offset these very challenging industry economics. Fourth and lastly, we had a cash and investment balance of 11 million and stockholders’ equity of 16.3 million as of March 31, 2016. Our balance sheet has been strengthened principally by our continued profitability and an equity raise. During the first quarter of 2016, we raised 5.9 million in gross proceeds from underwritten public offering of 1.1 million, shares of common stock, the net proceeds from the common stock issuance were approximately 5.3 million after deducting underwriting discounts and other expenses incurred in connection with the offering. Our current cash together with our cash flow from operations and the new $4.5 million debt facility that we signed during the first quarter of 2016 will be used to construct and equip a facility to product Nisin, the active ingredient in Mast Out. As a result, we now for the first time have a roadmap to complete the development of Mast Out and bring the product to market. Of the five technical sections required for approval of a new animal drug application, also known as an NADA by the FDA three year complete. We expect to complete the foreign technical section by mid-2017. The fifth and last technical section requires us to build a commercial scale production plant. Our preliminary budget for this project is approximately $17.5 million. We aim to complete the construction and installation work by the end of 2017. Sales of this product are subject to the FDA approval. We have disclosed the timeline of events that could lead us to achieving this approval during 2019. This is an important milestone in the history of ImmuCell. We look forward with great anticipation. So to summarize, we continue to execute on the two core components of our business strategy, first, we are expanding the market penetration for First Defense, our best-in-class treatment for calf scours, and second, we are advancing the development of Mast Out, our novel treatment for sub-clinical mastitis in lactating dairy cows. In April, we announced the hiring of Elizabeth Williams as our Vice President of our manufacturing operation. Betsy is already making a significant contribution towards helping us achieve our business objectives. To introduce Betsy I have asked her to share a few comments with you directly. Betsy?

I am delighted to join ImmuCell at such an important time in the history of company. In the very short time that I’ve been here, I’m certainly impressed with the dedication and commitment of the full team, and excited to know that we are on the verge of a critical milestone in terms of enabling for future, further growth of our company. A little bit on my background, I have spent most of my career in the animal health industry, the majority of it with Pfizer Animal Health and most recently with Zoetis. I held numerous leadership role at different plants and regional locations, and in these roles I had responsibility for expanding facilities and operations for new products start-ups, implementing new capabilities and technologies and manufacturing and also responsible for validation, new product regulatory filings and preparing for preapproval inspection by the global authorities. This would include USDA and FDA. So this well aligns with my role here at ImmuCell. As an update, cascading on from what Michael’s indicated, the Mast Out facility design is well underway. We anticipate breaking ground this year and expect to complete building construction and equipment installation by the end of 2017. We also expected the validation of the equipment and the process will be completed at the end of 2018. And adhere well with the design and construction of facilities, we are advancing the separation of the regulatory strategy and the dossier or the filing for the manufacturing process, all this to achieve a timely approval by the FDA. As Michael has noted, we’ve already received Technical Section Complete Letters from the FDA for three of the five sections. The CMC or the Chemistry Manufacturing and Control technical section is quite extensive involving drug substance, drug product and they’re ready to find the critical path for product approval. Our timeline well positions us for NADA approval by the FDA in 2019. As it relates to First Defense, our team remains laser focused on increasing capacity to meet this expanded sales demand. We’re looking at all aspects of the manufacturing value stream, start to finish to improve the yield and the output and to optimize the recently added capacity in both liquid processing and in the freeze-drying areas, all this to address and fill the order backlog. While I’m very excited to be here, I look forward to making meaningful contributions to the growth of the company and to enhance the value to our stockholders. With that let me turn the call back over to Michael. Michael?

Thank you Betsy. So to conclude, I’d like to again comment that we have provided extensive additional details in our press release and our quarterly report on Form 10-Q. I encourage interested investors to review these filings, and with that I’d like to move to the Q&A. So let’s open up the call for your questions. Operator, could you help us with that?

[Operator Instructions] the first question we have will come from Steve Roberts of NorthPointe Capital. Please go ahead.

I’m wondering looking ahead here to the second quarter, with the backlog and the increased capacity, should we expect sales to increase over the first quarter or [since] your first quarter one of the stronger quarter so --.

It is seasonal Steve so first quarter is always our top quarter the other three quarters tend to be pretty similar and the guidance that we’ve set out is one to identify the amount of backlog so you know orders in-house ready to go and simply to say there, we do expect the growth trend of the First Defense to continue and we do expect the recently profitability trying to continue.

So do you think Q2 will be more than Q1 or no?

That’s never happened. Q1 is just a different seasonality, the winter scour season, the beef calving season. The first quarter is always our best, I think that would be unusual. I would just expect continued growth and I would continue to expect the first quarter to be the best, the highest.

And then for the share count, what’s the fully diluted share count going forward?

Outstanding 4.179 million, fully diluted with [debt] equity rates closing February 3, so fully diluted in the first quarter, given effect for that we have excuse me one second.

I’m trying to model Q2, so I’m looking for what the share counts going to be going forward.

[4,170,844] is outstanding and we do have a flip note in the EPS calculations is for the dilutive options, let me just give you that number, because first quarter will be pretty similar to second quarter. Steve I’m going to have to follow-up you. I don’t waste your time and the time of others. We don’t have a whole lot of options, but I can give you that exact number I cannot put my finger right on it. So start with 4.170 million a similar dilution from the outstanding options --.

Next we have Sam Rebotsky of SER Asset Management.

The backlog - are we prepared to ship in other words are we in full production now with the new equipment to produce as much as we - there’s a demand for our product.

Yeah, the scale up is complete, but it is going to ship out over time. It doesn’t just come on over night. So it came online in the first quarter and as I mention we’ll have that benefit fully realized as we go forward to the second, third and going forward basically the ability to produce twice as much product. But it just doesn’t switch on April 1.

The backlog, what is the appropriate backlog that we would like to carry, in other words and ship out the product as fast as we can with the backlog.

The long term objective is zero, I don’t want any backlog. But we are in a catch-up mode and the production and then the build on the product has a six month production cycle. That’s where we’re at right now, but the goal is zero. The whole point of the investment was by doubling capacities to be ahead of orders, ahead of sales demand and have zero backlog.

So in which quarter do we think we would get there?

I’m not ready to pinpoint that. It is going to depend on just performance over the next three quarters. We were a little bit general in our disclosure saying fully realized going forward over these next three quarters. So it is fill and a build and fill and a ship, but I’m going have hard number for you quarter-by-quarter, I don’t have a hard projection on that.

And the export sales went down, were there reasons for export sales to go down?

Backlog is difficult, albeit our VP of Sales and Marketing, Bobbi Brockmann spends a lot of time trying to allocate those backlog orders as best we can and sometimes one market gets the shipment a little earlier than the other market. So I think that’s all that’s going on there is just allocation between markets of scarce product.

With Betsy on board and First Defense we’re looking for a proven 2017 and Mast Out in 2019, is there - and I’m not sure if you’re prepared to say it’s the first half, the first quarter. Is there something that Betsy could do to help ImmuCell speed up this dates to reduce it, so that we could - with the Mast Out, I know the FDA has indicated that antibiotic is supposed to be reduced as - eliminated as of December 31, 2016. So to take advantage of that if we can sort of do something sooner or get something done quicker, is there anything we could do?

Well two things, when you say 2017, I believe you’re talking about USDA approval of the Rotavirus claim. I think that’s pretty well locked in. I’m proud to have Betsy help us with the product aspects of completing that initiative, but that time line is pretty set. Which month in ’17 I don’t know, but there just is a process we go through with the USDA that takes us out in to ’17. Now with ’19 they are talking about Mast Out, and I think is realistic. We put it out there as our best estimate, Betsy is going to help us achieve that. But just having Betsy here is not going to move an FDA timeline by a significant amount. I would consider it rather a huge success just to know how to push forward. So ’19 is our best and if we have an update to that, we would provide it as soon as we have some confidence in it. But there’s just a lot of new activities that fall on Betsy’s plate just to achieve that approval. All the construction, all the installation, all the validation and the final submission of the [CMT], as you mentioned to get to that ’19 approval.

Hey Sam, while I have the floor here, just wanted to come back to Steve’s question, in the first quarter that fully diluted option was just over 100,000. So it’s the $4.178 million plus a little more than 100,000 of dilution from stock options to get to the fully diluted shares outstanding.

[Operator Instructions] Next we have David Starkey of Morgan Stanley.

I just had a question related to the potential of the sales growth, given that your added capacity if you’re potentially capacity over the next say six or nine months as the player comes on. Would you be able, all things being equal to be able to do 6 million in sales in the first quarter of next year in that range?

Yeah, it’s clearly mathematically, very clearly a double. How that plays out by quarter, not sure. So capacity, we want to be ahead of demand, so we’ll have a capacity if we did about 10 million in the trailing 12, we would have capacity to double that. Each quarter to double, but the demand is different than the capacity. I want to improve our production capacity ahead of demand after we satisfy the backlog.

Your sales this quarter - last year you said that competitor was not able to have the product off the market. So, this latest completed quarter that competitor had a product on the market the whole quarter and you were still only down a couple of percent, right?

Exactly. It did come back and we see them in the market, so the first quarter ’15 did benefit from their absence, but I would argue first quarter ’16 didn’t suffer greatly from their return down due to the orders that we couldn’t ship not due to loss to the competitor.

Right. And how many competitors are there in that particular product do you see?

I would answer it in two parts. One, if you have time, we just put an updated investor deck on our website.

Yeah, I’m looking at it.

(inaudible) detailed here, but I’ll read you the highlights from one important side that speaks to your question. The competitors are three products and three companies, the biggest one is the Calf-Guard product by Zoetis and Elanco has the product called Bovine Ecolizer. That’s the one that had interrupted supply. And the third one is not a major competitor, but when we look at the total category of oral scours preventatives, we had Boehringer Ingelheim’s Bar-Guard-99 and that’s on slide 14 on that slide deck.

The other question I have was related to Mast Out and coming up here in a couple of years. So what kind of market potential do you see on that?

Yeah, we really see this as a big one. I mean we’re very proud of First Defense and it’s been paying the bills and taking us a long way to be able to double sales from 5 million just five years ago to 10 million now. But I’ll also make reference back to that same slide deck, because this is a convenient way to answer your question. These numbers are all fully publicly disclosed in our quarterly filing and that’s how we put the new slide deck, the revised updated slide deck on the website in conjunction just after filing the Q and getting the press release. But I’m now on slide 24, and you can see our detailed assumptions of how we created this model with a well-known consulting firm in that amount of space. That takes us from a 5 million kind of product in year one to a sales potential of 36 million out there in five years.

So that would be 20-24 or something along that 36 million?

Yes, with ’19 getting launched. You know we were talking about 19, 20, 21, 22, 23 and 24 for the 30 kind of million level.

Is that plant going to be able to produce all that or you’re going to have to have two or three plants.

I think as we get in to the higher end of later years, we’re going to need some capacity expansion. So we’re sort of staging this investment to get us launched, get us well in to the launch and then verify and validate those sales and take a look at the projection model and see how it stands up against the actual. If its proven in the market, I can see it’s leading to make further investment out there in the year four, five.

Okay. And then in terms of fund raising everything, are you okay for now. The next couple of years, we got hit by the last offering here last year, caused a pull-back in the stock.

Right. So even when we look at Mast Out, we look at that 17.5 million this is the math I do. We have 11 million today that includes the equity raised. We do have a debt facility for another 4.5 million, that’s 15.5. We’re looking at $17.5 million investment, the other two coming from First Defense cash flow, continued profitability. So that’s what I meant when I said this equity raises debt facility for the first time gives us a clear roadmap to bring this product to market.

Do you have land picked out and everything?

We do. We bought it actually in December. It’s adjacent to our facility, essentially right out the back door. So that’s the land we own and we are working together shoveling the ground.

Next we have Jane Lendonmen, Investor.

I came across a story back in March and I was wondering if you could comment on it. This Elanco came out this, got approval for this investor, which also will treat mastitis, and I was wondering how it would compete with us. I know we had the [milk] discard for Mast Out, but how would it compete with us. Is there something that concerning to you being that we are still quite a way to weigh a strong approval. So if you could address that a little bit, I would appreciate it.

Yeah, it’s an interesting product, very new. It’s an immune stimulant so it boost the cow’s immune system. It has a clinical claim, we are seeking a sub-clinical claim. It’s given a dry-off and we intend our product will be delivered during the lactation. So a little bit in our space, but not directly and that Elanco’s with key difference, sub-clinical versus clinical dry versus lactating, immune boosting as opposed to our Nisin is a mastitis treatment. So, I think our positive view of the changing landscape in the market is that there could be some synergy there or cows have better immune response that could be good for the cow, good for the owner and good for other products that can treat the disease with it benefiting from the immune boost.

Could you see possibly using both products side by side?

You made the point better more clearly than I did. Being that they’re boosting the immune system, we’re treating the disease, they are dry-off, we come after the lactation. It clearly could do both, without a conflict.

So I guess this thing would be most concerning to me is that since they’re already approved and we’re still in to the future, would they capture enough market shares to hurt us before we can get going.

Well they’re going to work real hard to develop this dry period treatment and the dry period immune boost. But I don’t think they’re [cutting] to eliminate sub-clinical mastitis. So I lean more towards another competitor when I look at our market prospects and I look Zoetis and I look what they did towards the end of last year getting a sub-clinical claim on their SPECTRAMAST product in addition to their clinical claim they got a sub-clinical claim and they are doing some great work educating the market, how important it is to no longer ignore sub-clinical mastitis and treat it now that they have sub-clinical claim with their product. Yet they’re arguing that the benefit of treating sub-clinical is so good or the cost of ignoring sub-clinical is so high that its worth discarding the milk and of course our physician would be, that is all true and also do not discard the milk don’t incur that cost.

So our advantage would be not having to discard the milk, and that would compete with all these other products.

That definitely has always been - with this achieving as you know we got that zero milk to discard claim from the FDA. I do believe this product development would have ceased without that claim. I mean you have [ME2] and its competing against the big guys without a competitive advantage. So the zero milk is still and always has been a key. We want to have real good robust efficacy in comparison to the competition. But then the advantage the differentiating features is zero milk.

Will we be able to use our current sales force to sell this product when we get online with it?

You’re good to go. I looked on First Defense, but sales people always like something new. Absolutely same distribution, all the same First Defense relationship, stay in place, people just get even stronger because you’ve got a little something extra to sell on the same ride along on the same distributor visit.

[Operator Instructions] At this time it appears that we have no further questions. We’ll go ahead and conclude the question-and-answer session. I will now like to turn the conference call back over to Mr. Joe Diaz for any closer remarks. Sir?

Thank you. We want to thank all of you for taking the time to participate on today’s call. We will look forward to talking with you again in August with our second quarter financial results, and as a note, we hope to see many of you at our annual meeting of stockholders on June 15. If you have any questions regarding that please feel free to give me a call, Joe Diaz at Lytham Partners, and I can be reached at 602-889-9660, again 602-889-9660. We appreciate your time today and hope you have a great rest of the day. Thank you.

We thank you Mr. Diaz and to the rest of the management team for your time also today. The conference call is now concluded. At this time you may disconnect your lines. Take care.