ImmuCell Corporation (ICCC) Q2 2017 Earnings Report, Transcript and Summary

Good afternoon and welcome to the ImmuCell Corporation Second Quarter Fiscal Year 2017 Financial Results Conference Call. [Operator Instructions]. Please also note that this event is being recorded. I would now like to turn the conference over to Mr. Adam Lowensteiner. Please go ahead.

Thank you, Andrea and I thank all of you for joining us today to review the unaudited financial results of ImmuCell Corporation for the second quarter of 2017 which ended on June 30, 2017. My name is Adam Lowensteiner with Lytham Partners. We're the Investor Relations consulting firm for ImmuCell. With us on the call representing the company today is Michael Brigham, President and CEO. Before Michael gets started, let me say that statements made by management 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 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 analysis as of today and 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 the press release and the Form 10-Q that were both 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 the call for your questions. Michael?

Thanks, Adam and I thank all of you on the line for taking the time to join us on today's call. I do want -- I do not want to spend too much time together reviewing the quarterly numbers because all the financial details are available in both the press release and the Form 10-Q that were filed earlier today. So I'll briefly review the top line and bottom line results for the second quarter of 2017 and then move on to some updates about our business. Sales during the second quarter of 2017 of $1.7 million decreased by $626,000 or 26% in comparison to the second quarter of 2016. The drop in sales during the second quarter of 2017 was not a surprise to us because sales during the second quarter of last year included nearly $1.3 million of orders that had been on backlog as of March 31, 2016. This disruption in the order shipping pattern makes the 2 quarters difficult to compare. 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 have had sufficient inventory to ship in accordance to the demand of our distributors. Sales of $5.3 million during the first 6 months of 2017 were within $68,000 of the sales recorded in the first 6 months of 2016. The quarterly record-setting sales achieved during the first quarter of 2017 offset some of the second quarter decrease that I just mentioned to bring us about level for the first half of this year compared to the first half of last year. We expect to report positive sales growth for both the 6-month and 12-month periods ending December 31, 2017, in comparison to the same periods of the prior year. It will be good to have the impact of the backlog removed from our period-to-period comparisons going forward so that we can look at the sales results on more of an apples-to-apples basis. We reported a net loss of $218,000 or $0.05 per share during the second quarter of 2017 compared to $9,000 or less than $0.01 per share during the second quarter of 2016. We reported net income of $366,000 or $0.07 per diluted share during the 6 months ended June 30, 2017, compared to $443,000 or $0.11 per diluted share during the 6 months ended June 30, 2016. Market conditions in the dairy and beef industries, including milk prices and prices for calves, weakened during 2016 in comparison to 2015. Milk prices have made modest improvements going into 2017 over the annual averages for 2016 and 2015. Our objective is to bring the most effective technology to market. Our competitors, including Boehringer Ingelheim, Elanco, Merck and Zoetis may be bigger than we're, but they do not offer the kind of products that we do. Getting market share from competitive products at both the calf level for scours and the calf cow level for mastitis provides a great opportunity for us. I would like to discuss the 2 largest competitors we face in the calf level market. First, CALF-GUARD from Zoetis is the unit volume leader, but this product does not have an E. coli claim and puts calf through vaccination stress and can be inactivated by colostrum which is why it is recommended to withhold colostrum when administering CALF-GUARD. We provide calves immediate immunity that can be administered with colostrum soon after birth as possible and we know this is best practice for good calf health. Second, the market share of Bovine Ecolizer from Elanco which is derived from horse blood, is relatively small compared to ours and to CALF-GUARD's, but we're still aggressively displacing that product by reminding customers about the importance of our coronavirus claim which their product does not have and by discussing new data from our lab that shows that a dose of First Defense contains multiple times more E. coli antibodies, thereby providing calves more protection. Very importantly, the anticipated addition of a rotavirus claim to our bivalent gel tube product later this year will allow us not only to compete more effectively against these products at the calf level but also against vaccines that are given to the mother cow to increase the quality of the colostrum that she produces for the newborn. We intend to market this new product under the trademark First Defense Tri-Shield. Subject to USDA approval, we anticipate launching Tri-Shield during the fourth quarter of 2017. We also anticipate establishing USDA claims for our bivalent gel tube formulation of First Defense Technology which will -- which we will continue to sell after Tri-Shield is available to the market. During in July, we raised net proceeds of just over $1 million by issuing 200,000 shares of common stock at $5.25 per share. Without this incremental equity raise, we have been holding off on nonessential investments pending completion of the construction of our Nisin production facility. To name just one news of this new fund, we're now going ahead with a plan to increase our team of regional sales and marketing managers from 5 to 6. This will better prepare us for the launch of Tri-Shield. We like the calf scours market. We believe that the disease costs the dairy and beef industry is about $740 million per year. That's a good size market, but the mastitis market is even bigger. Mastitis costs the dairy industry about $2 billion per year, representing the single largest cause of economic harms for the dairy industry. Presently, mastitis is treated with traditional antibiotic products and treatment is generally reserved for clinical infection when the cow produces non-salable milk. Subject to FDA approval, we expect to enter into the mastitis market with our Nisin-based treatment for subclinical mastitis. 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 a meat withhold during or for a period of time after treatment. No other product can offer this value proposition. Nisin, the active ingredient, is a bacteriocin that is not used in human medicine and would not contribute to the growing concern that widespread use of antibiotics encourages the growth of antibiotic resistant bacteria or superbugs. As many of you know, we initiated construction of our $20.2 million pharmaceutical facility to produce Nisin during the third quarter of 2016. As of June 30, 2017, we have invested approximately $10.1 million in this project, leaving just over $10 million to go. To finance this, we had approximately $4.3 million in cash and investments on hand as of June 30, 2017 and have access to up to $6 million in available bank debt. Our available cash was increased by $1 million subsequent to June 30, 2017, through the equity raise that I mentioned previously. Construction of the building shell is now substantially complete and we have made significant progress on the interior fit-out. I encourage you to go to the Products page of our recently redesigned website at www.immucell.com and click on the Purified Nisin for Mastitis page to view progress photos of the construction. The tangible visual progress is really very exciting. We will continue to provide periodic updates there. We expect spending on this project to be largely complete by September 30, 2017. To maintain the time line for anticipated FDA approval in 2019, we're working to complete the facility construction and the installation and qualification of equipment by the fourth quarter of 2017 which would be followed by a process validation and subsequent regulatory filings. We expect that 2 submissions of the regulatory package covering the manufacturing objectives will be required, each of which will be subject to a 6-month review by the FDA. With that said, let's have the operator open up the lines for your questions.

[Operator Instructions]. And our first question comes from Sam Rebotsky of SER Asset Management.

So we've been working on international sales. What is the structure? Have we hired -- do we expect any significant sales in the third and fourth quarter of the current year? Have we hired some new people? Or what's going on with international sales?

Slow moving on that front, Sam. So I would not expect anything significant. We definitely would not be hiring an employee for that. But we're working with some in-country expert, so it's going to be a case-by-case kind of situation. And hope that they will do the regulatory work. They will do the in-country sales work, sales and regulatory. And we would retain our role as manufacturer. But yes, nothing big, nothing, as you said, anything significant, third and fourth quarter. It'd be an upside to me, nothing that I'd expect at this point.

Okay. Now as far as the facility in this third quarter, we have some of the equipment. Do we expect to have all the equipment on the site in the third quarter? Or where we...

Yes, we do. We do, really. As I mentioned, the construction is largely complete. We're well into install and that's my comment about having almost all the cost or the investment fully incurred by September 30 is because that's what's left behind the equipment. So it's moving -- it's transitioning from facility construction to insulation and then ultimately, validation and process runs. So by September 30, I think we're going to have almost all of it incurred.

Do we pay for it on receipt? Or do we pay for it when it's fully installed and acceptable and we talk criteria?

Well, we try and hold on to a piece for full installation. But most of these vendors want a deposit upfront, a progress payment and then a completion payment. That's pretty much true across the board. So, yes. It's all happening between really June and September.

So do we hope to get everything fully installed by December? Or when do we expect to get it installed and have the equipment run the Mast Out and then submitted to the FDA?

Yes. I mean, there's some lever on that between very end of the year and very beginning of next year, but we're going to be running these tanks in 2017. We've got process validation step is -- needs to be completed before we're ready to run the batches. We need to make 3 validation batches that gets submitted to the FDA. So that's what gets us into the completing installation in '17 then initiating the validation and the process test runs and then the submissions, the manufacturing for submission in 2018.

And as far as the rotavirus, when do we expect the final approval on the rotavirus?

We're sticking with that projection for fourth quarter. We think it's right. It's a little hard to be certain because it is at the discretion of the USDA. It's a little bit unlike the FDA, where you get a statutory turnaround. With the USDA, it's a little more flexible. The timeline is a little more in their control. But I still think it's reasonable to look for that product to get approved in the fourth quarter.

[Operator Instructions]. And we have a follow-up question from Sam Rebotsky.

So as far as -- the stock has moved back a little bit even though the volume is not so heavy. Is there any thoughts about telling the story? Or do you have any awareness where the spying is coming from?

Sam, when you say move back, what are you...

Well, it moved up, then it was down to $6.46. It's just been trending up. There seems to be more strength in the stock.

Okay. Okay. Yes, I took it the wrong way meaning back down but more back up. Yes, traded strong on a price per share basis over the last couple of weeks which is encouraging. I hope we've been able -- the second quarter decrease, I think is well explained. It was well anticipated. I hope we don't lose momentum due to that because that would be a disservice to the stock. But yes, I continue to work with Lytham Partners. We get out, we meet investors, we do calls. Just getting the Q filed today. There's a lot more to the story than this backlog-influenced drop in second quarter sales. So I hope people read the press release, read the Q, ask questions, understand what's going on because I think there's some very, very strong, very good progress kind of disclosures in that Q to those who would read it.

Okay. And at this point, do you go to Kansas City in August or is that...

Sam, that's a great question. I struggle with that. The answer is no, not this year. I do want to keep connections with those people. They're a great group of animal health companies that are all centered out there. There's a little conflict in my schedule this year. And honestly, it did not become a priority because we chose our site for the Nisin plant here in Portland. And a lot of our work out was considering a potential site out that way. So with that decision behind us with the facility in Portland, I am directing that time at the end of August in a different direction. But I'll be back. It's a great group of people who we want to stay connected with.

Well, you're making good progress, I guess, the ability of finally funding everything and hopefully, you get to completion, I guess, the rotavirus soon so you could start selling more and you have the ability to sell more of the First Defense overseas with your expansion. And hopefully, you can sort of get some more sales there and move on. Good luck, Michael.

Thank you, Sam. I appreciate it. That's exactly where we're at, with sales team is charged and ready to go for it.

And our next question comes from Doris Rossiter of Shattemac.

I'm just wondering, Mike, if you could talk a little bit more about what the commercial rollout of Mast Out will look like. Is there any kind of qualitative things you can tell us? Will you be going to conferences to present it? I'm just wondering how you get word out about it? And what type of timeline you would be expecting for the launch?

Yes. So of course, it depends on this final stage of the regulatory development. But our timeline was getting that first submission in 18 to 6 months review. We do anticipate needing to make a second submission, that's just almost always the case. I just don't anticipate there will be a unique exception to that rule. So a few months in between then a second submission and then there's about 90 days on the back end which is much more administrative. But very quickly, that gets us out to the second half of 2019. So timing, that's how we see the approval timeline layout. So sales and marketing strategy. I mean, one baby step. I mean, it's a really small step, but it's an important step with the hiring of the new rep which we anticipate we're going to do here shortly, just grow the team a little bit based on just First Defense volume. But that team's going to need to grow to launch a product as big as Mast Out. But that would come out later in 2019. And I would also, Doris, sort of reference you, if I may, over to the Q, where -- having that just got filed a few minutes ago, you probably hadn't had a chance to read it yet. But I'd point you to Page 28, where we actually tried to lay this timeline and the sales dollar launch plan out in pretty good detail, the best view we could have to what would happen in 2019 and the first few years right after that.

Okay. I'll take a look. So you'd actually expect to start seeing sales then in later 2019?

We do. We needed to stick to that very, very challenging timeline of getting that first submission in. Once that first submission is in then the clock does become much more predictable. Getting that first submission in the earlier part of 2018 gives us time to make 2 submissions and turnaround in between first and second and get to an approval by the second half of 2019, yes.

Okay. I'm just wondering then once your -- let's forget about the regulatory part of it. You're past all that and now you're in launch mode. Do you have any kind of feel for what the cadence of the roll-out will be? Is it going to be like a slow build? Or is going to be a big pop in the beginning and then a slowdown? Do you have any sort of feel for the cadence of sales growth for Mast Out?

Yes. I mean, we're going to work with the same distributors that already know us with First Defense. We're going to leverage our pretty small force. It will be a sales force, it'll be a little bit bigger at that point to really get the word out there in advance of 2019 but more aggressively with the approval. In the section of the Q on the MD&A on Page 28, we did answer the question to the extent we can predict it and estimate it. I don't want to be wrong, I just don't know if I'm a little high or a little low. But looking at first year's sales in the $5 million to $6 million range.

$5 million to $6 million. Okay, so that will be a first full year?

First full 12 months, exactly.

Okay so that would possibly be a 2020-type number.

Yes. Maybe it's fourth quarter '19, first 3 quarters, like that. A rolling -- we need a rolling 12 months to get that product out there and hit that kind of level in first year sales. But we think it's possible, but we haven't done it yet.

Okay. And then if you were just to focus on the U.S. market, your current clientele. What -- do you have an idea of what the total potential is over time, the sales of Mast Out?

Again, it's a projection. It's -- what I say about all projections. It's going to be wrong. I just don't know if it's a little high or a little low. But that same section there, your questions -- I must have, in a way, anticipated it because I think we've got better detail on this in this Q than perhaps previously. But try to get out to $36 million in year 5 but understanding that incremental investment will be required to hit that full level of sales because that's above the capacity of this current plant. So we don't want to make that investment before we've proven that, that first and even second year worth of sales and you have market acceptance. But we've laid out what we think the market potential is and how we can achieve it with today's facility and then the investment that will be required to increase capacity subject to that proven market acceptance.

Okay. So will the current plant, the shell, anyway, is built for the next 5 years. It's just that you'll need to add some more lines in there. Is that correct?

Right. It's kind of two phases. So the current shell is constructed with one production line with space for the second. Once we exceed twice of the capacity that we launched with then we'll be looking at a completely different building and would not even be on the same site. There's not even square footage for it. There's not even land for it.

Okay. But the current building would serve you out to that 5 -- year 5?

No, we couldn't quite get there. I'll read my section from that Page 28. If annual sales exceeds approximately $25 million, we would have to evaluate all Nisin supply options, factoring in experience and yield improvements at that point, building an additional Nisin production facility to meet our needs. It might be the most cost-effective way to go. So that would be a decision we'd make out of that point with sales under our belt.

Okay. Mike, this is a lot of detail. I appreciate it.

It's a great question. I feel good that we -- really -- the last paragraph on Page 28 is exactly where your question is going. I think you'll find the answer there, but we've touched on it here, too.

Okay. Yes, I will read it. I just found it now. You're right. It's already on the Internet and available for consumption so...

These are facts. These are projections. These are market estimates that have been available previously. I just think we're at the point now and you've proven me right here. We need to put it in one concise place and that's where it is. I think it pulls all the capacity, the launch, the timing all together in one relatively long paragraph. But it's packed with the answer to your question.

[Operator Instructions]. Our next question comes from Tom Fox, a private investor.

My question is actually about the FDA approval process. It seems to me like there's a step involved where you guys need to show the FDA in their laboratory how to detect Nisin in the milk. I've just read this based off, of what I've seen on the website. I was wondering if there's any update or -- on that or if you guys have achieved that by now.

No. To be honest, the timeline is driven by that manufacturing Technical Section that we were -- have just been discussing. Inside of that is another Technical Section, that one -- so the manufacturing is called chemistry, manufacturing and controls. Here, we're referring to the human food safety. The most important piece of human food safety is the zero milk discard. So we were granted that claim. I believe that was 2012. I'll just check that real quick. And when they granted that, they said -- I'm sorry, Q2 2011. So back in 2011, we've got the zero milk discard claim out of human food safety. And since then, we have been working on this method as you described it very well to detect Nisin in milk. So that's at its later stage right now. That process, that submission is very active. We think we can get it done by the end of the first quarter of 2018. If not, soon thereafter. It's in that time frame of the work being done now and then a 6-month submission. So very quickly, we'll have 6-month FDA review period in there, we're out into first quarter of 2018. But we've always seen that Technical Section as not being critical path because the manufacturing one will run longer. But nonetheless, your point's well taken. We'll be very happy when we check that box and get that method that you just described, detecting Nisin in milk, validated and transferred over to the FDA lab.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Adam Lowensteiner for any closing remarks.

Thanks, Andrea. I'd like to thank everyone for participating in today's call. We look forward to talking with you again at the conclusion of the third quarter, around November 9. Have a great week. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.