ImmuCell Corporation

Good morning. This is Andrea from Chorus Call. I will be assisting with your conference call this morning. To get things started, let me ask Joe Diaz to open up the call.

Thank you, Andrea. Good morning and welcome to everyone on the call this morning. My name is Joe Diaz with Litham Partners. We are the investor relations consulting firm for Emucel. Thank all of you for joining us today to discuss the unaided financial results for the first quarter ended March 31, 2022. I would like to preface this discussion today 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 the safe harbor statement provided with last night's press release and with our Form 10-Q for the quarter ended March 31, 2022, and with the company's other periodic filings with the SEC. With that said, let me turn the call over to Michael Brigham, President and CEO of Emucel Corporation, after which we will open the call for your questions.

Michael. Great, thanks, Joe, and good morning, everyone. We have some great stuff to talk about today, so let's get started. The press release that we issued last night summarizes the unaudited financial results. Since that information is available to you, I will not take your time here to review all the line item detail, but I would like to discuss some of the highlights. Our efforts to scale up our production capacity to capture the acceleration in demand for first defense is paying off. Sales are up considerably, and we are making big strides in reducing the amount of the order backlog. As you may know, on April 11th, we issued a press release covering our preliminary top-line sales results. We have been making these optional announcements to give investors a very timely look at product sales, which I believe is the most critical measure of our operations and financial performance early in the reporting period. I have no changes to that very strong previous disclosure. Again, Product sales were up 46% during the first quarter of 2022 and up 45% for the 12-month period ended March 31, 2022, in comparison to the respective periods of the prior year. That is a $6.6 million increase in sales during the 12-month period ended March 31, 2022, compared to the prior 12-month period ended March 31, 2021. So we are beginning to capture the benefits of our strategic decisions to invest more in sales and marketing expenses and to expand our product line. This sales growth is happening as we continue to manage a backlog of orders. Prior to our introduction of the newest extension of the First Defense product line in late 2017, namely First Defense TriShield, annual production capacity of about 16.5 million was adequate to cover sales promptly without an order backlog. However, our world changed with the introduction of TriShield. We have been investing millions of dollars in capital expenditures to increase our production capacity. This kind of significant investment in real estate, manpower, and equipment does take time, despite all the urgency and energy our team puts into it. The objective of the first phase of our production capacity expansion, which was initiated during 2019, was to increase our annual production capacity from 16.5 million to 23 million. We have achieved that goal with the annualized production output being just about 22.9 million during the fourth quarter of 2021 and about 23.8 million during the first quarter of 2022. Given our sales of approximately $21.1 million during the 12 months ended March 31, 2022, with an order backlog outstanding as of March 31, I feel confident that we made the right decision during the second quarter of 2021 to initiate an additional capital investment to further increase our annual production capacity to about $35 million by the end of this year. That work continues as planned. The gross margin as a percentage of sales improved to 52% during the first quarter of 2022 compared to 39% during the first quarter of 2021. Our gross margin percentage was 49.5% during the six-month period ended March 31, 2022, and 48% during the 12-month period ended March 31, 2022. The higher level of sales and improved gross margin helped us report net income of $736,000 during the first quarter of 2022, in contrast to a net loss of $441,000 during the first quarter of 2021. Earnings before interest, taxes, depreciation, and amortization, or EBITDA, increased to $1,434,000 during the first quarter of 2022, compared to $258,000 during the first quarter of 2021. These non-GAAP measures should be considered in context with our statement of cash flows that is presented in accordance with GAAP. In addition to increasing First Defense production capacity, our other company changing goal is to achieve FDA approval of Retain. We are anticipating a response from the FDA during the third quarter of 2022 to our second submission of the last of five technical sections, significant technical sections pertaining to Retain. This one specifically is called the Chemistry, Manufacturing, and Controls Technical Section. This would complete our new animal drug application. This response from the FDA will determine whether we will be able to commence market launch early in the fourth quarter of 2022. At the same time, we are responding to observations from a recent pre-approval inspection by the FDA. So our product development objective with Retain is to demonstrate that our polypeptide antimicrobial, Niacin A, can play a productive role in the treatment of subclinical mastitis in today's dairy industry and offer an effective alternative to traditional antibiotics. Because label requirements of all intramammary drugs on the market today require that milk be discarded and that meat be withheld during treatment for a period of time thereafter, it is common practice in the dairy industry to not treat sick animals that are still producing saleable milk. Retain provides an animal welfare benefit by removing the economic disincentive to treating subclinical mastitis and allowing sick cows to be treated without the milk discard or the meat withhold penalties. In addition to improved animal welfare, Retain enhances food safety and sustainability by utilizing niacin, that is not used in human medicine. This is important because the overuse of traditional antibiotics is thought to create antibiotic resistance, which is an ongoing public health concern. So that brings us current with regards to First Defense and Retain. At this point, I would like to look back at the beginnings of these product initiatives. To do that, I'm very excited to introduce Dr. Joseph H. Crabb to you. Joe is our former Chief Scientific Officer. and VP of Product Development. He is now serving in a consultancy role to ImmiCell. So thanks for joining, Joe. I got just two questions for you. First Offense was first approved by the USDA back in 1991. Take us back to that time, please. How did you come up with the idea of purifying antibodies from milk to make a scours prevention product for newborn calves?

Okay. Thanks a lot, Michael and Joe and everyone. I appreciate the opportunity to have a little discussion. Well, I wasn't the first one to come up with the idea, but I did ultimately develop the product first offense. I mean, it starts with the differences between ruminants and primates, believe it or not. Human infants get almost all of their immunity in their first days of life through the placenta of their mom. The IgG transfers across the placenta to the baby. In ruminants, the infant calf receives all of its maternal antibody, not from the placenta, but from mother's milk or colostrum. So it's always been known to be a very good practice in the dairy industry to feed your calves one gallon of high-quality colostrum, which contains a lot of antibodies for that developing calf. And there was a lot of literature in the 1980s regarding using bovine colostrum to treat or prevent gastrointestinal illnesses. In the 70s, work by Norton, Mebus, and others, primarily at the University of Nebraska, identified several different types of viruses that cause gastrointestinal problems in calves. And Norton established the value of using vaccines for the dam. In other words, vaccinate the mom so she can provide specific immunity to the developing calf. Right around that time in the late 80s, ImmuCell was, I came on board because I had a vaccine and an antibody purification background. And we were working with Mead Johnson, an infant formula company, researching the addition of adding bovine antirotovirus antibodies into specific formulas for human infants. And while that work never went forward too far, we retained the animal health rights, the technology, and we began working on first offense. Our reasoning here was that if we could make a convenient dosage form of these antibodies that are strong against the gastrointestinal pathogens, we might have a good product to easily prevent this illness in calves. So we focused on developing subunit or otherwise novel vaccines, and we also focused on antibody purification technology so that we could boost the antibody levels in colostrum to the point where we could offer an efficacious protective dose against multiple pathogens in a single orally delivered capsule. Also, we found that freeze drying, which is our main method of drying these purified antibodies, turned out to be the most gentle way to preserve the antibodies. And so that was basically the beginning of the first defense franchise.

Wow, Joe, that's really interesting. I learn something new every time you speak. That's great history. Thanks for reviewing that. Let me switch over to Retain. So as we know, Retain has a much longer development path with the FDA. than what we did experience with the USDA for first offense. Take us back to the 2000s. What was it about NISN that interested you, and how did you come up with the purification technology to make a pharmaceutical drug preparation of NISN at commercial scale?

Sure, thanks a lot. Well, then, so to transition here, after several years of working on human applications of these bovine antibodies, at Immucel, such as Travelers, Diarrhea, Clostridium difficile, and Cryptosporidium, and a lot of that was funded through SBIR grants from the NIH. In the late 90s, we made the strategic decision to focus on only animal health applications to focus in and be successful with animal health products. Mastitis was our obvious market because it's the largest animal health market. It's responsible for approximately $2 billion worth of losses in the US every year. I became interested in bacteriocins as potential mastitis treatments, looking at some of the literature through the work of Phil Sears, who at the time was in Cornell and later MSU, and some of the pioneering work of the company called Applied Microbiology, who became AMBI and then ultimately became N21. After discussions with AMBI, we were able to secure an animal animal health rights to their nice and technology. And we started off by purchasing their product already on the market. It was a nice and based pre milking teat wipe called wipe out. Our reasoning here was that, um, we could establish the, um, proof of concept of nice and being useful against mastitis pathogens by, um, having some experience with this, uh, with this teat wipe and we also gained experience in manufacturing Niacin. While ultimately the wipe out was a good product, it never really could compete on a cost basis with the iodine and chlorhexidine based products that were already on the market. But we were able to leverage the Niacin technology and develop Retain. And in doing so, we developed a novel purification method that ended up with pharmaceutical-grade niacin, i.e. 95% pure niacin. And since niacin was used for many, many years in the food industry as a food preservative, a much cruder form of niacin, we felt that we would have a clearer path through the FDA to develop this product for mastitis applications as an intramammary because of its long use and history as a safe product in food. That ended up not being totally true. We ended up going down pretty much the standard drug pathway for Retain. But thankfully, we were able to secure the zero milk discard, which is a critical difference between Retain and the other intramammaries, which are primarily based on antibiotics. So hopefully, in the coming months, we're going to meet the goal and be able to launch the product. Is there anything else I can add to that, Michael?

Well, I'm just so glad to join the call. You've captured 30 years or so in a few minutes, and I've traveled that road with you, and boy, is it really good to hear a concise summary like that. I hope that was helpful. of interest and benefit to our investors. So thanks for sharing that, Joe. I really do appreciate it. So let's watch the clock here a little bit and conclude this conference call, at least our presentation portion. I encourage you to review the press release and the quarterly report on Form 10-Q that we filed last night. Also, please have a look at our corporate presentation slide deck. A May update was just posted to our website last night. I believe it provides a very good summary of our business strategy and objectives as well as our current financial results. So just see the investor section of our website and click on the corporate presentation. So with that said, I will be happy to take your questions. Let's have the operator open up the lines. Thank you, Andrea.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star then 2. Once again, that was star then 1 to ask a question, and at this time, we will pause momentarily to assemble the roster. And our first question will come from John Lipman, a private investor. Please go ahead.

Hey, good morning, Michael and Joe. Nice to hear you. Thanks for the time and thanks for the great quarter. A couple questions for you, Michael. Just reading through your 10-K the other day, A very big investment has gone into this great story Joe laid out for us with NYSEN and how you've come here. The company has projected potentially, if approved, a million in sales for 2023 of retain and maybe potentially another million on top of that for 2024. It seems like that might be a very small investment. amount of sales for a company that spent a lot of money and a lot of time getting to this kind of blockbuster product. Could you talk to us about where you derive those potential revenues and what the real revenue opportunity is here for Retain?

Yeah, thanks, John. Good to connect here. So the term we use for this launch strategy is a controlled launch. So there's two ways to go. We could put this product out to distribution just like we do with First Offense, essentially deliver it to the warehouses and let the reps take it out to the farm. There's a great deal of risk with that with a novel product like Retain. We've opted... for this control launch strategy while not showing a hockey stick of revenue in, say, the first 18 months, but really focusing and prioritizing great customer experiences with the first group of customers that see the product so that we can make sure that it's administered correctly, it's dosed correctly, it's getting to the right cows, and we've managed very carefully industry risk like a hot dog milk tank or a faulted cheese tank, you know, the niacin is used appropriately to avoid some of these risks. I think while it requires a little bit of patience to get into the, you know, we've built a capacity, a production capacity of 10 million, I think trying to grab that through a mass market distribution launch in the first year or so is too risky. The sales team is really prepping up really well. You've seen the recent hires of Dr. Lichty and Dr. Wustenberg. These guys are going to help Bobby and Kathy and the team manage this control launch and secure the long-term benefit of the product at the expense of perhaps a quicker, bigger launch in the first year. So it is a bit of a trade-off, but I think the benefit long-term is smart. and we get this product launched appropriately and used appropriately for the maximum benefit over the years two, three, and four. I look forward to the day where we say that 10 million in capacity coming out of today's plant is not enough and we need to expand it so we can step down that path together. Does that help answer your question there, John?

Yeah, it sounds like a controlled launch to make sure that customers understand how the product works and to then seed it into the market, sounds like to me. Question on great profitability in the business. You're showing now with less development costs for Retain. As you launch, if you do launch Retain and are approved, Can you talk to us about the scaling up of staff to support retain while we're tempering, you know, sales? Do you have any expectations that – and also, you know, scaling up your business on the first defense franchise, you know, being able to hit 30-plus million in sales potential. Do you see that you're going to need to add a lot of, you know, CapEx or any – a large staff to support the business, or you're pretty comfortable with the higher sales growth with the current staff and infrastructure that you have today?

Yeah, John, that's a great follow-up because it really helps make more sense of this control launch strategy. First, we're so fortunate to have First Defense. The growth we're seeing there, it helps create some of that patience we need to do this control launch with Retain. So, yes, staffing is increasing. The CapEx is really well defined. I don't see any surprises. We know what we need to do to complete this growth on first defense, and that's laid out in the queue by specific project, and then disclosing the cost of those projects versus available cash. We've got headroom for the first time in EmuCell's history, which is unique in my experience with EmuCell. We're always scrambling with not enough cash. But so first events, I feel like that's well defined in the queue. And then on retain, you know, the staffing will increase, but it's not like huge. So what we're seeing is a staff today of about 67, just under 70 people. I can see very quickly going into 23, we'll be up to 80. But it's not a huge explosion in staffing. And again, the CapEx is is budgeted and known and the cash is available to fund it. So I would say modest on personnel, but we definitely need some new people. And CapEx is in good shape.

Michael, could you just, one last thing, and appreciate the answers to the questions. Can you just talk to us about the, back to, well, two parts. On retains, Do we need to educate or teach the farmers and the people in the dairy industry that are going to be using Retain how to apply the product? Or is it something that they are aware and know how to use already and apply?

Yeah, very fair. Very good question. The latter. It's a standard intramammary infusion. So it's a tube, a liquid pump. that is infused through the teat opening, just like the other mastitis treatments on the market. So as far as application, the customer will need no training and nothing new. This is what they do with the current intramammary tubes on the market today.

Great. And then my last one, and it's probably in the K, but I must not have picked it up. Could you just talk to us about, First Defense has been fantastic. The growth has been just stellar. Can you talk to us about the barriers to entry, the patents, the IP here? Seems like you've got a special soft here that's generating a lot of cash. I assume it would attract attention from others.

Yeah, well, that's a great question, having given Joe the opportunity opportunity to discuss the history. So a lot of that technology is very old, so none of it is patented. So we rely exclusively on the intellectual property around the manufacturing process, as Joe described, from the proprietary vaccines we use in the production process to what we do and what we're expanding here in Portland as far as the purification. And Joe even mentioned some of the technology around the freeze drying, just the particulars of how you purify those antibodies to get them down to a small, say, four to five gram deliverable dose. It's tricky. It's a lot of management. At the farm level, our farm team is unique in what they can do to manage the vaccine program, the hyperimmunization vaccine program, and the collection, the ship back to Maine, and then the process here, which is what we're essentially doubling or more. So it's process know-how, and there's not a blockbuster kind of patent that you might see in a typical pharma drug, but we're not a typical pharma company.

Well, thank you. I'll let other people ask some questions. I wish you well and a fantastic job that you're doing there, Michael.

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

Once again, if you would like to ask a question, please press star, then one. And our next question will come from Joe Diaz from Lithum Partners. Please go ahead.

Thank you. Leveraging off of the previous questioner, with regards to First Defense and your increasing production capacity, what's your plan going forward here in the next couple of years, and are you confident that that market will continue to grow and growing capacity makes sense?

Yeah, well, certainly it's hard to predict the future of market and future sales. I'm more focused on capacity. I'm very confident there. The sales team will support me 100% or more in that none of us can live further under this backlog condition that's really difficult on the team. It's really difficult on our customer. So, you know, the CapEx that I referred to, sort of the two phases of expansion that I referred to going from 16.5 to 23 to 35, all that is in place. We need to just finish off some of this equipment installation validation and put it in USDA-approved operation. that gets us there by everything is in place. I mentioned just, you know, it continues as planned. To get to that $35 million here by the end of the year, you know, so no more big hurdles like new real estate. It's more finished what we started and it's online. And, yeah, that's just critical as we go through the second half of this year to transition from a company that's asking its sales team to allocate scarce products to more productively asking the sales team to go find new customers and retain current and recover those we may have lost during the period of short supply.

Michael, both you and Dr. Crabb mentioned that niacin is a polypeptide antimicrobial, that it's not an antibiotic. Could you give us a little bit of... background on the difference between the two?

Yeah, that's a big word for me. I'm glad Joe's on the call. I'm going to ask Joe to speak to that, please, Joe.

Okay, sure. I'll try to do somewhat simplified. Well, niacin is a polypeptide. A polypeptide is made of amino acids like a protein. A protein is a polypeptide too, but most proteins are very large. Niacin happens to be a relatively small polypeptide, 34 amino acids. The traditional antibiotics like the beta-lactams are very small molecules, are much, much smaller than niacin, and they tend not to break down in the environment. So one of the attributes of niacin is that because it's kind of like a protein, it does its work against mastitis, but then in the milk, it will eventually break down, so it's not a problem. That's one issue. The other issue is that the use of niacin does not cause the development of antimicrobial resistance because it's a completely different class of molecules than the traditional antimicrobials. The third aspect of niacin, which is interesting, is that your beta-lactams like penicillin work, their mechanism of action is to stop the growth of a bacterium by interfering with the biosynthesis of its cell wall. But nicin is interestingly different because nicin, being a polypeptide and modified in a certain way, doesn't stop the growth of a bacterium. It actually pokes a hole in the bacterium and kills it directly. So while nicin can kill growing cells or resting cells, Traditional antibiotics can only kill growing cells. So there's a couple of differences between niacin and traditional antibiotics.

Thanks, Joe. I always appreciate the way you take some pretty complex science and put it into some common speak. Thank you.

One other question as it relates to niacin. You mentioned that it's naturally occurring in the environment. It's used as a food preservative. Is the Niacin that will be used in Retain any different?

The only difference is it's purified to a pharmaceutical level of purity. So, for example, Niacin and other bacteriocins are produced by normal bacteria in the environment. They're produced as a mechanism of having sort of bacterial competitions. They produce bacteriocins to establish their niche. So, yeah, they're produced in the environment, but they also degrade in the environment. And then so. So, yeah, nicin is naturally produced by a bacterium like many of the like. Essentially, all of the beta lactams are naturally produced by a fungus. So, you know. So our niacin is the same niacin that's produced by a certain type of bacteria, but we take the purification of it up to a pharmaceutical level, which is something that's not seen. So if you look at, for example, the food grade niacin preparations that you can buy to preserve things like dairy foods, those preparations are actually 2.5% pure niacin. The rest is milk solids. Our niacin is essentially 95% pure, pharmaceutical grade.

So, Joe, what you're saying, right, is that there's no way the FDA would approve this intramammary infusion at that 2.5 level. We had to get to that 95 to be considered for approval by the FDA.

Yeah, I mean, it's generally considered you need a pharmaceutical has to be over 90% pure. But the other interesting aspect is that if you infuse a crude preparation of niacin into the udder, you would have a massive inflammatory response because of all the other impurities. So part of the drug approval process is doing a target animal safety study where you look at infusing the product on the effect on the animal. Does the udder swell? Does it get red? Does it get hot? Have you caused mastitis? All of those things can be caused by the impurities. So it's incumbent on us to have a very high purity product for this.

Right. Makes sense. All right. Thank you, guys. Well, you're welcome.

Yeah. Thank you. So let's wrap here. I'll say that I guess I'd really just turn it over to Joe. I think let's wrap this call, Joe. I see no other questions coming, so...

There are no other questioners in the queue. So that being the case, let's go ahead and wrap up today. We appreciate everybody taking time to go over this quarter's results. We'll look forward to talking with you again after the next quarter. We expect that it'll be sometime in early August. So have a great weekend, stay safe, and we'll talk to you again. Have a great day.

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