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spk05: Good morning, and welcome to EmuCell Corporation's fourth quarter fiscal year 2021 financial results. My name is Tom from Chorus Call, and I will be assisting your conference call this morning. To get things started, let me ask Joe Diaz to open up the call.
spk06: Thank you, Tom, and good morning to everyone, and welcome. As Tom indicated, my name is Joe Diaz with Letham Partners. We're the investor relations consulting firm for EmuCells. We thank all of you for joining us today to discuss the unaudited financial results for the fourth quarter and full year ended December 31, 2021. 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, better known as a safe harbor statement, provided with last night's release and with the company's periodic filing with the Securities and Exchange Commission. With that said, let me turn the call over to Michael Brigham, President and CEO of Emucel Corporation, after which we'll open the call for your questions. Michael.
spk00: Thanks, Joe, and good morning, everyone. I appreciate the opportunity to provide some updates on what is going on at Emucel. We have several top priority challenges to meet presently. At the top of the list is increasing our product sales and expanding our production capacity to meet growing demands. I would add obtaining the final regulatory approval of retain from the FDA to the top of the list of challenges right in front of us. I'm excited to introduce our VP of Manufacturing Operations and our VP of Sales and Marketing, two key people who are being extremely effective at meeting these challenges for us later in this call. I'll let you hear directly from them. First, I will do a quick run through the numbers. The press release that we disclosed last night summarizes the unaudited financial results Since you have that information, I will not take your time here to review all the line item detail, but I would like to review some of the highlights. As you may know, on January 5th, we issued a press release covering our preliminary top line sales results. We've been making these optional announcements to give investors a very timely look at what I view as the most critical measure of our operations and financial performance, that being product sales, early in the reporting period. I have no changes to that very strong previous disclosure. Again, product sales were up 45 percent during the fourth quarter of 2021, and up 25 percent for the year ended December 31, 2021, in comparison to the respective periods of the prior year. The gross margin as a percentage of sales improved to 47 percent during the fourth quarter of 2021, compared to 43 percent during the fourth quarter of 2020. Our gross margin percentage was 45 percent during both of the full years ended December 31, 2021 and 2020. The higher level of sales and improved gross margin helped us report net income of $74,000 during the fourth quarter of 2021 and helped us reduce our net loss to $78,000 during the year ended December 31, 2021 from a net loss of just over $1 million during the year ended December 31, 2020. Earnings before interest, taxes, depreciation, and amortization, or EBITDA, increased to $2.7 million during the year end of December 31, 2021, compared to $1.9 million during the year end of December 31, 2020. These non-GAAP financial measures should be considered in context with our statement of cash flows that is presented in accordance with GAAP. By way of an update on the status of Retain, I'm pleased to report that we made our second submission to the FDA to address the FDA's previous comments and queries on the Chemistry, Manufacturing, and Controls, or CMC, technical section, which is required for approval of our new animal drug application, or NADA. This complex submission has been a very significant effort by our regulatory, manufacturing, and quality teams, In August, we will find out if the FDA either approves our NADA or asks for further questions. Our product development objective is to demonstrate that our peptide 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 labor requirements of all intramemory drugs on the market today require that milk be discarded and that meat be withheld during treatment and for a period of time thereafter, it is common practice in the dairy industry today not to treat sick cows that are still producing saleable milk. Retain provides an animal welfare benefit by removing this economic disincentive to treating subclinical mastitis. and allowing sick cows to be treated without the milk discard and meat withhold penalties. In addition to improved animal welfare, RETAIN enhances food safety and sustainability by utilizing a peptide antimicrobial 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. Outside of the development of Retain, probably the most exciting work going on in Immunosal right now is the growth in both of our production capacity and sales demand for the first defense product line. I have asked our VP of Manufacturing Operations, Betsy Williams, and our VP of Sales and Marketing, Bobby Joe Brockman, to speak about this exciting work. Betsy, let's start with you, please. It was not too long ago that our previous production capacity of about 16.5 million per year was enough to meet demand. However, as of the end of every quarter since March 31, 2020, we have had a backlog of orders. Would you please speak to the capacity expansion initiatives we've completed over the past two years that enabled us to increase our output to almost $23 million on an annualized basis during the fourth quarter of 2021?
spk02: Yes, happy to. Starting with the first steps in our manufacturing process, we substantially expanded the number of program farms. and the overall number of program cows from which we collect colostrum. This effectively doubled our capacity at this stage of manufacture. To support this growth, our immune cell vaccine team ramped up their manufacturing equipment capacity to provide for that doubling of program cows. They also were successful in numerous process enhancements to maximize yield. And I'm happy to say we have a very healthy stock of colostrum now for continued growth initiatives. Moving on to liquid processing, the next step in the process, the ME cell liquid processing capacity doubled by installation of a second whey concentrate, or what we call cheese, equipment train. The next step in the process is lyophilization or freeze drying of the liquid to powder. And we installed a third freeze dryer in 2021, which effectively expanded our capacity by 50%. And going into 2022, we're planning installation of a fourth freeze dryer to double the total capacity of what was in place in early 2021. So you may be wondering, where does all this new equipment fit into our main building? And the answer is it doesn't. We actually expanded our facilities by leasing and renovating a building about a block away from our headquarters. This specially renovated building, specific for our process, is now where we convert the freeze-dried powder from Building 56 to finished product. That is, First Defense capsule and bolus product, as well as dual-force and tri-shield gel products. We designed dedicated rooms or suites for each of the product types and added new and redundant equipment for our continued growth. The building actually has room to expand further for formulation and filling operations into the future. The building renovations, the dedicated footprint for finished goods production, and the higher capacity equipment really provide for efficient, streamlined product and process flows and good regulatory compliance. So on behalf of manufacturing, we truly appreciate these investments in our facilities to meet the increased demand and also being well aligned with current good manufacturing practices.
spk00: That's great, Betsy. Thank you. It is really great to see both increasing production output and growing customer demand at this time. Given what we were seeing in the way of increasing customer demand, I know we all think $23 million per year is not enough. Production output needs to be well ahead of sales and we need safety stock. We need to fill the backlog and stay ahead of demand going forward. Would you please speak to the ongoing new initiatives that are underway to increase our annual production capacity to about $35 million per year by the end of 2022?
spk02: Yes, of course. The next phase of our expansion in 2022 includes as I indicated before, the installation of a fourth lyophilizer or freeze dryer in Building 56. This is really essential and will result in 33% increase in capacity. We will also be installing a high-speed automated filler specific for gel product that has labeling capability, and this will reduce our cycle time for gel filling operations and enable additional production capacity. That new equipment is expected to be operational by the end of 2022. Okay, thanks, Betsy.
spk00: Thank you for sharing your thoughts on all the critical work you manage related to First Defense, while also keeping all the retained regulatory work moving forward at the same time. Of course, this investment of time and money would not be necessary if we were not experiencing increasing demand from our customers for First Defense. Bobby, could you speak to the work you and the sales team are doing to create and sustain all this demand for First Defense?
spk01: Well, let me start by pointing out what I want everyone on the call to know is obvious. We are not selling a Me Too product. Our First Defense product line is truly unique. We are the only USDA licensed products in the scour prevention space that utilize polyclonal antibodies. You see, this technology removes the producer's reliance on variable vaccine responses to generate antibodies, and instead protects every calf equally with a measured dose of immediate immunity. With this, we are not only protecting the individual calf, but we are reducing pathogen shedding and disease amplification across the whole calf herd. We're not splitting hairs to gain a messaging advantage. We've got something truly different to sell, and that's a testament to the gut fortitude of our product development and manufacturing teams. We have taken the road less traveled by big pharma companies. But that means prospective customers need to know we're on that road. To quote one of our highest growth territory managers, Mr. Dale Miller, if you can't see them, you're not going to sell them. You see, Emusel had this unique technology for several years, but we didn't start a more aggressive sales and marketing investment until 2010. We're still very much the David amongst pharmaceutical Goliath, but our commercial team has grown from one to eight territory managers, a marketing director, a technical service veterinarian, and me. So there's 11 of us facing the market every day. Sure, there are territories we'd like to split for improved coverage, but starting in 2015, this team growth hit a cumulative mass, and we're seeing that translate into reaching more prospects. Now, that reach needs to move across the sales process efficiently and result in reoccurring customers. I'm probably stating the obvious there. But I'm proud to say that's happened. We have more customers. and those customers are buying our higher revenue products. Closing those sales, though, takes time and skill because we are three times the sticker price of our competition. But our improved marketing message and at times non-traditional tactics led by Ms. Kathy Becker has created a ripple effect that's earned us a seat at the table with traditional vaccines. This advanced yet common sense marketing closes sales quicker. I believe that's because the customer finds our message about how verified antibodies are better than a variable vaccine response more credible if marketing has done their part to get in that customer's mind space ahead of the face-to-face sales call. So we aim for each region to grow faster than the competition. And as a team, that's translated into consistent market share gains. So I'm happy to say marketing and sales are effectively pulling the rope in the same direction. You know, I also want to speak about our supply issues. So supply shortages typically kill sales momentum. But the strategy we've used to manage through our shortages seems to be working in our favor. For the last 26 months, we've carefully allocated product to what we refer to as our make or break us customers. This requires coordination with distribution and careful inventory management throughout the entire chain, even at the farm level. Our whole commercial team pivoted toward this service focus, and it's earned us some goodwill, which is paying back. The positive conversations we're having on-farm suggest that this strategy is working. And I'll wrap by saying we have a lot of market share yet to gain domestically and are developing some new international markets. The first defense line's future appears bright, despite the challenge we may have to overcome any fallout from the extended order backlog. I'll also speak briefly on how our team is preparing the commercial strategy for Retain. Dr. Rafael Lichty is a valuable new addition to my group in that regard. We know well how to sell first defense. I mean, that sales and marketing recipe has been perfected over the years. We are currently learning what that sales recipe might look like for Retain. Post approval, we will get the opportunity to put that recipe to the test. We then listen to the market and tweak the recipe Simply put, that's how our commercial team intends to develop a value proposition and sales approach or retain that is as solid as what we have for the first defense line.
spk00: Wow, that was really helpful, Bobbi. Thank you for sharing your thoughts on all the critical work you managed for us so effectively. In conclusion to this conference call, I would encourage you to review the press release that we filed last night We expect to file our audited annual report on Form 10-K at the end of March. Also, please have a look at the corporate presentation slide deck. A February 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 see the Investors section of the website and click on the corporate presentation. With that said, I'll be happy to take your questions. Let's have the operator open up the lines.
spk05: Thank you. We'll now begin the question and answer session. If you'd like to join the question queue, press star, then 1 to join. If you are using a speakerphone, please pick up your handset before pressing the keys. If you'd like to remove yourself from the question queue, press star, then 2. We will pause momentarily to assemble our roster. Again, we have no one currently joined in the queue. That is star, then one to join. We have a question from George Milas with MKH Management. Please go ahead.
spk04: Yes, thanks for taking my question. Good morning, Michael, and a real pleasure to hear Bessie and Bobby on the call. Thank you very much for your for your explanations. On the last call, I think the plan for capacity expansion for First Defense was from 23 to 30, and now you guys are talking about 35. Can you explain sort of what happened and is there some additional investments or are there some process improvements that you think, you know, able you to get to 35?
spk00: Sure. Yeah. Good morning, George. Thanks for following like that. And, you know, Betsy really mentioned the trick that, you know, the more the better. We're just trying to find all the efficiencies we can. But that gel automation, the gel filling automation, really is that last sort of incremental benefit that kind of pushes us a little higher than we first thought. So largely the plan is the same, but the gel filler does change. Give that extra bump, that extra $5 million over previous plan.
spk02: Coupled with the full year of LIO4. Exactly. Yeah, those two.
spk00: Yeah, these steps are so incremental. We always talk, I take quarterly numbers and I annualize them. We talk about annual, but, of course, each new piece of equipment comes in in a particular quarter and we don't get the benefit for the full fiscal year. But, yeah. Yeah. It's very much a similar plan and just getting it done and getting it done with all possible efficiencies and this automation of gel will be a great help. It's really necessary at this level of production. Okay, that sounds great.
spk04: And then from a CapEx perspective, both for first defense and retain, what do you guys expect to get to... to 35 million capacity for first defense and just to get retains started at the initial capacity level.
spk00: Right. So our September 30 Q disclosures where I detailed out each project, we letter them out A to F, budget for each, status of each, that's still well in place, well in line. So I'd refer back to that. Definitely we're going to update that with some current detailed numbers in the 10K at the end of March. But no new projects. Those are all the same projects, same budgets. And a similar answer for retain, you know, the big money was spent on the development. One project Betsy's managing is that $4 million investment to bring the aseptic filling from a CMO or outside contractor in-house. But again, that was in the September 30. I don't expect any big changes to the 1231 disclosures. So steady as we go, those CAPEX projects are funded and moving forward and no big changes. Okay, great.
spk04: And then maybe just a quick question for Bobby. You've done an amazing job with your team, but I imagine they're quite stretched given... that you cover a huge territory with eight territory managers. Is the plan to increase your staff or not?
spk01: Yeah, we do have big territories. How we manage those territories, I think, is maybe a bit of a competitive advantage. We use some good market share data, so that focuses on high concentration areas of competitor product instead of feeling like we have to get to every corner of the territory, right? So that's kind of how we've managed through with that few sales people. We certainly have areas like I kind of mentioned where we want to split territories and get better coverage. But as of now, that's kind of put on hold. We need production to match demand before we make any of those investments. Um, the strategy is, is in place and we're ready to activate it, but we want to make sure we optimize and sell as much as we can with the team we have now before we bring on added headcount.
spk00: Okay. Bobby and I are on the same page with that. I mean, more, more hiring is possible, but we've done some hiring to get to where we want to be right now and further, uh, Further expansion of the staff is going to be in proportion to sales and cash flow and funding at it.
spk04: Okay. And then as you layer on retain, is it the same sales force that will sell retains?
spk01: Oh, yeah, for sure. I mean, we are capable of selling more than one product, as do a number of animal health sales reps. They'll sell a whole portfolio of multiple products. Now, our team is real serious right now about learning the mastitis space, right, because we are really well-versed on the calf area and are getting up to speed on the mastitis side. But we certainly have the bandwidth to sell both.
spk04: Okay, great. Thank you very much.
spk00: Thanks, George. Appreciate that.
spk05: We still have time for questions. Again, if you'd like to join the question, if you press star, then one. We currently have no one in.
spk06: Okay. I've got a couple questions that I think would be important for our listeners to hear about. Bobby, as it relates to the dam vaccine program, can you give us a bit of a recap? How's it going? You mentioned some make us or break us type customers. How does that fit into the dam vaccine program?
spk01: Yeah, so to have your cows vaccinated ahead of calving, they're on a schedule, right? And so when we go in and we displace that technology for our first defense line, which is administered to the calf after birth, those customers are counting on us to be there to protect that calf because they can't, if we don't have that product available at the time that calf is needing it, they've missed their window to protect that calf with the damn vaccine. So, I mean, we really have to know your customer base and where the fit is for our product on those farms and then manage the supply to be able to funnel those type supplies to those critical customers so you don't leave them in the lurch. So that's the interaction of the supply shortage and how we've managed through that with those make or break us customers. And then on the other side, the opportunity side, you know, pre-calving scour vaccines are incredibly traditional. They've been around forever. One of those things that I'd say customers just kind of maybe do without a lot of thought. They just do it because they've always done it. And so disrupting that protocol and bringing in our technology to treat at the calf level has actually been pretty fun. It's a slow go because they are so traditional in grade. But the advantages are pretty significant to the producer because now every calf is equally protected. You're not dealing with that variable vaccine response. And in fact, you're not investing that money on those pre-calving scour vaccines for calves that might not even be born because there's a certain percentage calves that are either aborted or dead on arrival. And so you're able to focus your investment on those live-born viable calves. So the messaging works, the impact, the producer is there. It's just a matter of getting those traditional thought processes changed, making sure people recognize the value of antibodies over a variable vaccine response.
spk06: I think related to that is the pricing. You mentioned that you may be as high as three times the pricing of the competitors. How do you sell against that? What is the argument that you're making for the value proposition that where your price is somewhat higher than the competitors.
spk01: Yeah, so when you're selling a premium product, not every prospect is a suitable customer, right? You're not going after the low-cost guys. You're going after the guys who really want to invest in their calf crop because they recognize that that newborn calf is the future of their herd, right? So it's identifying the right prospect, number one. And then number two, it goes back to protecting every calf equally. I think on farm what tends to happen is you might be going along fine and the calf crop is looking good, and then all of a sudden you have a massive scour outbreak. And, I mean, that is stressful. That's not only economically negative for the farm, but it's incredibly stressful for farmers. the employees and employee keeping and maintaining good employees are really important. You don't want them to have compassion fatigue. And so those messages really build into our value proposition because we keep that pathogen load at a lower level, more consistent basis of immunity for that calf crop. And so you don't have those flare-ups, those scour flare-ups, and they're certainly not as severe as what you would have with the alternative products. So I think that builds into our value proposition. The opportunity to, again, not invest, because you have to have that shot into the cow for the pre-calving scour vaccines. You're giving her that vaccine before you've got a live calf on the ground, right? There's a movement to do more beef crosses. And so really fine tune the number of heifers that you're raising or that you're keeping to replace the crops. to come into the milking string. And so as producers head toward that more sophisticated, more dialed-in approach to their replacement heifer program, there's really an added value to using our product because now there's a subset of that market or that calf crop that really has to be protected. And you're able to target that investment to that subset.
spk06: Thank you, Bobby.
spk01: You bet.
spk05: Hey, Tom, I think we have a... Yes, we have a question over the phone from Tom Fox, who is a private investor. Please go ahead.
spk03: Yeah, so my question is about the FDA's response to retains. You've made these, you've submitted these batches and you say that they come back with questions. I'm just wondering if you can elaborate on what these questions are. Thank you.
spk00: Yeah, it's a very interactive process, very detailed questions, but it's aligning on how data is presented and what data is presented. To keep to this schedule, which on each turn has been pretty quick, I think it's implied and it is true. that there haven't been significant questions requiring lots of time, new trials, new studies. We've been able to work with them to get their specific questions answered in a relatively matter of months, not two or three months, not six, 12 months. So I guess in a general way I'm saying no queries, no revisiting of old technical sections, no new trials, but just clarification of data, which requires some lab work and then just aligning on how it's presented.
spk02: We also did meet with CVM, the Center for Veterinary Medicine, several times virtually to make sure we understood what they were looking for in clarity, and I think that was a good path to making what I feel is a very quality submission.
spk00: It definitely increases our expectation, our hopeful prospects for success, but when we always caution investors and our board and others that you just don't know. They could raise a new question. We don't think that's likely, but they could. As well as we think we're aligned, they could say, you know, you really didn't answer our question. We have a further question. We're just not going to know until August, but we do know, as Betsy said, we put our best effort forward.
spk03: Okay, so just so I have a clear picture, I mean... I guess I'm picturing right now maybe the FDA is questioning what's on the label and the way you're presenting the data on the label of the product. Am I correct in thinking that?
spk00: No, the label is pretty well aligned. I mean, in that last 60-day period, say we get to August and it is complete. If it is complete, there's 60 days admin review. The label will be tweaked and finalized, but we have really good alignment on the label. They haven't challenged any of those big kind of, that would be a big one. It potentially could require new studies. None of that. So again, label aligned.
spk02: And they've provided minor changes to the label already.
spk00: Yeah, you'd like to anticipate that if you're in that level of detail, that means you've already covered your big picture questions and they're resolved and no further. And that's what we're going to find out in August if that hope and assumption is true.
spk03: Okay, that answers my question, and congratulations on your continued success at MSL.
spk00: Okay, that's appreciated, Tom. Thank you.
spk05: We still have some time for questions. So, again, if you'd like to join the queue, press star, then 1.
spk06: Okay, it appears that we have no other questions in the queue. I would like to thank all of you for participating in today's call. We look forward to talking with you again to review the results for the first quarter of 2022 during the second or third week of May. Have a great week. Stay safe and be well. Thank you.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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