10-K
1
f10k2020_immucellcorp.htm
ANNUAL REPORT
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2020
001-12934
(Commission
file number)
ImmuCell
Corporation
(Exact
name of Registrant as specified in its charter)
(State of incorporation) (I.R.S. Employer
Identification No.)
56 Evergreen Drive, Portland, Maine 04103
(Address of principal executive office) (Zip Code)
Registrant’s
telephone number: (207) 878-2770
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.10 per share
(Title
of class)
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate
by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☑
Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate
by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit
and post such files). Yes☑ No ☐
Indicate
by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☑
Emerging growth company ☐
Indicate
by check mark whether the Registrant has filed a report or an attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 USC 7262(b)) by the independent
registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☑
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The
aggregate market value of the voting and non-voting common equity held by non-affiliates at June 30, 2020 was approximately $29,521,000
based on the closing sales price on June 30, 2020 of $4.73 per share.
The
number of shares of the Registrant’s common stock outstanding at March 19, 2021 was 7,220,836.
Documents
incorporated by reference: Portions of the Registrant’s definitive Proxy Statement to be filed in connection with the 2021
Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
ImmuCell
Corporation
TABLE
OF CONTENTS
December
31, 2020
PART I
ITEM 1 Business 1
ITEM 1A Risk Factors 11
ITEM 1B Unresolved Staff Comments 18
ITEM 2 Properties 18
ITEM 3 Legal Proceedings 19
ITEM 4 Mine Safety Disclosures 19
PART II
ITEM 6 Selected Financial Data 20
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk 32
ITEM 8 Financial Statements and Supplementary Data 32
ITEM 9A Controls and Procedures 33
ITEM 9B Other Information 33
PART III
ITEM 10 Directors, Executive Officers and Corporate Governance 34
ITEM 11 Executive Compensation 34
ITEM 14 Principal Accounting Fees and Services 35
PART IV
ITEM 15 Exhibits and Financial Statement Schedules 36
Audited Financial Statements F-1 to F-26
Signatures 38
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ImmuCell
Corporation
PART
I
ITEM
1 – BUSINESS
Cautionary
Note Regarding Forward-Looking Statements (Safe Harbor Statement):
This
Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements include, but are not limited to, any statements
relating to: our plans and strategies for our business; projections of future financial or operational performance; the timing
and outcome of pending or anticipated applications for regulatory approvals; factors that may affect the dairy and beef industries
and future demand for our products; the extent, nature and duration of the COVID-19 pandemic and its consequences, and their direct
and indirect impacts on the Company’s production activities, operating results and financial condition and on the customers
and markets the Company serves; the scope and timing of ongoing and future product development work and commercialization of our
products; future costs of product development efforts; the estimated prevalence rate of subclinical mastitis and producers’
level of interest in treating subclinical mastitis given the current economic and market conditions; the expected efficacy of
new products; estimates about the market size for our products; future market share of and revenue generated by current products
and products still in development; our ability to increase production output and reduce costs of goods sold; the future adequacy
of our own manufacturing facilities or those of third parties with which we have contractual relationships to meet demand for
our products on a timely basis; the impacts of backlogs on customer relationships; the anticipated costs of (or time to complete)
planned expansions of our manufacturing facilities and the adequacy of our funds available for these projects; the continuing
availability to us on reasonable terms of third-party providers of critical products or services; the robustness of our manufacturing
processes and related technical issues; estimates about our production capacity, efficiency and yield, which are highly subject
to biological variability and the product format mix of our sales; the future adequacy of our working capital and the availability
and cost of third-party financing; future regulatory requirements relating to our products; future expense ratios and margins;
future compliance with bank debt covenants; costs associated with sustaining compliance with current Good Manufacturing Practice
(cGMP) regulations in our current operations and attaining such compliance for the facility to produce the Nisin Drug Substance;
our effectiveness in competing against competitors within both our existing and our anticipated product markets; the cost-effectiveness
of additional sales and marketing expenditures and resources; anticipated changes in our manufacturing capabilities and efficiencies;
the value of our net deferred tax assets; projections about depreciation expense and its impact on income for book and tax return
purposes; anticipated market conditions; and any other statements that are not historical facts. Forward-looking statements can
be identified by the use of words such as “expects”, “may”, “anticipates”, “aims”,
“intends”, “would”, “could”, “should”, “will”, “plans”,
“believes”, “estimates”, “targets”, “projects”, “forecasts”, “seeks”
and similar words and expressions. In addition, there can be no assurance that future developments affecting us will be those
that we anticipate. Such statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties
relating to difficulties or delays in development, testing, regulatory approval, production and marketing of our products (including
the First Defense® product line and Re-TainTM), competition within our anticipated product markets,
customer acceptance of our new and existing products, product performance, alignment between our manufacturing resources and product
demand (including the consequences of backlogs or excess inventory buildup), our reliance upon third parties for financial support,
products and services, changes in laws and regulations, decision making and delays by regulatory authorities, currency values
and fluctuations and other risks detailed from time to time in filings we make with the Securities and Exchange Commission (SEC),
including our Quarterly Reports on Form 10-Q, our Annual Reports on Form 10-K and our Current Reports on Form 8-K. Such statements
involve risks and uncertainties and are based on our current expectations, but actual results may differ materially due to various
factors, including the risk factors summarized under PART I: ITEM 1A – RISK FACTORS of this Annual Report on Form
10-K and uncertainties otherwise referred to in this Annual Report.
Summary
ImmuCell
Corporation was founded in 1982 and completed an initial public offering of common stock in 1987. After achieving approval from
the Center for Veterinary Biologics, U.S. Department of Agriculture (USDA) to sell First Defense® in 1991,
we focused most of our efforts during the 1990’s attempting to develop human product applications of the underlying milk
protein purification technology. Beginning in 1999, we re-focused our business strategy on the First Defense®
product line and other products that improve the health and productivity of dairy and beef cattle. The demand for animal
protein, that must be produced efficiently while ensuring food quality and safety, increases as the human population grows. Further,
our products help address the growing human health concern about using less antibiotics in food-producing animals. We aim to capitalize
on the growth in sales of the First Defense® product line (a product that provides significant Immediate
ImmunityTM to newborn dairy and beef livestock) and to revolutionize the mastitis treatment paradigm with Re-TainTM
(formerly Mast Out®), a product we are developing to treat this most significant cause of economic loss
to the dairy industry.
1
ImmuCell Corporation
During
2000, we began the development of Re-TainTM, our purified Nisin treatment for subclinical mastitis in lactating dairy
cows. No sales of this product can be made without prior approval of our New Animal Drug Application (NADA) by the Center for
Veterinary Medicine, U.S. Food and Drug Administration (FDA). We have achieved FDA approval for four out of five of the significant
regulatory submissions required for product approval, and we made the fifth and final submission during the first quarter of 2021.
Regulatory achievements to date have significantly reduced the product development risks in the areas of safety and effectiveness.
Our primary product development focus has now turned to completion of the manufacturing objectives required for FDA approval.
Since
2006, we have made ongoing efforts to maintain compliance with current Good Manufacturing Practice (cGMP) regulations in all of
our manufacturing operations, which requires a sustained investment that further enhances the quality of all of our products and
our operating efficiency. As we make process improvements, we continue to invest in personnel, equipment and facility modifications
to increase the efficiency and quality of our operations.
From
the first quarter of 2016 to the first quarter of 2019, we issued an aggregate of 4,037,861 shares of common stock, raising net
proceeds of approximately $20.5 million in five separate transactions. In order to minimize the dilutive effects of these transactions
on our existing stockholders, we chose not to issue any form of convertible or preferred securities and issued these common shares
without any warrants. After refinancing our bank debt twice during 2020, we had approximately $9 million in bank debt outstanding
under four different credit facilities as of December 31, 2020 compared to $8.4 million as of December 31, 2019. This new equity
and debt capital has been, and is being, used to increase the production capacity for the First Defense®
product line and complete the development of Re-TainTM without relying on funding from a partner or licensee, thereby
keeping control over all product rights and future revenues.
During
the past five years, we have funded our operations, completed a significant capital investment in our Drug Substance manufacturing
facility for Re-TainTM and nearly completed a capital investment to increase our production capacity for the First
Defense® product line. We have also initiated another capital investment to bring the formulation and aseptic
filling capabilities for Re-TainTM in house in order to remove our present reliance on an outside contractor. The
following table displays the changes in the balances of certain accounts over this period (in thousands, except for percentages):
As of December 31, $ Increase Over Five- % Increase Over Five-
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ImmuCell Corporation
Animal
Health Products
The
First Defense® product line is manufactured from hyperimmune cows’ colostrum (the antibody rich milk
that a cow produces immediately after giving birth) utilizing our proprietary vaccines and milk protein purification technologies.
The First Defense® product line provides bovine antibodies that newborn calves need but are unable to produce
on their own immediately after birth. The target disease, calf scours (bovine enteritis), causes diarrhea and dehydration in newborn
calves and often leads to serious sickness and even death. The First Defense® product line is the
only USDA-licensed, orally delivered scours preventive product on the market for calves with claims against E. coli, coronavirus
and rotavirus (three leading causes of scours). A single dose of our product provides a measured level of protection proven to
reduce mortality and morbidity. Our pre-formed antibody products provide Immediate ImmunityTM during the first few
critical weeks of life when calves need this protection most. Studies have shown that calves that scour are more susceptible to
other diseases later in life and under-perform calves that do not contract scours. The direct, two-part mode-of-action of the
First Defense® product line delivers specific immunoglobulins at the gut level to immediately protect against
disease, while also providing additional antibodies that are absorbed into the bloodstream. These circulating antibodies function
like a natural timed-release mechanism, as they are re-secreted into the gut later to provide extended protection. The First
Defense® product line is convenient to use. A calf needs to receive only one dose of First Defense®
within the first twelve hours after birth. The capsule format of this product is stored at room temperature and no mixing
is required before it is given to the calf. The gel tube formats of this product require refrigeration in accordance with product
label indications. We are the market leader (in terms of both unit volume and dollar sales) when compared to other calf-level
scours preventatives but have greater market potential as we gain market share from the dam-level (pre-calving scour vaccines)
competitors. The third quarter of 2020 marked the 29th anniversary of the original USDA approval of this product in
1991. During the fourth quarter of 2020, our cumulative sales of First Defense® since inception exceeded
26,000,000 doses. We believe that these milestones demonstrate the value of our technology and the long-term market acceptance
of our product.
The
First Defense® product line continues to benefit from wide acceptance by dairy and beef producers as an
effective tool to prevent scours (diarrhea) in newborn calves. Our Beyond Vaccination® marketing campaign
focuses on providing antibodies without vaccination. A 100% vaccine response rate is biologically impossible. The First Defense®
product line removes the variability associated with a scour vaccine response and instead provides a measured level
of pre-formed antibodies, protecting each calf with an equal level of scours protection. There is a strong link between how we
sell our product and the challenges we face in producing it. We know better than most how variable a cow’s response is to
any vaccine. We see this in every batch of First Defense® that we produce. The value in First Defense®
is that we adjust for this variability in antibody content, as needed, so the newborn is given a steady, equal level
of protection with each dose. This technology removes a producer’s reliance on variable vaccine responses to generate passive
antibody protection and instead protects every calf equally with a measured dose of Immediate ImmunityTM against the
most common scour pathogens. Plus, an effectively treated calf is much less likely to require expensive antibiotic treatments
or build antibiotic resistance. We are the only manufacturer within the scour prevention space offering polyclonal multi-pathogen
antibodies. The market is learning that the best preventative for scours may not be a vaccine. We are educating the market about
the health benefits of a measured dose of pre-formed antibodies.
The
product line extension, Tri-Shield First Defense®, is the first calf-level, passive antibody product on the market
with USDA-approved disease claims providing Immediate ImmunityTM against each of the three leading causes of calf scours
(E. coli, coronavirus and rotavirus). This new product achieved USDA approval during the fourth quarter of 2017 and was listed
with the Organic Materials Research Institute (OMRI) during the first quarter of 2019, which means it can be used on organic farms. Tri-Shield®combines the E. coli and coronavirus antibodies contained in our bivalent product with a measured level of rotavirus
antibody in a single-dose gel tube delivery format. This unique breadth of claims further differentiates our product from calf-level
competitive products on the market that contain only one or two of these label claims. The unique virus like particle (VLP) technology
that is used in our production process increases rotavirus titers in colostrum to a level much greater than traditional vaccine technology
can. Because it is possible that all farms may not have (or perceive to have) a rotavirus problem, we are continuing to sell the bivalent
formats of the First Defense® product line as options for customers.
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ImmuCell Corporation
Historically,
the most common tool to help combat scours has been to vaccinate the mother cow (dam) with a scours vaccine and deliver the antibodies
that she produces to the newborn. It is generally believed that only 80% of animals respond to a vaccine, which could leave about
20% of calves unprotected. We believe that the variability in a cow’s immune response to vaccines creates a sales opportunity
for our product. Additionally, our research suggests that treatment protocols for dam-level scours vaccine programs are not always
followed, leaving even more calves compromised. We are competing effectively against these dam-level vaccine products. Our marketing
campaign, Beyond Vaccination®, emphasizes that by delivering Immediate ImmunityTM directly to the
calf via the First Defense® product line, producers can reduce stress-causing injections to the cow. Reliance
on a dam-level scours vaccine requires that money be spent before it is known whether the cow is carrying a viable, valued calf.
With the First Defense®product line, that investment can be targeted to the calves that are most critical to
the operation. This, in turn, can free up space in the cow’s vaccination schedule to improve her immune response to vaccines
that are critical to her health.
We
believe that the long-term growth in sales of the First Defense® product line may reflect, at least in part,
the success of our strategic decision to invest in additional sales and marketing efforts to help us introduce the expanding First
Defense® product line to new customers. Our communications campaign continues to emphasize how the unique ability
of the First Defense® product line to provide Immediate ImmunityTM generates a dependable and
competitive return on investment for dairy and beef producers. Preventing newborn calves from becoming sick helps them to reach
their genetic potential and reduces the need to use treatment antibiotics later in life.
First
Defense Technology® is a unique whey protein concentrate that is processed utilizing our proprietary colostrum
(first milk) protein purification methods, for the nutritional and feed supplement markets without the claims of our USDA-licensed
product. During 2012, we initiated a limited launch of a gel tube delivery format of our First Defense Technology®
in a gel solution. We achieved USDA claims for this product format during the fourth quarter of 2018 and Canadian approval
during the first quarter of 2019, and it is now being sold as Dual-Force First Defense®. We are selling
the same concentrated whey proteins in a bulk powder format (no capsule), which is delivered with a scoop and mixed with colostrum
for feeding to calves. We are working to achieve USDA claims for this product format during 2021. During 2011, Milk Products,
LLC of Chilton, Wisconsin launched commercial sales of their product, Ultra Start® 150 Plus and certain similar
private label products, which are colostrum replacers with First Defense Technology®Inside.
During
2001, we began to offer our own, internally developed California Mastitis Test (CMT). CMT is most often used as
a quick on-farm diagnostic to determine which quarter of the udder is mastitic. This test can be performed at cow-side for early
detection of mastitis. CMT products are also made by other manufacturers and are readily available to the dairy producer.
In connection with our acquisition of certain gel formulation technologies during the first quarter of 2016, we acquired private
label manufacturing rights covering a feed supplement product sold by Genex Cooperative, Inc. of Shawano, WI.
Sales
and Markets
Our
sales and marketing team consists of one vice president, seven regional managers (including one open position) and one director
of marketing and customer service. The First Defense® product line and CMT are sold primarily through
major animal health distributors who, in turn, sell to veterinary clinics, fleet stores and direct to farms. Sales of the First
Defense® product line are normally seasonal, with higher sales expected during the first quarter, largely driven
by the beef calving season, which runs primarily from January to April, unlike the dairy industry in which operations generally
calve year round. Warm and dry weather reduces the producer’s perception of the need for a disease preventative product
like the First Defense® product line. However, heat stress on calves caused by extremely hot summer weather
can increase the incidence of scours, just as harsher winter weather benefits our sales. Other competition for resources that
dairy producers allocate to their calf enterprises has been increased by the many new products (principally feed supplements)
that have been introduced to the calf market. Despite the market volatility affecting both milk prices and feed costs, we continue
to increase our sales.
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ImmuCell Corporation
We
estimate that the total U.S. market for scours preventative products (including sales of our product) that are given to newborn
calves (the calf-level market) is approximately $23.4 million per year. With the additional claim for our new product (Tri-Shield
First Defense®) against rotavirus, we are now competing against the dam-level vaccine products that are given
to the mother cow to increase the antibody level against specific scours-causing pathogens in the colostrum that she produces
for her newborn. We estimate that the dam-level product category covers approximately twice as many calves as the calf-level product
segment reaches. We estimate that the total domestic addressable market (both calf and dam levels) is approximately $68.1 million
per year.
The
majority of our international sales are to Canada. We price our products in U.S. dollars. To the extent that the value of the
dollar declines with respect to any other currency, our competitive position may be enhanced. Conversely, an increase in the value
of the dollar in any country in which we sell products may have the effect of increasing the local price of our products, thereby
leading to a potential reduction in demand. Generally, our international sales have been generated through relationships with
in-country distributors that have knowledge of the local regulatory and marketing requirements. We are initiating our plan to
expand the number of countries to which our First Defense® product line is approved for export. Generally,
it is our intent to be the holder of these product registrations for each country rather than rely on distribution partners to
gain and hold these registrations. This is a long regulatory process but allows us to maximize the use of our product label claims.
We continue our efforts to grow sales of the First Defense® product line in North America, where there are
approximately 41 million dairy and beef cows in the United States and 4.6 million dairy and beef cows in Canada. We believe that
significant market opportunities exist in other international territories. The statistics above are provided by an industry compilation
of USDA data for 2021. Industry practices, economic conditions, cause of disease, distribution channels and regulatory requirements
may differ in these international markets from what we experience in North America, potentially making it more difficult or costly
for us to generate and sustain sales volumes at profitable margins in these markets.
We
introduced First Defense® into South Korea in 2005 through Medexx Co., Ltd of Gyeonggi-do, Korea and its
equivalent into Japan in 2007 through NYS Co., Ltd of Iwate, Japan. The business in Japan is currently not active, but we are
working to resume sales in this territory. We entered into distribution contracts covering certain Middle Eastern countries with
Triplest for Drugs and Trade of Madaba, Jordan during the first quarter of 2017 (no sales have yet been achieved under this contract)
and covering Iran with Senikco, LLC of Laguna Niguel, CA during the fourth quarter of 2016 (sales have been initiated under this
contract).
With
Re-TainTM, we are working to expand our product offerings to include an intramammary treatment for subclinical mastitis
for the mother cow during lactation. Nisin (the active ingredient in Re-TainTM) is a bacteriocin that is not used
in human medicines and could alleviate some of the social concerns that the widespread use of antibiotics encourages the growth
of antibiotic-resistant bacteria (“superbugs”). Mastitis (inflammation of the mammary gland) is estimated to cost
the U.S. dairy industry approximately $2 billion in economic harm per year, which makes it the most costly and common disease
affecting the dairy industry. The disease diminishes the saleable quantity and overall value of milk, in addition to causing other
herd health and productivity losses. While the benefit of treating clinical mastitis is widely known, subclinical mastitis (those
cases where cows have infected udders, but still produce saleable milk) is associated with its own significant economic losses
and is recognized as a substantial contributor to clinical mastitis cases. There is a growing awareness of the cascade of adverse
events and conditions associated with subclinical mastitis for both the dairy producer and the milk processor, including reduced
or foregone milk quality premiums, lower milk production (some have estimated approximately 1,500 pounds of lost milk, or about
$270 at $18.00 per hundredweight, per infected cow), shorter shelf life for fluid milk, lower yields and less flavor for cheese,
higher rates of clinical mastitis, lower conception rates, increased abortions and increased cull rates. Some industry experts
have estimated that subclinical mastitis costs the U.S. dairy industry approximately $1 billion per year.
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ImmuCell Corporation
We
believe that Re-TainTM could revolutionize the way that mastitis is treated by making earlier treatment of subclinically
infected cows (while these cows are still producing saleable milk) economically feasible by not requiring a milk discard during,
or for a period of time after, treatment, which would be a significant competitive advantage for our product. No other FDA-approved
mastitis treatment product on the market can offer this value proposition. It is generally current practice to treat mastitis
only when the disease has progressed to the clinical stage where the milk from an infected cow cannot be sold. Because the milk
from cows treated with traditional antibiotics must be discarded, most dairy producers simply do not treat subclinically infected
cows. The ability to treat such cases without a milk discard could revolutionize the way mastitis is managed in a herd. It is
common practice to move sick cows from their regular herd group to a sick cow group for treatment and the related milk discard.
This movement causes stress on the cow and a reduction in milk production. Cows treated with our product would not have to be
moved, allowing this costly drop in production to be avoided. Our product likely will be priced at a premium to the traditional
antibiotic products currently on the market, which are all sold subject to a milk discard requirement. Common milk discard periods
cover the duration of treatment and extend from 1.5 to 3 days after last treatment, depending on the antibiotic. On average, a
cow produces approximately 60 to 80 pounds of milk per day. While milk prices vary significantly, at an average value of $18.00
per 100 pounds, a cow produces approximately $10.80 to $14.40 worth of milk per day. These estimated figures would result in milk
discard costs ranging from approximately $37.80 (for 3.5 days of milk at 60 pounds per day) to $158.40 (for 11 days of milk at
80 pounds per day) per treated animal. We estimate that the approximate cost to the U.S. dairy industry of this discarded milk
may be around $300 million per year. These high milk discard costs associated with traditional antibiotic treatments lead producers
to only treat mastitis after clinical signs develop. The Re-TainTM label will be for subclinical mastitis (not clinical).
Without a milk discard cost, we expect producers to be more motivated to identify and treat cows at the subclinical stage. We
believe that the product’s value proposition demonstrates a return on investment to the dairy producer and the milk processor
that will justify a premium over other mastitis treatments on the market today.
The
USDA’s National Animal Health Monitoring System through its Dairy 2014 study suggests that 21% of all dairy cows are treated
with a mastitis drug, of which approximately 51% are treated with third generation cephalosporins. Many fear that the possible
overuse of antibiotics in livestock undermines the effectiveness of drugs to combat human illnesses and contributes to a rising
number of life-threatening human infections from antibiotic-resistant bacteria, commonly known as “superbugs”. The
FDA is committed to addressing this public health risk. Citing concerns about untreatable, life-threatening infections in humans,
new FDA and European regulations are aimed at restricting the use of antibiotics (including cephalosporins) in food animals and
at improving milk quality. Regulators have recently increased their monitoring of antibiotic residues in milk and meat. During
the first quarter of 2012, the USDA reduced the allowable level of somatic cell counts (SCC) in milk from 750,000 (cells per milliliter)
to 400,000 at the individual farm level (not a blended calculation of comingled milk) in order to qualify for an EU health certification
for export.
The
FDA’s Veterinary Feed Directive (VFD) became effective January 1, 2017, restricting the use of medically important antibiotics
for performance purposes and requiring more oversight of antibiotic usage in food producing animals by a veterinarian, and more
changes and restrictions relating to antibiotic usage appear to be likely. Several major food processors and retailers have implemented
policies addressing this growing public health concern. By reducing the risk of antibiotic residues and slowing the development
of antibiotic-resistant organisms, we can improve food quality and preserve medically important antibiotics for human disease
treatment. This would not be a concern for Re-TainTM because Nisin is not used for human health. This current environment
is favorable to the introduction of our new product as an alternative to traditional antibiotics such as penicillin and cephalosporins.
We believe that this changing environment of new regulations and public opinion supports the value of our ongoing development
and commercialization efforts for Re-TainTM. Additionally, we believe that the use of our First Defense®
product line is consistent with this trend of reducing the use of antibiotics because the prevention of calf scours early
in life with our purified colostrum antibodies can reduce the need for treatment antibiotics later in a calf’s life.
It
is difficult to estimate the potential size of the market for the treatment of subclinical mastitis because presently this disease
is largely left untreated. We believe that approximately 20-30% of the U.S. dairy herd is affected by subclinical mastitis caused
by Gram-positive organisms falling within the claim spectrum of our product. This compares to approximately 2% of the U.S. herd
that is thought to be infected with clinical mastitis, where approximately $60 million per year is spent on drug treatments. Finding
candidate cows will require farms to obtain monthly individual cow somatic cell count (SCC) data through participation in organizations
such as the National Dairy Herd Information Association (DHIA) or by installing monitors to indicate high SCC cows or a potential
health event. Only about 50% of cows are on DHIA test today. Similar market opportunities are likely to exist outside the U.S.
We believe the use of Re-TainTM could be expanded with additional data to support treatment late in lactation and
possibly for clinical stage mastitis. We also believe there may be a market for use in small ruminates, where the majority of
mastitis cases are caused by strep-like organisms aligned with our effectiveness data. Given what we believe to be reasonable
assumptions, we estimate that the U.S. market potential for first year sales of our new product could be approximately $5.8 million
and could grow to approximately $36.1 million during the fifth year after market launch. However, due to our limited sales and
marketing resources and the significant challenges inherent in a small company inducing large numbers of producers to quickly
embrace a new technology, we presently expect actual Re-TainTM sales to be substantially below those levels, at least
in the early stages of the Re-TainTM launch. The amount of sales that we can capture from this estimated market potential
and the timing of when this can be achieved is very difficult to know, and the actual size of the market for our new product may
differ materially from our estimates (up or down). We expect the Drug Substance production facility that we constructed for approximately
$20.8 million to have initial annual production capacity sufficient to meet at least $10 million in sales of Re-TainTM
at current production yields. This production capacity estimate does not yet reflect any inventory build strategies in advance
of product approval or ongoing yield improvement initiatives. Our new facility is designed to have enough room to add a second
fermentation and recovery portion of the production line to be purchased and installed at the cost of approximately $7 million
to effectively double production output. We would consider making this investment only after commercial acceptance of the product
is demonstrated. That being said, we are presently planning to use the space originally intended for the second Drug Substance
fermentation and recovery production line for the installation of a Drug Product formulation and aseptic filling module. Thus,
expansion of the estimated annual capacity of the Drug Substance facility beyond approximately $10 million (without factoring
in potential yield improvements) would now require relocation of the Drug Product formulation and aseptic filling module to another
facility, or the acquisition and equipping of other Drug Substance production facilities at substantial additional cost or alternative
manufacturing strategies.
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ImmuCell Corporation
With
a measured approach to expanding our customer-facing staff, it is our objective to increase our current annual level of product
sales of just over $15 million to approximately $23 million through both continued growth in sales of the First Defense®
product line and a successful launch of Re-TainTM as soon as possible. As market penetration for both new products
is achieved and additional resources are dedicated to production, sales, marketing and technical services, our longer-term goal
is to exceed the $30 million level of annual product sales as soon as possible during the five-year period after the market launch
of Re-TainTM.
Product
Development
The
majority of our product development spending has been focused on the development of Re-TainTM, our purified Nisin
treatment for subclinical mastitis in lactating cows. During the 21-year period that began on January 1, 2000 and ended on December
31, 2020, we invested an aggregate of approximately $19.8 million (excluding depreciation and the capital cost of our Drug Substance
production facility) in the development of this product. This estimated allocation reflects only direct expenditures and includes
no allocation of product development or administrative overhead expenses. Approximately $2.9 million of this investment was offset
by related product licensing revenues and grant income, most of which was earned from 2001 to 2007.
During
2000, we acquired an exclusive license from Nutrition 21, Inc. (formerly Applied Microbiology Inc. or AMBI) to develop and market
Nisin-based products for animal health applications, which allowed us to initiate the development of Re-TainTM. In
2004, we paid Nutrition 21 approximately $965,000 to buy out this royalty and milestone-based license to Nisin, thereby acquiring
control of the animal health applications of Nisin. Nisin is a well characterized substance, having been used in food preservation
applications for over 50 years. Food-grade Nisin, however, cannot be used in pharmaceutical applications because of its low purity.
Our Nisin technology includes patented processing and purification methods to achieve pharmaceutical-grade purity.
During
2004, we entered into a product development and marketing agreement with Zoetis (formerly Pfizer Animal Health, a division of
Pfizer, Inc.) covering this product. That company elected to terminate the agreement in 2007. We believe that this decision was
not based on any unanticipated efficacy or regulatory issues. Rather, we believe the decision was primarily driven by a marketing
concern relating to their fear that the milk from treated cows could interfere with the manufacture of certain cultured dairy
products. Due to the zero milk discard feature, there is a risk that Nisin from the milk of treated cows could interfere with
the manufacture of certain (but not all) commercial cultured dairy products, such as some kinds of cheese and yogurt, if a process
tank contains a high enough percentage of milk from treated cows. The impact of this potential interference ranges from a delay
in the manufacturing process (which does happen at times for other reasons) to the less likely stopping of a cheese starter culture.
Milk from cows that have been treated with our product that is sold exclusively for fluid milk products presents no such risk.
We worked with scientists and mastitis experts to conduct a formal risk assessment to quantify the impact that milk from treated
cows may have on cultured dairy products. This study concluded that the dilution of milk from treated cows through comingling
with milk from untreated cows during normal milk hauling and storage practices reduces the risk of interference with commercial
dairy cultures to a negligible level when the product is used in accordance with the product label. Further, we believe that such
a premium-priced product will be used selectively, which reduces the risk of cheese interference and is consistent with modern
“precision dairying” practices that discourage the indiscriminate use of drug treatments.
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ImmuCell Corporation
Subclinical
mastitis, and the study required to achieve an effectiveness claim for it, is defined under the FDA/Center for Veterinary Medicine
Guidance #49: Target Animal Safety and Drug Effectiveness Studies for Anti-Microbial Bovine Mastitis Products (Lactating and Non-Lactating
Cow Products). Trial eligibility requires both pretreatment samples to be positive for the mastitis pathogen (except for
Staphylococcus aureus and Streptococcus agalactiae, where a single pretreatment sample qualifies a cow for enrollment). For
all pathogens, both samples taken between 14 and 28 days post treatment (and at least 5 days apart) must be negative to be judged
a cure. These conservative criteria generally result in enrolling cows with chronic subclinical disease, which rarely self-resolves.
Milk from cows infected with subclinical mastitis has greater somatic cell counts (SCC), and producers may be paid less for this
lower quality milk. Cows with subclinical mastitis infections are known to produce less milk, and cows that maintain subclinical
mastitis across the dry period have been shown to produce significantly less milk. The failure to treat subclinical mastitis
may result in chronic infections that are unlikely to respond to antibiotic therapy. Finally, cows with subclinical mastitis maintain
a reservoir of infection within the herd and increase exposure of healthy cows to contagious pathogens.
Our
second most important product development initiatives (in terms of dollars invested and, we believe, potential market impact)
have been focused on other improvements, extensions or additions to our First Defense® product line. During
the second quarter of 2009 we entered into a perpetual, exclusive license with the Baylor College of Medicine covering the underlying
rotavirus vaccine technology used to generate the specific antibodies for use with animals. We achieved product license approval
and initiated market launch of this product, Tri-Shield First Defense®, during the fourth quarter of 2017.
During the third quarter of 2018, we obtained approval from the Canadian Food Inspection Agency to sell Tri-Shield®
in Canada. We initiated sales in Canada through our in-country distributor during the fourth quarter of 2019. We achieved
USDA approval of our bivalent gel tube formulation (formerly marketed as First Defense Technology®) during
the fourth quarter of 2018 and have re-branded this product format as Dual-Force First Defense®. We
are currently working to establish USDA claims for our bivalent bulk powder formulation of First Defense Technology®.
We
are also working to expand our product development pipeline of bacteriocins that can be used as alternatives to traditional antibiotics
through expansions of our Nisin technology and yield improvements. Subject to the availability of resources, we intend to begin
new development projects that are aligned with our core competencies and market focus. We also remain interested in acquiring,
on suitable terms, other new products and technologies that fit with our sales focus on the dairy and beef industries.
Competition
Our
competition in the animal health market includes other biotechnology companies and major animal health companies. Most, if not
all, of these competitors have substantially greater financial, marketing, manufacturing and human resources and more extensive
product development capabilities than we do.
We
would consider any company that sells an antibiotic to treat mastitis, such as Boehringer Ingelheim, Merck Animal Health and Zoetis,
to be among the potential competitors with respect to Re-TainTM. We expect the FDA to grant a period of five years
of market exclusivity for our product (meaning the FDA would not grant approval to a second NADA with the same active drug for
a period of five years after the first NADA approval is granted) under Section 512(c)(2)F of the Federal Food, Drug, and Cosmetic
Act. The Nisin A to which we have exclusive rights for animal health applications is produced from our high-yielding, proprietary
L. lactis strain and purified to a high level, providing us with a level of protection over a competitor that might try
to develop a similar product.
There
are several other products on the market (some with claims and some without) that are delivered to newborn calves to prevent scours.
We believe that the First Defense® product line offers two significant competitive advantages. First, only
the First Defense® product line provides protection against E. coli, coronavirus and rotavirus, three
of the leading causes of calf scours. Second, being derived from colostrum, our product offers Immediate ImmunityTM
through antibodies that both function at the gut level and are absorbed into the blood stream for future protection. All
formats of our product can be administered immediately after birth and are not negatively affected by maternal colostrum.
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ImmuCell Corporation
Zoetis
sells a product that competes directly with the First Defense® product line in preventing scours via oral
delivery to newborn calves. Their product (Calf-Guard®) is a modified-live virus vaccine. Newborn calves respond
poorly to vaccines and the immune system must be given time to develop a response to vaccines. Both our product and Calf-Guard®
carry claims against coronavirus and rotavirus infections, but this competitive product does not carry a claim against E.
coli infections like our product does. It is common practice to delay colostrum feeding when dosing a calf with Calf-Guard®
so that the antibodies in the colostrum do not inactivate this vaccine product. There is no nutritional or health benefit
to withholding milk from newborn calves. In contrast, we encourage the feeding of four quarts of high quality colostrum immediately
after birth when dosing a calf with our product, which is standard practice for good calf health. Because the antibodies in our
product would likely work to inactivate a modified-live virus vaccine, rendering it useless or less useful, our product label
historically included a precaution that First Defense® should not be used within five days of such a vaccine.
During the first quarter of 2015, the USDA granted us permission to remove this precaution from our label, and we have done so.
We believe that this precaution should be required on the Calf-Guard® label to prevent inactivation of that product
by First Defense® antibodies or by colostrum. Our product is priced at a premium to Calf-Guard®.
During
the fourth quarter of 2016, Merck launched a new competitive product into this market space. This product (BOVILIS®
Coronavirus) is a modified-live virus intranasal vaccine that carries a claim against coronavirus only.
Around
the end of 2019, Elanco Animal Health gave notice to the market that it had discontinued the manufacture of its competitive products,
Bovine Ecolizer® and Bovine Ecolizer + C20, and subsequently exited the market during the first quarter of 2021.
This product was the smallest of our three significant calf-level competitors.
When
compared to the other USDA-approved calf-level scours preventatives, we lead in both sales dollars and calves treated within the
U.S. market. This product category is comprised of the four primary brands discussed above that are given either orally or intranasal
to newborn dairy and beef calves immediately after birth. With the new rotavirus claim for our product (Tri-Shield First Defense®),
we are now also competing against dam-level vaccine products that are given to the mother cow to increase the antibody level against
scours-causing pathogens in the colostrum that she produces for her newborn. Those products are sold by Elanco (Scour BosTM),
Merck (Guardian®) and Zoetis (ScourGuard®). Despite the best-managed dam vaccine program, colostrum
quality is naturally variable and newborn calves do not always get the antibodies they need from maternal colostrum. We believe
that the measured dose of antibodies in our product provides more consistent protection than such vaccine products.
We
may not be aware of competition that we face, or may face in the future, from other companies. Our competitive position will be
highly influenced by our ability to attract and retain key scientific, manufacturing, managerial and sales and marketing personnel,
to develop proprietary technologies and products. We need to obtain USDA, FDA or foreign approvals for new products to effectively
promote and market our products. We must have available properly licensed, efficient and effective raw material and finished product
manufacturing resources to continue to profitably sell our current products. We currently compete on the basis of product performance,
price and distribution capability. We continue to monitor our network of independent distributors to maintain our competitive
position.
Intellectual
Property
We
own a broad collection of intellectual property rights relating to our research, products and processes. This includes: patents,
copyrights, trademarks, trade dress, trade secrets, know-how and other intellectual property rights in the United States and other
countries. We believe the ownership of our intellectual property rights is an important factor in our business and that our success
depends in part on such ownership. We also rely heavily on the innovative skills, technical competence and marketing abilities
of our personnel. The Nisin A that is produced from our proprietary strain of L. lactis is an essential component of our
intellectual property covering Re-TainTM.
We
own: (a) U.S. Patent No. 6,794,181 entitled “Method of Purifying Lantibiotics”, which covers a manufacturing process
for preparing pharmaceutical-grade Nisin, which was issued in 2004; and (b) U.S. Patent No. 10,023,617 entitled “Methods
and Systems of Producing Pharmaceutical Grade Lantibiotics”, which covers key, novel and proprietary aspects of our manufacturing
process for preparing pharmaceutical-grade Nisin, and was issued during the third quarter of 2018. In the future, we may file
additional patent applications for certain products under development. There can be no assurance that patents will be issued with
respect to any pending or future applications. In some cases, we have chosen (and may choose in the future) not to seek patent
protection for certain products or processes. In those instances, we have sought (and may seek in the future) to maintain the
confidentiality of any relevant intellectual property and other proprietary rights through operational measures and contractual
agreements.
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ImmuCell Corporation
We
own numerous trademarks and trade dress that are very important to our business, and have several trademark and trade dress applications
and registrations in the United States, Canada, Iran and Turkey. We own the following U.S. trademark registrations: IMMUCELL,
FIRST DEFENSE, FD FIRST DEFENSE (& Design), FIRST DEFENSE TECHNOLOGY, TRI-SHIELD FIRST DEFENSE, TRI-SHIELD FIRST
DEFENSE (& Design), YOUR CALF CREW, BEYOND VACCINATION, BEYOND VACCINATION (& Design), CALF HERO, DUAL-FORCE, TRI-SHIELD and
MAST OUT. We also own U.S. registrations claiming rights in the color blue
for our blue gel and blue bolusFIRST DEFENSE products. We own a pending U.S. trademark application for the RE-TAIN
trademark. The United States Patent and Trademark Office refused registration of our IMMEDIATE IMMUNITY trademark, which we
use extensively in connection with marketing of all of our products, on the grounds that the mark is generic. Rather than appeal this
finding, we are continuing to build our common law rights in the brand. The FDA issued a determination that the name, MAST OUT,
which we had intended to use for our purified Nisin product, is overly promotional. Rather than continuing an appeal of this decision,
we selected a new product name, RE-TAIN, which was approved by the FDA during the first quarter of 2019.
Government
Regulation
We
believe that we are in compliance with current regulatory requirements relating to our business and products. The manufacture
and sale of animal health biologicals within the United States is generally regulated by the USDA. We have received USDA and Canadian
Food Inspection Agency approval for the bolus format of First Defense® and for the gel tube formats of Tri-Shield
First Defense® and Dual-Force First Defense®. Re-TainTM is regulated by the
FDA, which regulates veterinary drugs. Regulations in the European Union will likely require that our product be sold subject
to a milk discard requirement in that territory, although the duration of the milk discard requirement may be shorter than the
discard requirement applicable to competitive antibiotic products in that market. Comparable agencies exist in foreign countries,
and foreign sales of our products will be subject to regulation by such agencies. Many countries have laws regulating the production,
sale, distribution or use of biological products, and we may have to obtain approvals from regulatory authorities in countries
in which we propose to sell our products. Depending upon the product and its applications, obtaining regulatory approvals may
be a relatively brief and inexpensive procedure or it may involve extensive clinical tests, incurring significant expenses and
an approval process of several years’ duration. We generally rely on in-country experts to assist us with or to perform
international regulatory applications.
Employees
We
currently employ 61 employees (including 5 part-time employees) in comparison to 54 employees (including 3 part-time employees)
approximately a year ago. Approximately 35.9 full-time equivalent employees are engaged in manufacturing operations, 9.4 full-time
equivalent employees in sales and marketing, 7.6 full-time equivalent employees in product development activities (primarily supporting
facility maintenance and operation, regulatory filings and commercial scale-up for Re-TainTM ) and 5.6 full-time equivalent
employees in finance and administration. As needed, we augment our staff with contracted temporary employees. All of our employees
are required to execute non-disclosure and invention assignment agreements (and some are required to execute non-compete agreements)