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, 2021
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 offices) (Zip Code)
(207)878-2770
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock, $0.10 par value per share ICCC Nasdaq
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit 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 ☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and 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 U.S.C. 7262(b)) by the 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, 2021 was approximately $64,209,000
based on the closing sales price on June 30, 2021 of $9.50 per share.
The
number of shares of the registrant’s common stock outstanding as of March 18, 2022 was 7,742,864.
Documents
incorporated by reference: Portions of the registrant’s definitive Proxy Statement to be filed in connection with the 2022 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
ImmuCell Corporation
TABLE OF CONTENTS
December 31, 2021
PART I
ITEM 1 Business 1
ITEM 1A Risk Factors 12
ITEM 1B Unresolved Staff Comments 20
ITEM 2 Properties 21
ITEM 3 Legal Proceedings 21
ITEM 4 Mine Safety Disclosures 21
PART II
ITEM 6 [Reserved] 22
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk 35
ITEM 8 Financial Statements and Supplementary Data 35
ITEM 9A Controls and Procedures 36
ITEM 9B Other Information 36
ITEM 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 36
PART III
ITEM 10 Directors, Executive Officers and Corporate Governance 37
ITEM 11 Executive Compensation 37
ITEM 14 Principal Accountant Fees and Services 37
PART IV
ITEM 15 Exhibits and Financial Statement Schedules 38
Audited Financial Statements F-1 to F-26
Signatures 40
i
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 our
production activities, operating results and financial condition and on the customers and markets that we serve; the impact of Russia’s
military invasion of Ukraine and attack on its people on the world economy including inflation and the price and availability of grain
and oil; the impact of the global supply-chain disruptions on our ability to obtain, in a timely and cost-effective fashion, all the supplies
and components we need to produce our products; the impact of inflation and rising interest rates on our operating expenses and financial
results; 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 per unit; 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 our facilities to produce the Nisin Drug Substance and
Drug Product; 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;
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-Tain®), 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), uncertainty associated with the timing and volume
of customer orders as we come out of a prolonged backlog, adverse impacts of supply chain disruptions on our operations and customer relationships,
our reliance upon third parties for financial support, products and services, our small size and dependence on key personnel, changes
in laws and regulations, decision making and delays by regulatory authorities, a recurrence of inflation and its impact on our customers’
order patterns, 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.
1
ImmuCell Corporation
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. We support the dairy and beef industries’ purpose to produce nutritious proteins efficiently while ensuring food
quality and safety. 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-Tain®,
a product we are developing to treat this most significant cause of economic loss to the dairy industry.
During 2000, we began the development of Re-Tain®,
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 Technical Sections required for product approval, and we made a second submission
of the fifth and final Technical Section during the first quarter of 2022. 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 through the second
quarter of 2021, we issued an aggregate of 4,553,017 shares of common stock, raising gross proceeds of approximately $26.7 million in
six 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 $9.2 million in outstanding debt under five different credit facilities as of December 31,
2021 compared to $9.5 million as of December 31, 2020. 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-Tain® without relying on funding from a partner or licensee, thereby keeping control
over all product rights and future revenues.
During the past six years, we have funded our
operations, constructed an FDA regulated Drug Substance manufacturing facility for Re-Tain® and invested capital
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-Tain® in house in order to end 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 Six-Year % Increase Over Six-Year
2
ImmuCell Corporation
Animal Health Products
The First Defense® product
line is manufactured from hyperimmunized cows’ colostrum (the antibody rich milk that a cow produces immediately after giving birth)
utilizing our proprietary vaccine 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 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. Our capsule format of this product, which requires no mixing, is stored at room temperature. 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 and have greater market potential as we gain market share from the
dam-level (pre-calving scour vaccines) competitors. The third quarter of 2021 marked the 30th anniversary of the original USDA
approval of this product in 1991. During the third quarter of 2021, our cumulative sales of First Defense® since
inception exceeded 28,000,000 doses.
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, which is the leading cause of death in preweaned calves. Our Beyond Vaccination® marketing campaign focuses
on providing antibodies without vaccination. A 100% vaccine protection 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 by
standardizing the 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
and 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, and we are continuing to educate 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 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 rotavirus antibodies 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 some 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.
3
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.
Preventing newborn calves from becoming sick
helps them to reach their genetic potential and reduces the need to use treatment antibiotics later in life. 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.
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 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, Wisconsin. This product was discontinued by mutual agreement during the first quarter of 2022. Annual sales of this product
were less than $170,000 during the years ended December 31, 2021 and 2020.
Sales and Markets
Our sales and marketing team consists of one vice
president, one commercial research and technical services veterinarian, one director of marketing and customer service and eight regional
managers. 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.
4
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 $24 million
per year. With the additional claim for our new product (Tri-Shield First Defense®) against rotavirus, we are now
also 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 $70 million per year.
Based
on market share information that we purchase from the leading source of this data for the animal health sector, we are gaining market
share in the United States year after year with our Beyond Vaccination® strategy. We aim to continue these
market share gains in both the dairy and beef segments. Our share of the market (on a unit volume basis) of scour preventative products
administered at the calf-level was approximately:
Our share of the market of calves treated with
products administered to calves and those administered to the dam prior to calving (adjusting for two doses of dam-level scour vaccines
required for primary vaccination of first-calf heifers) was approximately:
We continue our efforts to grow sales of the First
Defense® product line in North America, where there are approximately 40 million dairy and beef cows in the United
States and 4.5 million dairy and beef cows in Canada. We believe that significant market opportunities exist in other international territories.
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. The statistics above are provided by an industry compilation of
USDA data for 2022. 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. We are working with Medexx to expand our business in South Korea to include
the registration of Tri-Shield First Defense®. 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, California during the fourth quarter of 2016 (sales have been initiated
under this contract). We are investigating the requirements to sell the First Defense® product line in Mexico.
With
Re-Tain®, 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-Tain®) is a naturally-occurring polypeptide
antimicrobial that is not used in human medicines and could alleviate some of the social and public health 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. Currently, treatment of subclinical mastitis is limited because
it cannot be visibly detected and treatment requires a milk discard, which is costly.
5
ImmuCell Corporation
The USDA’s National Animal Health Monitoring
System through its Dairy 2014 study suggests that 21% of all dairy cows are treated per year 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 these 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. More regulatory and private sector 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. This would not be a concern for Re-Tain® because Nisin is not used for human health. 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 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-Tain®. 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.
We believe that Re-Tain® 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. While practices may vary farm-to-farm,
there would be no requirement to move cows treated with our product, 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-Tain®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.
6
ImmuCell Corporation
It is difficult to accurately 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 20-40% of the U.S. dairy herd is infected with subclinical mastitis at any given time. 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 Improvement Association (DHIA) or by installing monitors to indicate high SCC cows or a potential health
event. DHIA testing can provide this data monthly, and emerging technology can provide this data real-time. Testing results at an elevated
level could indicate a good treatment candidate. Likewise, testing results showing a reduced level after treatment could indicate a treatment
success. To reach the portion of the market that does not have access to this data presently, we would need to show new customers that
the benefit of using our product is worth the roughly $2.00 per cow per month test cost. Similar market opportunities are likely to exist
outside the U.S. We believe the use of Re-Tain® could be expanded, with additional data and regulatory approval,
to support treatment late in lactation and possibly for clinical stage mastitis. We also believe there may be a market for Re-Tain®
in small ruminants, where the majority of mastitis cases are caused by strep-like organisms aligned with our effectiveness data.
Based on consultations with industry experts
and key opinion leaders, we have opted to carefully control the launch of this novel product over the first eighteen months or so after
FDA approval, as we seek to revolutionize the way that mastitis is treated in the dairy industry over the long term. Through our direct
sales team, our goal is to create exceptional customer experiences with first adopters. We believe that the resulting positive customer
testimonials should help create the momentum necessary to optimize product sales over the longer period. Our goal is to help early adopters
select treatment candidates, develop easy to use protocols, optimize treatment results and realize a positive return on their investment.
We intend to limit initial distribution of Re-Tain® to a level that enables our sales team to select the optimal
dairy farms at which to introduce Re-Tain® and to limit the initial numbers of participating farms so that the desired
levels of support and guidance relating to effective usage of Re-Tain® can be provided with our available resources. We
believe that the operational adjustments and accommodations that dairy farmers will need to make to effectively use Re-Tain®
will not be so burdensome as to deter its adoption and usage. Our overarching objective is to minimize the risk of early stage unsatisfactory
outcomes that could harm the longer term prospects and market acceptance of Re-Tain®. This strategy also reduces
the amount of inventory that we would need to build at risk before regulatory approval is achieved, and it reduces the amount of cash
we would need to spend to purchase inventory from our contract manufacturer before our in-house aseptic filling services are approved
by the FDA. This strategic choice means that we have elected not to pursue an alternative strategy that might have maximized short-term,
initial sales quickly through a mass market approach where we provide product to distribution and let them sell it to as many farms as
possible. While we are dedicated to increasing our sales revenue, we must consider the damage a mass market strategy could cause to the
long-term value of the product. We have seen products sold by much larger companies that were substantially damaged by such failed market
launch strategies. We are developing detailed launch plans, focusing on the readiness of dairy operators to successfully introduce Re-Tain®
to their herds. We believe that these prudent steps, while potentially leading to lower initial Re-Tain® revenues,
may create a smooth and successful launch and could safeguard the longer term performance of our investment in Re-Tain®.
In the big picture, we are introducing an entirely
new class of antimicrobial as an animal drug, a bacteriocin, that does not promote resistance against antibiotics used in human medicine
making it more socially responsible. As the great NHL hockey player, Wayne Gretzky, is known to have said, “I skate to where the
puck is going to be, not where it has been.” This is motivational to us. We believe our product fits very well with where the industry
is going to be in the coming years. Sustainability objectives of the industry require that less antibiotics be used in food producing
animals, yet a new product to treat mastitis has not been developed in years (other than new formulations of the same old stuff). The
over-use of antibiotics that are medically important to human healthcare is a growing concern of our society and an active issue with
the FDA, largely because of the growing evidence that this over-use contributes to antibiotic resistance and the rise of “super-bugs”.
The industry could keep treating this very significant disease with traditional antibiotics, but it takes innovation to bring a polypeptide
antimicrobial like Nisin to market. Re-Tain® will, when introduced, offer a needed alternative to these traditional
antibiotics, while at the same time improving milk quality and the quantity of milk produced by treated cows. We also know that animals
infected with subclinical mastitis have higher abortion rates and often progress to the clinical disease state. We believe that societal
animal welfare objectives will put more and more pressure on the industry to treat cows with subclinical infections.
7
ImmuCell Corporation
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-Tain® at current production yields. This production capacity estimate does not yet reflect any inventory
build strategies or ongoing yield improvement initiatives. Expansion of the estimated
annual capacity of the Drug Substance facility beyond approximately $10 million (without factoring in potential yield improvements) would
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 or adopting alternative manufacturing strategies.
As disclosed in previously filed reports, we
have made preliminary assessments and estimates relating to the market opportunity for Re-Tain®, both during and
after its initial launch, and have described the principal challenges facing the launch of a new product by a company such as ours with
limited sales, marketing and financial resources into a competitive market populated with several global pharmaceutical enterprises. We
expect annual sales to be well below the $36.1 million level that we previously estimated as the potential of the market opportunity for
our product five years after product launch. This is because we are taking a more controlled launch approach, respecting the challenges
of introducing a paradigm changing technology. We are going to be very transparent with the launch of Re-Tain®.
To that end, we have expanded Note 17, “Segment Information”, to the accompanying audited financial statements to now display
a break-out of our financial results among the following two components of our business: i) First Defense® and ii)
Re-Tain®. This will allow investors to see our progress with both products. We generally do not provide financial
projections, as we know such projections can prove to be materially inaccurate. However, in this case, we are providing a high-level projection
for Re-Tain® that under this controlled launch plan strategy, we think we can achieve sales of approximately $1
million in 2023 and then about double that in 2024. This assumes FDA approval is achieved and that product launch is initiated around
the beginning of the fourth quarter of 2022. If we are successful with this launch strategy, we would aim to grow this curve in 2024 and
after. We believe this strategy lends itself to a more gradual adoption curve but higher and more sustainable sales over the long-term.
Actual sales results will vary from these projections up or down.
Through both continued growth in sales of the First
Defense® product line and a successful launch of Re-Tain®
as soon as possible and with a measured approach to expanding our customer-facing staff, it is our objective to increase our current annual
level of total product sales of just over $19 million to approximately $23 million. As additional resources are dedicated to production,
sales, marketing and technical services, our longer-term goal is to exceed $35 million of annual total product sales as soon as possible
during the five-year period after the market launch of Re-Tain®.
Product Development
The majority of our product development spending
has been focused on the development of Re-Tain®,
our purified Nisin treatment for subclinical mastitis in lactating cows. During the 22-year period that began on January 1, 2000 and ended
on December 31, 2021, we invested an aggregate of approximately $22.3 million (excluding depreciation and the capital cost of our Drug
Substance production facility) in the development of this product. This estimation 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-Tain®. 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. A much less pure preparation of our active ingredient, Nisin, is commonly
used as a food preservative and has been given Generally Regarded as Safe (GRAS) status by the FDA. Our Nisin technology includes patented
processing and purification methods to achieve pharmaceutical-grade purity.
8
ImmuCell Corporation
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. Among the measures that
we intend to deploy will be detailed guidance on limiting the portion of a herd that is treated with Re-Tain®
at any one time in order to avoid concentration levels in the milk that could lead to the rejection of the contents in a cheese tank.
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 antimicrobials that can be used as alternatives to traditional antibiotics through expansions of our Nisin technology and
yield improvements. 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.
9
ImmuCell Corporation
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-Tain®. 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. Our Nisin A 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, the First Defense® product line is the only calf-level
product that 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.
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 competing
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 competing 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 competing 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
three primary brands discussed above that are given either orally or intranasally 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 and effectively produce and market 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, distribution capability and
customer support. We continue to monitor our network of independent distributors to maintain our competitive position.
10
ImmuCell Corporation
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-Tain®.
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.
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 RE-TAIN. We also own U.S. registrations claiming rights
in the color blue for our blue gel and blue bolus FIRST DEFENSE products. 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