ITEM 1A Risk Factors 11
ITEM 1B Unresolved Staff Comments 19
ITEM 2 Properties 19
ITEM 3 Legal Proceedings 20
ITEM 4 Mine Safety Disclosures 20
PART II
ITEM 6 [Reserved] 21
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk 33
ITEM 8 Financial Statements and Supplementary Data 34
ITEM 9A Controls and Procedures 34
ITEM 9B Other Information 34
ITEM 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 34
PART III
ITEM 10 Directors, Executive Officers and Corporate Governance 35
ITEM 11 Executive Compensation 35
ITEM 14 Principal Accountant Fees and Services 35
PART IV
ITEM 15 Exhibits and Financial Statement Schedules 36
Audited Financial Statements F-1 to F-24
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 the Private Securities Litigation
Reform Act of 1995, as amended. Forward-looking statements can be identified by the fact that they do not relate strictly to historical
or current facts, and will often include words such as “expects”, “may”, “anticipates”, “aims”,
“intends”, “would”, “could”, “should”, “will”, “plans”, “believes”,
“estimates”, “targets”, “projects”, “forecasts”, “seeks” and similar words
and expressions. Such statements include, but are not limited to, any forward-looking 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; 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 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 efficacy or timeline to complete our contamination
remediation efforts; the likelihood, severity or impact of future contamination events; 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 robustness of our
manufacturing processes and related technical issues; estimates about our production capacity, efficiency and yield; future regulatory
requirements relating to our products; future expense ratios and margins; the efficacy of our investments in our business; future compliance
with bank debt covenants; anticipated changes in our manufacturing capabilities and efficiencies; our effectiveness in competing against
competitors within both our existing and our anticipated product markets; projections about depreciation expense and its impact on income
for book and tax return purposes; and any other statements that are not historical facts. These statements are intended to provide management’s
current expectation of future events as of the date of this earnings release, are based on management’s estimates, projections,
beliefs and assumptions as of the date hereof; and are not guarantees of future performance. Such statements involve known and unknown
risks and uncertainties that may cause the Company’s actual results, financial or operational performance or achievements to be
materially different from those expressed or implied by these forward-looking statements, 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), 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 and supplier relationships,
commercial and operational risks relating to our current and planned expansion of production capacity, and other risks and uncertainties
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. In addition, there can be no assurance that future risks, uncertainties or developments affecting us will be those that we anticipate.
We undertake no obligation to update any forward-looking statement, whether written or oral, that may be made from time to time, whether
as a result of new information, future developments or otherwise.
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 novel product we are developing to treat this most significant
cause of economic loss to the dairy industry.
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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 are preparing to make a third submission of the fifth Technical Section. 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. Net of debt issuance costs, we had approximately $10.2 million in outstanding debt under five different credit facilities
as of December 31, 2022 compared to approximately $9.1 million as of December 31, 2021. 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 seven 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):
Production
Capacity Increase and Product Contamination
During
2018, it became clear that demand for Tri-Shield First Defense® was outpacing production. In response to this increasing
demand, we began a series of investments during 2019 to increase our production capacity for the First Defense®
product line to approximately $30 million per year. The necessary facility expansions and new equipment needed to increase production
capacity were in place by the end of 2022. See PART I: ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, “Liquidity and Capital Resources”, for more detail about our production capacity.
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Unfortunately,
as this increased production capacity was coming online, a product contamination event was detected by standard in-process quality control
testing around the end of the third quarter of 2022. Contamination events during 2022 (largely this one around the end of the third quarter)
resulted in a total charge to costs of goods sold of approximately $588,000. We took immediate steps to address the contamination, and
production ran without issue during the balance of the fourth quarter of 2022. Then during the first quarter of 2023 our standard in-process
quality control testing detected a second contamination event. The related charge to costs of goods sold during the first quarter of
2023 is expected to be up to approximately $200,000, of which approximately $114,000 worth of product remains under evaluation. In response,
we have slowed down our production output as we take the necessary steps to assess and remediate the issues and perform a deep sanitization
of our facilities and process equipment to ensure that any product that is put to market meets all quality standards. We believe that
the ongoing implementation of our capacity expansion plans and the corrective actions being taken in response to these contamination
events should allow us to operate at the higher level of production output going forward without further significant contaminations.
We are working diligently to address the situation and believe we are taking the appropriate steps to emerge from this problem stronger
with the production capacity in place to produce approximately $30 million of product per year going forward.
This
production slowdown during the first quarter of 2023, has, in part, caused an increase in the amount of our order backlog from approximately
$2.5 million as of December 31, 2022 to approximately $8 million as of March 10, 2023. However, we do not believe this backlog number
is highly relevant anymore as it includes very old orders, redundancy in demand and orders that may be cancelled. We expect to report
reduced sales during the first quarter of 2023 and a large backlog as of March 31, 2023. We are on track to produce approximately $3.2
million to $3.4 million of product during the first quarter of 2023, which is approximately 56% less than our $7.5 million quarterly
production target. While this is less than we need, our remediation efforts are beginning to work as we cautiously come back into production.
Due to the loss in earned gross margin that is being incurred during the first quarter of 2023, we have made the decision to defer, for
the time being, completion of the incremental planned investment to increase our production capacity further to approximately $40 million
per year.
The
increase in sales demand for First Defense® is both exciting and challenging for us. One view is that we are operating
with short supply caused largely by contamination events on the First Defense® side, while not yet achieving FDA
approval of Re-Tain®. However, the other view is that we are approaching both approximately $30 million in annual
production capacity for First Defense® (with a flex option to get to approximately $40 million per year in the
future) while also advancing to the final stages of a very significant FDA product development initiative.
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 2022, our cumulative
sales of First Defense® since inception exceeded 30 million doses.
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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.
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 in her milk 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.
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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 private label product were less than $170,000 during each of 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 commercial leader of stakeholder engagement, one director
of marketing and customer service and eight regional sales 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 expect to continue to increase our sales over
the long term (despite a drop in 2022).
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 $27.9 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 $74.5 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. We aim to continue these market share gains in both the dairy and beef segments. Our share
of the market (calculated on the basis of calves treated) of the scour preventative products administered at the calf-level was approximately:
Our
share of the market (calculated on the basis of calves treated) of both products administered at the calf-level and vaccines 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 approximately 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. 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.
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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, Pakistan and Israel.
With
Re-Tain®, we are working to expand our product portfolio to include an intramammary infusion for the treatment
of subclinical mastitis in lactating dairy cows. Mastitis is inflammation of the mammary gland typically associated with a bacterial
infection. It is estimated to cost the U.S. dairy industry approximately $2 billion in economic harm per year. It is the most costly
and common disease affecting the dairy industry. This illness is categorized as either clinical mastitis or subclinical mastitis. Clinical
mastitis infections cause visibly abnormal milk which cannot be sold. On the other hand, subclinical mastitis infections do not
cause any visible changes in milk or udder appearance, making it difficult to detect. Most mastitis cases treated today are those that
reach the clinical stage even though it is understood that clinical cases are only the tip of the mastitis iceberg. Milk from cows with
subclinical mastitis can still be sold if not treated with traditional antibiotics. Milk from cows treated with traditional antibiotics
must be discarded for the duration of the treatment and for 1.5 to 4 days after the last treatment, depending on the antibiotic that
was used. The cost of that milk discard along with the stress and risk in moving the cow to the hospital pen is thought to be the primary
reasons more subclinical mastitis cases are not treated today. However, the cascade of negative events triggered by subclinical mastitis
for both the dairy producer and the milk processor are significant. These include lower milk production (some have estimated approximately
1,500 pounds of lost milk, or about $270 at $18.00 per hundredweight per infected cow per lactation), higher rates of clinical mastitis,
lower conception rates, increased abortions, increased cull rates, reduced or foregone milk quality premiums, shorter shelf life for
fluid milk, and both lower yields and less flavor for cheese. Cows with subclinical mastitis maintain a reservoir of infection within
the herd and increase exposure of healthy cows to contagious pathogens. Subclinical mastitis also increases the risk of various quality
defects on a variety of final dairy products.
The
active ingredient in Re-Tain®is pharmaceutical-grade Nisin-A. FDA approval for this drug would establish an entirely
new class of anti-infective that is different from those currently available to treat mastitis. This new class, called bacteriocins,
are anti-microbial polypeptides with no resistance risk for human health. Bacteriocins selectively target Gram+ bacteria, the same bacteria
that commonly cause mastitis. We expect Re-Tain®will be the first FDA-approved intramammary treatment for subclinical
mastitis without a milk discard or meat withhold. This gives us the opportunity to revolutionize the way mastitis is treated, since Re-Tain®is specifically designed to treat ahead of clinical signs without a milk discard and, as a result, cows can reach their peak milk
production and not be sent to the hospital pen.
Re-Tain®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. 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.
It
is difficult to accurately estimate the potential size of the subclinical mastitis market because presently this disease is largely left
untreated. We believe that approximately 20% to 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. Rarely is an industry revolutionized overnight. Getting producers to change protocols to make subclinical
mastitis treatment a standard and routine procedure is going to take initiative, but we believe producers are eager for something new
and better since the FDA has not approved an intramammary treatment within the last 20 years. Similar market opportunities are likely
to exist outside the United States. 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.
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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 18 to 24 months after FDA approval, as we seek to transform the way that mastitis is treated in the dairy industry over the
long term. 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. 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 continue to develop 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®.
Because
Nisin is a naturally occurring bacteriocin that is not used in human medicines, it could alleviate some of the social and public health
concerns that the widespread use of antibiotics encourages the growth of antibiotic-resistant bacteria. For example, there is a 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 has expressed a commitment 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. By reducing the risk of antibiotic residues and slowing the development of antibiotic-resistant organisms,
we believe that 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 to use treatment antibiotics later in a calf’s life.
In
the big picture, we are introducing an entirely new class of antimicrobials 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. The industry could keep treating this very significant disease with traditional antibiotics, but it takes innovation to bring
a bacteriocin like Nisin to market. Re-Tain® will, when introduced, offer a needed alternative to these traditional
antibiotics. We believe that societal animal welfare objectives will put more and more pressure on the industry to treat cows with subclinical
infections.
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.
In
an effort to provide greater visibility into the launch of Re-Tain®, 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 three components
of our business: i) Scours, ii) Mastitis and iii) Other. This will allow investors to see our progress with both product lines. 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 our controlled launch plan strategy, we estimate that
we can achieve sales of approximately $1 million in 2024 and then achieve approximately twice that in 2025. This assumes FDA approval
is achieved and that product launch is initiated around the end of 2023. If we are successful with this launch strategy, we would aim
to grow this curve in 2026 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.
7
ImmuCell
Corporation
Through
continued growth in sales of the First Defense® product line, and as additional resources are dedicated to production,
sales, marketing and technical services, it is our objective to exceed our total product sales of approximately $19 million achieved
during the year ended December 31, 2022 as soon as possible. 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
Most
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 23-year period that began on January 1, 2000 and ended on December 31, 2022, we
invested an aggregate of approximately $25.2 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.
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.
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.
8
ImmuCell Corporation
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-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. During the first quarter of 2023, we learned that some of our dam-level scour competitors were tight in supply
and may not be able to meet all of their marketing demand.
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 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.
9
ImmuCell Corporation
Intellectual
Property
We
own a broad collection of registered and unregistered intellectual property rights relating to our research, products and processes.
These rights include 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 enter into and rely on confidentiality and proprietary rights agreements
with our employees, contractors and business partners to protect our trade secrets, proprietary developments and confidential information.
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 registrations
in the United States, Canada and Iran. 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 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 as we do with other brands from time to time. 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-Tain® is regulated by the FDA, which regulates veterinary
drugs. Regulations in the European Union will likely require that Re-Tain® 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 competing
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 74 employees (including 7 part-time employees) in comparison to 67 employees (including 7 part-time employees) approximately
a year ago. Approximately 48.4 full-time equivalent employees are engaged in quality and manufacturing operations, 13.5 full-time equivalent
employees in sales and marketing, 6.7 full-time equivalent employees in product development activities (primarily supporting facility
maintenance and operation, regulatory filings and commercial scale-up for Re-Tain®) and 5.4 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) intended
to protect our rights in our proprietary products. We are not a party to any collective bargaining agreement and consider our employee
relations to be excellent.
10
ImmuCell Corporation
Public
Information
As
a reporting company, we file quarterly and annual reports with the Securities and Exchange Commission (SEC) on Form 10-Q and Form 10-K,
respectively. We also file current reports on Form 8-K, whenever events warrant or require such a filing. The public may read and copy
any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
internet site that contains reports, proxy and information statements and other information about us that we file electronically with
the SEC at http://www.sec.gov. Our internet address is http://www.immucell.com.
ITEM
1A — RISK FACTORS
Financial
Risks
Gross
margin on product sales: One of our goals is to achieve a gross margin (before related depreciation expenses) as a percentage of
total sales approaching 50% after the initial launch of new products. Depreciation expense will be a larger component of costs of goods
sold for Re-Tain® than it is for the First Defense® product line. Gross margins generally
improve over time, but this anticipated improvement may not be realized for Re-Tain®. Many factors discussed in
this report (including inflation and the COVID-related and other cost increases, supply-chain disruptions and the rising price of oil
and other commodities and supplies) impact our costs of goods sold. There is a risk (which was experienced during 2022) that we are not
able to achieve our gross margin goals, which would adversely affect our operating results and could impact our future operating plans.