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ICCC > SEC Filings for ICCC > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for IMMUCELL CORP /DE/

Form 10-Q for IMMUCELL CORP /DE/


13-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER

30, 2012

Product Sales

Product sales increased by approximately 7%, or $73,000, to $1,077,000 during the three-month period ended September 30, 2012 in comparison to $1,003,000 during the same period in 2011. Product sales increased by approximately 4%, or $162,000, to $3,969,000 during the nine-month period ended September 30, 2012 in comparison to $3,807,000 during the same period in 2011. Sales during the nine-month period ended September 30, 2012 included approximately $116,000 in sales of our bulk reagents used in a drinking water diagnostic test sold by others that did not occur during the same period during 2011. During the nine-month period ended September 30, 2012, domestic sales increased by approximately 1%, or $34,000, and international sales increased by 21%, or $129,000, in comparison to the same period in 2011. Product sales increased by approximately 7%, or $344,000, to $5,274,000 during the twelve-month period ended September 30, 2012, in comparison to $4,930,000 during the twelve-month period ended September 30, 2011.

Sales of our lead product, First Defense“, increased by 2% during the nine-month period ended September 30, 2012 and increased by 3% during the twelve-month period ended September 30, 2012, in comparison to the same periods ended in 2011. During the nine-month period ended September 30, 2012, domestic sales of First Defense“ increased by 1%, and international sales of First Defense“ increased by 6%, in comparison to the same period in 2011. With the exception of the anticipated decrease during the second quarter of 2012, we have realized consistently positive sales growth of First Defense“ for seven of the last eight quarters ending with, and including, the third quarter of 2012, as demonstrated below:

9%: Third Quarter 2012 over Third Quarter 2011 (17%): Second Quarter 2012 under the Second Quarter 2011 13%: First Quarter 2012 over First Quarter 2011 21%: Fiscal Year 2011 over Fiscal Year 2010 7%: Fourth Quarter 2011 over Fourth Quarter 2010 22%: Third Quarter 2011 over Third Quarter 2010 37%: Second Quarter 2011 over Second Quarter 2010 21%: First Quarter 2011 over First Quarter 2010 13%: Fourth Quarter 2010 over Fourth Quarter 2009

We believe that the long-term growth in sales of First Defense“ (despite the drop in the second quarter of 2012) may reflect, at least in part, the success of our strategic decision to invest in additional sales and marketing efforts. Our sales and marketing team currently consists of one director and two regional sales managers. We launched a new communications campaign at the end of 2010 that is highlighting how the unique ability of First Defense“to provide Immediate ImmunityTM generates a dependable return on investment for producers. Effective for 2011 and 2012 (and renewable for 2013 and 2014 if certain sales growth objectives are met), we entered into a sales and marketing collaboration with Agri Laboratories Ltd. of St. Joseph, Missouri, (AgriLabs“), under which the AgriLabs“ sales and marketing team is working with us to expand market demand for First Defense“.

Competition for resources that dairy producers allocate to their calf enterprises has been increased by the many new products that have been introduced to the calf market. The weather during the 2012 spring calving season was extremely mild in North America. Warm and dry weather reduces the producer's perception of the need for First Defense“ . The severe heat and drought conditions during the summer of 2012 in many key agricultural regions in the U.S. has caused a significant increase in the cost of feed that has offset some improvement in milk prices. The combination of mild weather during the 2012 calving season and the increasing cost of feed has created a very challenging environment in which to sell a disease prevention product. The animal health distribution segment has been aggressively consolidating over the last few years. Larger distributors have been acquiring smaller distributors. In an effort to maximize their efficiencies, one of our largest distributors has reduced warehouse locations by approximately 20%. This may have reduced the inventory of First Defense“ held at the distributor level, thereby reducing First Defense“ sales out our door. Although beef herd numbers are down currently because of drought conditions in many parts of the U.S., projections indicate 2012 could be another year of record high cattle and beef prices. This upswing would increase a producer's likelihood to invest in First Defense“ for their calf crop. Even in this challenging market, First Defense“ continues to benefit from wide acceptance as an effective tool to prevent bovine enteritis (scours) in newborn calves. The third quarter of 2011 marked the 20thanniversary of the original USDA approval of this product in 1991. During the fourth quarter of 2011, we sold our 11,000,000th dose of First Defense“ . We believe that these milestones demonstrate the value of our technology and the long-term market acceptance of our product. Sales are normally seasonal, with higher sales expected during the first quarter. It is our production and customer service objective to ship orders within one day of receipt. We have been operating in accordance with this objective since the third quarter of 2009.

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ImmuCell Corporation

We are developing new product applications of our First Defense TechnologyTM, which is a unique whey protein concentrate that is purified utilizing our proprietary whey protein processing methods, for the nutritional and feed supplement markets without the claims of our USDA-licensed product. Through our First Defense TechnologyTM, we are selling whey concentrate globulin proteins in different formats. During the second quarter of 2011, we initiated sales of First Defense TechnologyTM in a bulk powder format (no capsule), which is delivered with a scoop and mixed with colostrum for feeding. During the first quarter of 2012, we initiated a limited launch of a tube delivery format of our First Defense TechnologyTM in a gel solution. Through two collaborations, we are working to expand sales of our First Defense TechnologyTM by accessing the U.S. feed market. During the first quarter of 2011, AgriLabs“ launched commercial sales of their product, Colostrxģ, a colostrum supplement with First Defense TechnologyTM Inside. During the fourth quarter of 2011, Milk Products, LLC of Chilton, Wisconsin launched commercial sales of their product, Ultra Start“150 Plus, a colostrum replacer with First Defense TechnologyTM Inside.

Gross Margin

The gross margin as a percentage of product sales was 58% and 52% during the three-month periods ended September 30, 2012 and 2011, respectively. The gross margin as a percentage of product sales was 58% and 55% during the nine-month periods ended September 30, 2012 and 2011, respectively. The gross margin as a percentage of product sales was 57% and 54% during the twelve-month periods ended September 30, 2012 and 2011, respectively. Our gross margin percentages were 55%, 52% and 53% for the years ended December 31, 2011, 2010 and 2009, respectively. Our objective is to maintain the full-year gross margin percentage over 50%, and we have achieved this objective during the periods being reported. We expect some fluctuations in gross margin percentages from quarter to quarter. We believe that a number of factors can cause our costs to be variable. Biological yields from the raw material used in the production of First Defense“do fluctuate over time. Like most manufacturers in the U.S., we have been experiencing increases in the cost of raw materials that we purchase. Product mix also affects gross margin in that we earn a higher gross margin on First Defense“and our bulk reagents used in a drinking water diagnostic test and a lower gross margin on Wipe Out“Dairy Wipes. We had held our selling prices without significant increase for approximately the seven-year period ended December 31, 2007, believing that we could benefit more from higher unit sales volume than through a higher average selling price per unit. During the first quarter of 2008, we implemented a modest increase to the selling price of First Defense“and have held that selling price without increase since then. Changes in the gross margin on product sales are summarized in the following table for the respective periods:

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                              ImmuCell Corporation



                              Three-Month Periods
                              Ended September 30,            Increase
                             2012            2011        Amount       %
Gross margin               $     621       $     526     $    95       18 %
Percent of product sales          58 %            52 %         6 %     12 %




                              Nine-Month Periods
                             Ended September 30,            Increase
                              2012           2011        Amount       %
Gross margin               $     2,304      $ 2,089     $    215       10 %
Percent of product sales            58 %         55 %          3 %      5 %




                             Twelve-Month Periods
                              Ended September 30,            Increase
                              2012            2011        Amount       %
Gross margin               $     3,029       $ 2,676     $    353       13 %
Percent of product sales            57 %          54 %          3 %      6 %

Product Development

In 1999, we shifted the primary focus of our product development efforts from human applications of our whey protein purification technology to scientifically-proven and practical products that result in a measurable economic impact on animal health and productivity in the dairy and beef industries. We expect to continue this strategic focus. As anticipated, we reduced product development expenses during the periods being reported primarily because we are spending less money on the development of Mast Out“with the significant clinical studies now largely complete. Product development expenses decreased by approximately 26%, or $80,000 to $224,000 during the three-month period ended September 30, 2012 in comparison to $304,000 during the same period in 2011. Product development expenses decreased by approximately 53%, or $766,000, to $683,000 during the nine-month period ended September 30, 2012 in comparison to $1,449,000 during the same period in 2011. We spent approximately $1,720,000, $1,493,000 and $1,645,000 on product development activities during the years ended December 31, 2011, 2010 and 2009, respectively.

Estimated to cost the U.S. dairy industry approximately $2 billion per year, mastitis (inflammation of the mammary gland) is the most costly and common disease affecting dairy cows. The disease diminishes the saleable quantity and overall value of milk, in addition to causing other herd health and productivity losses. Mast Outģ, our lead product development initiative, is a Nisin-based intramammary treatment of subclinical mastitis (those cases where cows have infected udders, but still produce saleable milk) in lactating dairy cows. While the benefit of treating clinical mastitis (which results in abnormal milk that cannot be sold) is widely known, there is a growing awareness of the cascade of adverse events and conditions associated with subclinical mastitis, including reduced or foregone milk quality premiums, lower milk production, shorter shelf life for fluid milk, lower yields and less flavor for cheese, higher rates of clinical mastitis, increased abortions and increased cull rates. In the pivotal effectiveness study, Mast Out“treatment was associated with a statistically significant reduction in milk somatic cell count (SCC), which is an important measure of milk quality. Some industry experts have estimated that subclinical mastitis costs the U.S. dairy industry approximately $1 billion per year. Because milk from cows treated with traditional antibiotics must be discarded for a period of time during and after treatment due to concerns about antibiotic residue in the milk, currently it is not common practice to treat subclinical mastitis. Current intervention strategies for subclinical disease are considered inadequate and generally not cost-effective due to milk discard requirements. Mast Outģ presents the option to treat such cases without a milk discard, which could revolutionize the way mastitis is managed in the industry. There is no other FDA-approved intramammary mastitis treatment product that has such a "zero discard" claim. Common milk discard periods cover the duration of treatment and extend from 36 to 96 hours after last treatment, depending on the antibiotic. On average, a cow produces approximately 80 pounds of milk per day. While milk prices vary significantly, at an average value of $15 per 100 pounds, a cow produces approximately $12 worth of milk per day. Milk discard costs, ranging from approximately $40 to $100 per treated animal, are a significant barrier to the routine treatment of subclinical mastitis. We believe Mast Out“could expand the subclinical mastitis treatment market niche largely because it would not be subject to this milk discard requirement.

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ImmuCell Corporation

In 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 Mast Out“. 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, the same active ingredient contained in Wipe Out“Dairy Wipes, is an antibacterial peptide. Nisin is known to have activity against most gram positive and some gram negative bacteria. Nisin is a well characterized substance, having been used in food preservation applications for over 50 years. Food-grade Nisin, however, cannot be used in pharmaceutical applications because of its low purity. Our Nisin technology includes methods to achieve pharmaceutical-grade purity.

In 2004, we entered into a product development and marketing agreement with Pfizer Animal Health, a division of Pfizer, Inc., covering Mast Out“. Under that agreement (as amended and supplemented and later terminated), we received $2,375,000 in payments from Pfizer. Pfizer elected to terminate the agreement in 2007. Soon thereafter, Pfizer returned to us all rights, data, information, files, regulatory filings, materials and stocks of Nisin and Nisin producing cultures relating to the development of Mast Out “. We believe that Pfizer's decision to terminate the agreement was not based on any unanticipated efficacy or regulatory issues. Rather, we believe Pfizer's decision was primarily market driven, largely relating to their concern that the use of Mast Out“might require specific treatment restrictions at the herd level to avoid a potential problem using the milk from treated cows in the manufacture of certain dairy products.

Due to the zero milk discard feature, there is a risk that Nisin from milk of cows treated with Mast Out“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 milk from a high enough percentage of treated cows. We have conducted 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 Mast Out“is used in accordance with the product label. This interference is more likely to cause a production delay in the culturing process than it is to terminate the process. Milk from treated cows that is sold exclusively for fluid milk products presents no such risk. Another market risk is that Mast Out“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. However, we believe that the product's value proposition demonstrates a return on investment to the producer that will justify this premium.

Many fear that the possible overuse of antibiotics in livestock may undermine the effectiveness of drugs to combat human illnesses and may be a contributing factor to the rising problem of bacterial drug resistance. The FDA is committed to addressing this public health concern. For example, citing concerns about untreatable, life-threatening infections in humans, new FDA and European regulations are aimed at restricting the use of cephalosporins in food animals and at improving milk quality. New USDA regulations have been implemented to reduce the allowable level of somatic cell counts in milk to 400,000 at the farm level in order to qualify for an EU export certification. In late 2011, The Dutch Veterinary Society proposed strict guidelines for veterinary use of antibiotics in the EU. Additionally, regulators have recently increased their monitoring of antibiotic residues in milk and meat. This current environment could be favorable to the introduction of a new product such as Mast Out“ as an alternative to traditional antibiotics. We continue to believe that this product opportunity justifies ongoing product development efforts necessary to commercialize the product.

Commercial introduction of Mast Out“in the United States is subject to approval of our New Animal Drug Application (NADA) by the Center for Veterinary Medicine, U.S. Food and Drug Administration (FDA), which approval cannot be assured. Foreign regulatory approvals would be required for sales in key markets outside of the United States and would involve some similar and some different requirements. In 2007, we began the production of pivotal batches of drug product to fulfill the regulatory requirements of effectiveness, stability, target animal safety and human food safety. The NADA is comprised of five principal Technical Sections subject to the FDA's phased review of a NADA. By statute, each Technical Section submission is generally subject to a six-month review cycle by the FDA. The current status of our work on these Technical Sections is as follows:

1) Environmental Impact: During the third quarter of 2008, we received the Environmental Impact Technical Section Complete Letter from the FDA.

2) Target Animal Safety: During the second quarter of 2012, we received the Target Animal Safety Technical

Section Complete Letter from the FDA.

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ImmuCell Corporation

3) Effectiveness: During the third quarter of 2012, we received the Effectiveness Technical Section Complete Letter from the FDA.

4) Human Food Safety (HFS): The HFS Technical Section submission was made during the fourth quarter of 2010. This Technical Section determines if a milk discard period or meat withhold period will be required. This Technical Section includes several subsections such as: a) toxicology, b) total metabolism, c) effects of drug residues in food on human intestinal microbiology, d) effects on bacteria of human health concern (antimicrobial resistance) and e) pivotal residue chemistry. During the second quarter of 2011, we announced that the FDA had accepted the subsections described above and granted Mast Out“ a zero milk discard time and a zero meat withhold period. Before we can obtain the Technical
Section Complete Letter, we must adapt our analytical method that measures Nisin residues in milk around the newly assigned tolerance limit and transfer that method to the FDA laboratory. We submitted the validated analytical method to the FDA during the fourth quarter of 2012 and anticipate receiving a Technical
Section Complete Letter from the FDA by the first quarter of 2013.

5) Chemistry, Manufacturing and Controls (CMC): During the fourth quarter of 2012, we withdrew our first submission to the FDA of the CMC Technical Section because of changes we have made to our regulatory filing and manufacturing strategies. We intend to make a revised first submission for a six-month review cycle by the FDA as soon as all of the relevant information is prepared. We are party to agreements with two manufacturers to produce inventory for us utilizing our proprietary technology and processes. First, a long-term, exclusive supply agreement with Plas-Pak Inc. of Norwich, Connecticut covers the proprietary syringe that was developed specifically for Mast Out“. These syringes were used for all pivotal studies of Mast Out“. Second, an exclusive Contract Manufacture Agreement with Norbrook Laboratories Limited of Newry, Northern Ireland, an FDA-approved drug product manufacturer, covers the formulation of the Active Pharmaceutical Ingredient (API) into drug product, the sterile-fill of syringes and the final packaging. Norbrook provided these services for clinical material used in all pivotal studies of Mast Out“. During the fourth quarter of 2012, we expect to enter into a lease with respect to a facility in which we intend to install the equipment and infrastructure necessary to produce the API. This strategy allows us to move forward with the regulatory approval process without needing outside funding to construct a new facility and allows us to avoid the cost and time delay of constructing a new facility during the winter season. It also provides us with more control and flexibility with regards to production volumes and costs than would be possible if we relied on a contract manufacturer to produce the API for us. It is our objective to complete the necessary facility modifications and equipment installations over the next twelve to eighteen months. At that time, the site would be ready for the production of validation batches of API required for approval of the CMC Technical Section and for inspection by the FDA. This would complete the CMC Technical Section and make us eligible for a Technical Section Complete Letter from the FDA, after a six-month review cycle.

Obtaining FDA approval of the CMC Technical Section defines the critical path to the submission of the administrative NADA to the FDA and ultimately to commercial sales. After obtaining the final Technical Section Complete Letter and after preparing materials responsive to other administrative requirements, the administrative NADA submission can be assembled for review by the FDA. This final submission would be subject to a statutory sixty-day review period.

In addition to our work on Mast Out“, we are actively exploring further improvements, extensions or additions to our current product line. For example, we currently are developing treatments that could prevent calf scours (diarrhea) caused by enteric pathogens other than E. coli K99 and bovine coronavirus (the current disease claims for First Defenseģ). In connection with that effort, during the second quarter of 2009 we entered into an exclusive license with Baylor College of Medicine covering certain rotavirus vaccine technology. This perpetual license (if not terminated for cause) is subject to milestone and royalty payments. Results from pilot studies completed during the first quarter of 2009 justified continued product development. We completed a pivotal effectiveness study of this experimental formulation during the third quarter of 2011 without seeing the anticipated level of effectiveness needed for regulatory approval and market acceptance. We are currently conducting additional pilot studies of different formulations of this antibody preparation. If positive results from these pilot studies are achieved, a second pivotal effectiveness study could be initiated during the first half of 2013. During the third quarter of 2012, we entered into an exclusive option to a license with North Carolina State University covering certain recombinant Cryptosporidium parvum technology that may have utility in the development of a dry cow vaccine. As additional opportunities arise to commercialize our own technology, or licensable technology, we begin new development projects. While we continue to pursue internally funded product

development programs, we also remain interested in acquiring new products and technologies that fit with our sales and

marketing focus on the dairy and beef industries.

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ImmuCell Corporation

Administrative Expenses

During the three-month period ended September 30, 2012, administrative expenses increased by 7%, or $14,000 to $231,000 as compared to the same period in 2011. During the nine-month period ended September 30, 2012, administrative expenses increased by 8%, or $54,000, to $701,000 as compared to the same period in 2011. While we implement efficiencies where possible, we continue to incur costs associated with complying with the Sarbanes-Oxley Act of 2002 and other costs associated with being a publicly-held company. At this stage in our development, we have limited our investment in investor relations spending. We provide a full disclosure of the status of our business and financial condition in three quarterly reports and one annual report each year, as well as Current Reports on Form 8-K when desired or deemed appropriate by management. Additional information about us is available in our annual Proxy Statement. All of these reports are filed with the SEC and are available on-line and upon request to the Company. At this time, our financial and time resources are committed principally to managing our commercial business and developing Mast Out“. Our Board of Directors is very involved with and supportive of this resource allocation. While this strategy of providing cost-effective investor relations through our SEC reporting is subject to change, we believe that this focus currently is in the best long-term interest of all stockholders.

Sales and Marketing Expenses

During the three-month period ended September 30, 2012, sales and marketing expenses increased by 28%, or $55,000, to $253,000 in comparison to the same period in 2011, aggregating 23% and 20% of product sales during the three-month periods ended September 30, 2012 and 2011, respectively. During the nine-month period ended September 30, 2012, sales and marketing expenses increased by 8%, or $53,000, to $687,000 in comparison to the same period in 2011, aggregating 17% of product sales during both the nine-month periods ended September 30, 2012 and 2011. This level of investment in 2012 and 2011 was expected and planned given our strategic decision to invest in additional sales and marketing efforts. This investment may have driven, at least in part, our recent increase in product sales. Our current budgetary objective is to maintain the ratio of product selling expenses to product sales below 20% for the full year 2012.

Income (Loss) Before Income Taxes and Net Income (Loss)

Our loss before income taxes was ($94,000) during the three-month period ended September 30, 2012 in comparison to a loss before income taxes of ($211,000) during the three-month period ended September 30, 2011. Our income tax benefit was (33%) and (39%) of our loss before income taxes during the three-month periods ended September 30, 2012 and 2011, respectively. Our net loss for the three-month period ended September 30, 2012 was ($64,000), or ($0.02) per share, in comparison to a net loss of ($128,000), or ($0.04) per share, during the three-month period ended September 30, 2011. Our income before income taxes was $203,000 during the nine-month period ended September 30, 2012 in contrast to a loss before income taxes of ($699,000) during the nine-month period ended September 30, 2011. Our income tax expense (benefit) was 48% and (41%) of our income (loss) before income taxes during the nine-month periods ended September 30, 2012 and 2011, respectively. Our net income for the nine-month period ended September 30, 2012 was $106,000, or $0.03 per share, in contrast to a net loss of ($409,000), or ($0.14) per share, during the nine-month period ended September 30, 2011. The improved financial performance is principally due to planned reductions in product development expenses associated with our Mast Outģinitiative, as well as increased gross margin for sales of First Defenseģ . . .

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