• Immucell is an almost completely overlooked biotech stock; this is an unique research report, that includes an interview with the CEO.
• Immucell offers next gen treatments in animal biotech, a market Wall Street is also completely overlooking.  
• I also expect the FDA, based on Immucell’s excellent fundamentals and trackrecord, to give a final approval for their lead drug called Mast Out, which could make the share price go parabolic.
• As a consequence, shares are trading far below fair value. I expect a quick double.
• Continuous insider buying and no selling whatsoever spurred my enthusiasm.

An often very profitable investment strategy is spotting companies just before they are about to capture a significant market share in a large, unknown, underserved and perhaps totally new market.  Think land grab availability here. What also helps is that the investment community hasn’t discovered the stock yet. If you then determine that the flipside of the trade, downside risk, is limited thanks to fundamentals that matter like profitability, continuing quarter-to-quarter revenue growth and a stock priced far below fair value, you may have discovered a phenomenal buying opportunity. 

I believe I have spotted such an opportunity in Immucell (ICCC); a NASDAQ listed biotech stock that somehow never has sprung up on investor’s radar screens. While many biotech companies focus on human beings, Immucell has developed technologies that prevent and treat costly cattle diseases; an egregiously underserved market. While I think this company is an easy double just based on its current sales growth and financials, a very compelling element in this story is that Wall Street doesn’t know yet that Immucell has a probable chance of becoming the sole company that may commercialize a paradigm shifting treatment against Mastitis, today’s most significant cause of economic loss to the dairy industry. Wall Street also doesn’t know that the FDA already has approved the effectiveness and safeness, so there’s no doubt this drug works. All that’s left is the completion and submission of the manufacturing technical section, and if final market approval is granted, and the odds are it will, this stock could go parabolic.

The investment community doesn’t know this company even exists.

I could not find any research on this stock. There is no activity on the Yahoo message boards, no comments that matter on Investorshub, Twitter and Stocktwits, and no articles on this website or similar websites. Isn’t this remarkable for a Nasdaq stock? Either way, the result of the total lack of coverage: the share price trading in deeply undervalued territory.

What does Immucell do?

Immucell operates at the forefront of animal biotechnology, by having developed and selling innovative treatments that improve animal health and productivity in the dairy and beef industries. They sell an USDA approved product for calf scours called ‘First Defense’. The annual growth in sales and market share prove that the market continues to accept the superiority of this product. This is a profitable segment.

Immucell has also developed a technology called ‘Mast Out’ that addresses mastitis, today’s most significant cause of economic loss to the dairy industry. As of now, the company is in the endgame in the process of acquiring market approval by the FDA. The potential of Mast Out is huge, because this treatment is unique and vastly superior over today’s antibiotic treatments.  

First Defense: an unique and approved solution for calf scours

First Defense is Immucell’s approved solution for calf scours, one of the most common and costly diseases in calves, resulting from lack of sufficient protection from colostrum. The first 12 hours of a calf’s life are critical for antibody absorption. ImmuCell continues to be on the forefront of scours prevention technology by manufacturing and selling First Defense, the most popular scours preventive administered to calves. First Defense dissolves readily upon reaching the calf’s stomach, providing protective levels of antibodies to potential sites of intestinal infection.

Here’s the interesting thing: First Defense is the only product on the market that is proven to aid in the prevention of calf scours caused by K99+ E. coli and coronavirus, two major causes of scours. Immucell's financial statements show the sales growth of this product is nothing but impressive, as the market continues to adopt First Defense as a solution proven by the increase of the market share (approaching 30%). By some estimates the total cost to society in North America of calf scours sum up to $770 million, so there’s clearly plenty of upside for this product. This is for North America only, but everybody knows that calf scours are a global problem.

Another interesting observation is that First Defense could be used for related diseases.

Therefore, management has initiated new studies to obtain market approval for applying First Defense to other purposes like bovine rotavirus.

The enrollment of calves should be completed by now, making USDA (United States Department of Agriculture) approval possible in 2015, if positive results are obtained. I have no doubt they will, because First Defense has proven to be so effective. Obviously, new approvals would cause a good boost in revenue.

Mastitis: an underserved problem in today’s diary industry

Mastitis in the lactating dairy cow is considered the costliest disease to animal agriculture in the US and major dairy producing regions of the world. Annual losses are presently estimated to be upwards of $2 billion in the US alone, and more than $2 billion worldwide. These losses are comprised of losses in milk production, discarded milk, costs of replacement animals, labor, costs of drug, treatment, etc. Mastitis refers to an inflammation of the udder, most commonly caused by a bacterial infection of the gland itself. This disease manifests itself in one of two forms, ‘clinical’ or ‘subclinical’ mastitis. Clinical mastitis has overt symptoms; the udder warm or hard, milk visibly abnormal, with clots and/or flakes. This form of mastitis usually requires intervention since the abnormal milk cannot be sold and the animal could have complications if left untreated. This is the major mastitis market for antibiotic treatments, which is at least a $40 million market in the US.

Subclinical mastitis however is considered the ‘silent mastitis’ or the ‘silent thief’ stealing profits by reducing productivity, leading to spread of infection and increased physical and reproductive problems in the cow; its prevalence is 15-40 times higher than clinical mastitis. The problem is that it’s very hard to detect let alone to treat it. If you are able to detect subclinical mastitis, there’s the requirement to discard milk after treatment of the infected udder until the level of antibiotic residues in the milk fall to levels deemed safe for human consumption. This comes with a high economic cost. All currently approved antibiotics unfortunately have such a discard requirement, which can range from 36 to 96 hours after treatment. What the market needs is a treatment without this very costly milk discard. 

Immucell’s solution for Mastitis: Mast Out

Immucell is the only company that has developed a technology that solves Mastitis without the need for milk or meat discard. This is a true game-changing innovation. As said, this is exactly what the market wants. 

Mast Out is a Nisin based intramammary treatment of subclinical mastitis in lactating dairy cows. Pivotal studies have already showed how effective Mast Out is. Immucell has conducted 4 major double blind and  placebo controlled field and laboratory studies using product that has been manufactured using the same process that will be used commercially. This type of study is typically conducted after several smaller ‘pilot studies’ have helped delineate the disease indications that would be sought after in the pivotal study. After applying Mast Out on hundreds of cows the endpoint results were stastistically >50X more significant than what the FDA minimally requires. The FDA therefore approved the effectiveness of this treatment.

Mast Out has proven to be safe too; Target Animal Safety studies have been completed and shown Mast Out to be well tolerated and associated with no udder irritation or systemic problems. 

Immucell is nearing FDA market approval for Mast Out

The commercial introduction of Mast Out in the United States is subject to approval of the New Animal Drug Application - NADA- by the FDA. Likewise, regulatory approvals would be required for sales in key markets outside of the USA, which would involve some similar and some different requirements.  The NADA is comprised of five principal technical sections that are subject to the FDA’s phased review. By statute, each technical section submission is generally subject to a six month review cycle by the FDA. It’s quite a complicated undertaking (read page 1921 of this SEC filing), but it comes down to this: as of today, Immucell has completed the first 3 technical sections with success, and is expected to complete all by end of this year.  Approval for the NADA by the FDA is expected in 2016. Since Immucell started the Mast Out project back in 2004, it appears they are nearing the endgame& of the sought after market approval. 

Will Immucell obtain final market approval? I believe they will, here’s why:

Number 1: The progress has been excellent so far, and the FDA has been very cooperative with Immucell. 

Number 2: This is an obviously unique and better treatment for Mastitis than any other antibiotic currently available on the market. The superiority and urgency of and for this treatment should sway the FDA to approve this product.

Number 3: The test results were very impressive. The primary and secondary endpoints in both efficacy and safety were statistically extremely significant. The FDA has therefore already approved the effectiveness and safety. 

Number 4: Immucell doesn’t need to partner up with another company. They could, but they don’t have to. Immucell made all the investments in R&D and facilities themselves, so they’re sitting in quite an independent and comfortable position. 

Immucell is growing rapidly

Immucell has been growing in 15 out of the last 16 quarters (!). That’s amazing. The latest sequential quarter-to quarter growth was 43%, and there’s no reason to assume this growth won’t continue.  

The CEO commented as follows:

“...The continued strong growth in product sales was due to the success of a number of management initiatives as well as improved market conditions. We continue to invest in our expanding sales and marketing team with the hiring of two additional sales representatives during the third quarter to increase our presence on farm and with distributors. An improved milkfeed ratio and a strong price for newborn calves also contributed to our significant sales growth..."

It’s good to know that the market conditions will remain favourable, as this article outlines. And as the CEO states, Immucell has expanded its sales force, so I expect revenue to (continue to) increase significantly. And if the FDA approves Mast Out in 2016, sales will instantly double in the first year of commercialisation, and is project to grow 50% annually thereafter.

Immucell’s financials

Immucell has a solid balance sheet:

The ratio of current assets/current liabilities is 7.5, which is very good. There’s no goodwill on the balance sheet, that’s good too. Long term debt is only 793k, which is being reduced every quarter, so no red flag here. In short, the total assets far outweigh total liabilities.

The income statement shows Immucell is profitable:

Interestingly, the reported profit would have been much higher if management did not elect to make a one time investment of $1 million in connection with the installation of the pharmaceutical-grade Nisin production facility for the development of Mast Out. Remember, this is an investment in R&D, that is bound to richly pay off in the longer term. 

Overall, Immucell is financially very healthy, especially for a biotech company.

Interview with Michael Brigham, CEO of Immucell

In order to gain more insight, I contacted the company and managed to interview the CEO. Following are the excerpts:

Question 1: In layman's terms, could you explain what ImmuCell is all about? 

M. Brigham: Our purpose is to create scientifically proven and practical products that result in a measurable economic impact on animal health and productivity in the beef and dairy industry. Our commercial business, which is USDA approved, is focused on the newborn calf that suffer from calf scours. Our development business focuses on the mother cow, by bringing a novel treatment to market that combats a disease called Mastitis, today’s biggest economic loss to the dairy industry. This treatment is subject to FDA approval.

Question 2: Could you give a brief technical explanation? 

M. Brigham: Our product for the newborn calf is First Defense. This is purified milk proteines; antibodies purified from milk. We have a vaccine and processing technology that purifies these antibodies.  Our technology separates out water, fats and things other than antibodies so that we can get a very concentrated dose of antibodies with specific disease targets against EColi and Coronovirus, all in handy capsules. This is our USDA claim. On the development side, we are working on a new product called Mast Out for more than 10 years now and spent a lot of money on it. But this is how things go with the FDA. This product is based on a peptine called Nisin. Its a formentation based process, we know how to make it, grow it and put it in a tube like any other serin. The drugs is then infused in the teeth opening. ​

Question 3: To what degree is the technology validated?  

M. Brigham: In order to obtain final approval by the FDA for Mast Out, there are 5 technical sections (letters) we have to go through and complete. We have 3 letters so far. We expect to finalize the remaining 2 letters, regarding laboratory processes and manufacturing, later this year.

As for First Defense, this product is 100% validated. It’s USDA approved and has been validated by the market for at least 24 years, proven by the annual growth in market acceptance.

Question 4: How is ImmuCell's technology any better or different than what's on the market now?

M. Brigham: First of all our treatment is very safe. Secondly, our competitive advantage is that we got the FDA’s approval on zero milk discard. This means you can treat your cow and still sell the milk. Traditional antibiotic treatments always result in an unfortunate milk discard. There is no other company out there that can claim zero milk discard like we can. Same with meat withhold. You can’t bring your cow to slaughter if you apply traditional antibiotic treatments. But with Mast Out, you can. 

Question 5: How is your technology protected?

M. Brigham: The protection doesn’t stem from patents per se, but really from the ultra-high barrier for entry. It takes a long time, lots of resources and the know-how to get where we are right now. We do have an IP package, but you need approval by the USDA and FDA anyway to able to commercialize. Interestingly, when we get the green light for Mast Out, we will automatically have a 5 year exclusivity, meaning that the FDA won’t approve any other Nisin-based treatment. This works like a patent, if you will. Plus our Nisin is proprietary and high-yielding, which is of much higher quality than the imported stuff from China other companies may depend on. 

Question 6: Does ImmuCell have any partnership with an other company or institution? 

M. Brigham: No. We do have distribution partners for First Defense, but for Mast Out, we are doing it all by ourselves. But we are not ruling out any partnership. If the timing and terms are right, this could be an idea worth investigating.

Question 7: What are the odds FDA approves Mast Out? 

M. Brigham: What I like about our path to approval is that it’s unlike any human biotech submission. There are some serious de-risking factors at play here. The odds actually increase the farther we are in the timeline. The riskiest parts have already been completed successfully. Remember that the FDA already approved to effectiveness of our drug. The least risky part of the entire process is the final part - the manufacturing technical section - which we just have begun investing in. You should bear in mind that we already have done some serious process optimization regarding manufacturing for a long time with a previous product of ours called Wipe Out. In other words, we are highly experienced and know what to do. So that significantly de-risks the submission in my view.

Question 8: When will the FDA make a decision? 

M. Brigham: We plan to do a final submission later this year. But we do factor in that we have to do 2nd final submission eventually, because the FDA could return the first submission with all kinds of questions. This is normal and to be expected. It would be a positive of course if they won’t, but we rather stay realistic and conservative. In the end, our rough timeline expects a final decision in 2016.  

Question 9: How does an approval translate to revenue potential? 

M. Brigham: First Defense is doing great, 15 quarters of growth out of last 16 quarters, and an approval will top that; Mast Out is bigger than First Defense. Our estimates indicate up to a $30 million market penetration.

Question 10: What about targeting other parts of the world besides North America? 

M. Brigham: For sure we would like to expand to other markets. With the right partner, anything is possible. 

Question 11: Compared to many biotech stocks, ImmuCell has a miniscule valuation. What are your thoughts this? 

M. Brigham: I have always seen Immucell as a very undervalued company. I think Mast Out is not understood by the market. It is seen as a liability rather as an asset. We have been investing a lot in this product, which has obscured profitability. Well we are profitable now, and the investments made in Mast Out should yield a high return. Also, there are only 3 million shares outstanding. With such a low float and low valuation, things can change quickly.

Question 12: How large is ImmuCell's addressable market? 

M. Brigham: With First Defense we conquered approximately 25% of the market in newborn calves. This market share is growing, so there’s certainly an upside of millions more. More broadly, there’s also upside in related markets. As for Mast Out, we estimate around $60 to $75 million. This numbers are for North America only.

Question 13: What's your current cash and debt position? 

M. Brigham: Per September 30th, $4.6 million in cash and $954k in debt (mortgage). 

Question 14: What's your cash burn? 

M. Brigham: First Defense generates a lot of cash, which we elect to use for developing Mast Out. So on one hand we are cash flow positive, but on the other hand we have expenses on the R&D side. But the good news is that those are non-recurring; once the investment has been made, it’s done. 

Question 15: When’s the next earnings call due? 

M. Brigham: Feb 11th, end of market day.

Question 16: Could you comment on insider ownership? 

M. Brigham: Only buying, no selling. About 30% is held by the board. 

Question 17: Anything else you want investors to know about?

M. Brigham: Investors need to know that Mast Out is the paradigm shift in the company and the industry. And we still have First Defense, a very successfull product, that still captures market share, and is a true cash-generator. 

-- end of interview --

Interview summary

• Immucell is an unique and overlooked company operating in an unique and overlooked part of the broader biotech industry; cattle diseases.
• Immucell is actually a very profitable company that elects to use it’s excess cash to develop Mast Out; a potential paradigm shift in the beef and dairy industry. There is no other company that can claim such a superior treatment.
• The upside is very big, certainly if you consider the fact that cattle diseases are a global problem.
• The FDA already approved the safety and effectiveness of Mast Out. This is a huge deal. All that’s remaining now in the path to final approval is the manufacturing technical section. It’s very hard imagining the FDA not giving final approval.
• Immucell will have 5 years exclusivity once they’re granted market approval.
• Insiders continue to accumulate shares in the open market, and no insider has sold a single share.
• First Defense generates a lot of cash, and continues to capture market share. This significantly de-risks an investment in Immucell.
• Immucell is currently very undervalued and misunderstood, providing a great buying opportunity.

Immucell’s risk vs. reward profile is phenomenal 

We can value a biotech company based on a price/sales or EV/Ebitda multiple. 

What’s a fair p/s multiple? The average biotech or pharmaceutical company is valued between 4 and 10, see this link.  

If we look at EV/Ebitda we can see that the average valuation, based on 349 stocks, is 23, see this link. 

The current price/sales valuation of Immucell is 2.5 and the EV/Ebitda is 18. Both are far below what’s normal. That’s weird, because Immucell makes a profit, grows revenue quarter-by-quarter, has a solid balance sheet and a clean share structure. These fundamentals should actually warrant a premium in my opinion. 

We can also look how other comparable companies are valued at. Well, here’s a bit of a problem; it’s very hard to find other animal biotech pure plays.I only know of Zoetis (ZTS). This company is valued at $22 billion, and has a p/s multiple of 4.7, double that of Immucell. I came across an interesting article that mentioned:

 “..If the Zoetis pure play is able to capitalize on the growing megatrends in animal health, we could very well see a slew of big pharma companies making plans to create their own pureplay animal health care companies. And with the overall stock market's recent love of spinoffs, it seems like it really is only a matter of time...”.

This means Immucell is operating at the forefront of animal health, a soon to be megatrend. 

Furthermore, I believe Wall Street overlooks the odds for a FDA approval for both Mast Out in 2016 and USDA approval for broadening First Defense later this year which I am not overlooking. If approvals are granted, revenue will more than double during the first year of commercialisation and will then grow +50% annually. I would not be surprised if other countries follow suit soon. After all, cattle diseases are a global problem. So imagine the upside here.

So I argue that the fair value of Immucell stock is $12 at least, which is a double from current share price.

Longer term, the share price could multiply if any of the catalysts materialize. 

In other words, the 50% discount to fair valuation and solid financials make a case for very limited downside risk, while the continuing growth and probable land grab opportunity make a case for multi-bagger gains. 

(By the way, it’s very hard to find a stock that has such a compelling risk vs. reward profile. If you happen to know one, please let me know, and I might do an article on it.)

Immucell has the spikeability potential

Here’s why Immucell stock could spike easily:

Number 1: clean share structure

Immucell has a very clean share structure that contains no dilutive derivatives that could cap the share price like warrants or any other toxic instruments. 

Number 2: tiny float

There are only 2.17 million freely outstanding shares available. This is very low, and if demand for Immucell shares surges, the stock price could go up very easily. This also works the other way around, which is a good explanation why this company is currently so undervalued.

Number 3: very low market cap

Immucell’s market cap is only 18 million, which is way too low. The moment Wall Street wakes up, the stock price could reset to a fair valuation. I’ve seen this so many times before, stocks with market caps as low as $18 million to double quickly. That’s the appeal of buying shares of overlooked and deeply undervalued small cap companies. 

What are the near-term catalysts?

The most immediate catalyst is awareness on Wall Street. Once investors realize how undervalued this stock is, the share price could climb quickly.

Secondly, the Q4 earnings, and 2014 annual statements, on February 11th will show another improvement in revenue and profits. I expect the share price to react positively on a blowout quarter.

Thirdly, news regarding the Mast Out project, or broadening First Defense for other purposes could be made announced any day by now. I expect the share price to move higher, or even go parabolic, upon any press release.

Insiders keep accumulating shares

Only buying, no selling. 

Risks of this trade

I just don’t see much downside risk given the excellent management execution, fundamentals and large discount to fair valuation. Growth could stall, but that would only limit the upside. The FDA not granting approval would prevent this stock from becoming a multi-bagger. 

Another thing is competition bringing a better product on the market that could hurt existing shareholders, but this is a very common risk. But I can’t see this risk materializing in the short-term given the high entry barrier (money and time) to develop a top-notch treatment in animal biotechnology. 

A trading risk is the low trading volume. So watch the spread, but if Wall Street wakes up to this story, I expect volume to increase, and the trading spread to narrow.

Conclusion

This biotech company:

• Is profitable
• Is completely overlooked
• Is deeply undervalued
• Has been growing revenue in 15 out of the last 16 quarters (!)
• Has a very high probability of final FDA approval for their treatment against Mastitis, which would allow them to treat a $2 billion cattle disease that no other company is able to treat
• Has other catalysts this year like an USDA approval for broadening First Defense to other purposes
• Has $5 million positive working capital
• Has a clean and tight share structure (no warrants, tiny float)
• Insiders keep adding shares

Yet today’s market cap is just $18 million? That’s way too low. I think this stock is an easy double in the short-term, and longer term, it could turn out to be multi-bagger. Given the limited downside risk as far as I can see, Immucell appears to be a phenomenal risk vs. reward buying opportunity.