Good day everyone and welcome to the Rockwell Medical Technologies, Inc. third quarter 2008 conference call. This call is being recorded. At this time, I would like to turn the conference over to Ms. Jessica Lloyd. Please go ahead ma’am.
Thank you and welcome everyone to our third quarter 2008 conference call. We appreciate your continued interest in our company. I’m Jessica Lloyd from the Trout Group; and with me today is Rob Chioini, Chairman and CEO, and Tom Klema, Chief Financial Officer of Rockwell.
Before we get started, I’d like to remind everyone that this conference call may contain forward-looking statements. All forward-looking statements involve risk and uncertainty, including without limitation the risks detailed in the company’s filings and reports with the Securities and Exchange Commission. Such statements are only predictions and actual results may differ materially than those projected.
I will now turn the call over to Mr. Robert Chioini, Chairman and CEO of Rockwell.
Thank you, Jessica. Good afternoon. Thank you for joining us today. I’m proud to report another quarter demonstrating strong sales growth for Rockwell. Sales were $13.5 million for the quarter, a 22% increase compared to the same period in 2007. I will address Rockwell’s progress in developing our lead drug candidate SFP and then I’ll pass the call on to Tom Klema, our CFO, to explain this past quarter’s financial analysis.
I do want to note that we just returned from the American Society of Nephrology Conference, which took place in Philadelphia last week, and we were pleased to experience a high level of enthusiasm and interest in SFP amongst our clinical investigators as well as nephrologists both in the US and abroad. SFP represents an innovative opportunity to physicians to effectively manage iron therapy for patients suffering from end-stage renal disease, which is a population of approximately 370,000 in the US and 1.2 million worldwide.
We are making progress in the two ongoing SFP clinical studies, the NIH funded study and our FDA Phase IIb study. The NIH study is a 9-month, 30 patients, multi-site study comparing SFP and IV iron. It was examined in maintenance of hemoglobin, iron parameters, need for IV iron, and oxidative stress markers in patients receiving SFP via dialysis. We remain on schedule with patient enrollment and estimate data results in late 2009.
Our FDA Phase IIb dose-ranging study is a 6-month, 25 to 30 sites study with 100 to 120 patients. The primary objectives are to evaluate both safety and efficacy of SFP in varying dose levels and to determine the optimal concentration that will maintain iron balance within the target hemoglobin range in patients undergoing hemodialysis.
As in many clinical studies, enrollment has presented some challenges for us, and as a result we have taken a number of positive steps during the quarter that will enable us to complete enrollment as fast as possible. We have added a dedicated enrollment specialist to work directly with the study sites and to facilitate the CROs interaction with those sites.
We have increased the number of trial sites to more than double the original number. We have amended patient inclusion and exclusion criteria to optimize enrollment, and we have developed a pre-screening protocol to effectively choose those patients best suited to pass screening criteria at each site. These steps have been essential in accelerating our patient enrollment throughout the third quarter and we have started to see positive results.
Our goal is to complete enrollment for this study by the end of the year. However, we do note that the holiday season is coming quickly and that may affect our target date. Given these assumptions, however, we anticipate seeing results from the Phase IIb study in mid 2009.
The independent Data Safety Monitoring Board recently provided positive oversight for the SFP Phase IIb study. The DSMB reviewed the cumulative data from the study and concluded that there were no safety concerns. As a result, the DSMB recommended that we continue to study as planned with no modifications. This encouraging and expected feedback strengthens our confidence in SFP in its safety profile.
It’s important to note there had been more than 1,500 doses of SFP administered since the Phase IIa study and not one adverse reaction has been reported. This is an exceptional safety profile. The successful completion of our SFP development program remains our top priority and we will continue to take actions to achieve FDA market approval. With that in mind, we have made significant headway in our recruitment search for a Chief Medical Officer. We have identified an ideal candidate and we hope to have that individual secured very shortly.
As we progress with our SFP clinical development, we’re evaluating the other applications and opportunities that SFP presents. We plan to expand SFP and those other indications in markets. Those markets include prescription oral iron, iron delivered in TPN solution, iron delivered in PD solution, and iron delivered in the oncology setting. A few of these new markets look to be even greater in size than SFP’s $400 million domestic and $800 million global market potential.
To explore these new opportunities, we are committed to strengthening both our renal and scientific development team. We will continue to look to strengthen the Scientific Advisory Board but then additionally plan on creating a steering committee comprised of key opinion leaders. And aside from the addition of a Chief Medical Officer, we plan to hire a Senior VP of Science and Development. These resources will enable the company to carry SFP for commercialization and to develop proprietary SFP-related extensions, potential market penetrations, and a new renal drug therapy evaluation.
In parallel with our SFP clinical advances, we will continue to build and develop our concentrate business to leverage our existing distribution channel for future SFP market penetration.
As we mentioned last quarter, we have continued to significantly increase our concentrate prices to end users to offset higher material cost due to inflationary raw components and oil prices. These price increases along with the current reduction in diesel fuel we are now experiencing should have a favorable impact on our margins in the fourth quarter.
Overall, we are pleased with our SFP clinical development progress and the growth of our concentrate business over the past quarter. We currently have $7.5 million in cash and that should be more than enough to complete our Phase IIb study, and we will continue to take necessary actions to remain on track with completing enrollment in our Phase IIb and its ongoing clinical development.
Moreover, we have made significant investments to expand upon our core competencies. With a solid base business, the development of an innovative drug showing to be superior over re the current ESRD standard of care and the strengthened foundation of clinical and scientific experts, Rockwell is well positioned to successfully advance SFP and move further into the specialty pharma market, exploiting innovative technologies.
With that, I’ll turn the call over to Tom to review our third quarter financial results.
Thank you, Rob. And I will now provide a financial review of the third quarter along with a summary of our financial position.
As Rob mentioned, we experienced solid sales growth in the third quarter with sales up 22.2% over the last year’s third quarter. Sequentially, sales increased 11.1% in the third quarter compared to the second. Our net loss was $2.5 million, of which R&D was about $1 million and $750,000 was for legal settlement. There were also non-cash charges for stock options and warrants of about a third of a million, depreciation was about a $0.25 million for the quarter.
The core business after adjusting for these non-cash items lost about $150,000. The primary reason for the lower gross profit and loss in the core business operations was due to distribution cost rising dramatically in the third quarter. Much of the short-term increase in distribution and transportation cost was due to record diesel fuel cost which peaked in the third quarter. However, the recent dramatic drop in diesel fuel prices should positively impact our fourth quarter gross profit margins compared to the third quarter. We expect to see an improvement in cash flow this quarter.
Sales in the third quarter of 2008 were up $2.5 million and were 22.2% higher than last year’s third quarter. Sales of our dialysis concentrate product lines which represented over 95% of our sales in the third quarter increased approximately 24% compared to last year. Sequential revenue increased 11.1% over the second quarter.
Sales increased $1.35 million from the second quarter and our international sales were up $1 million, with 60% of that servicing key distributors in Latin America. Sales in the first nine months of 2008 were $38.1 million for sales growth of $7 million or a 22.6% increase for the first nine months. Domestic sales were up 16.7%, about $5 million and international sales increased by 147% to $3.5 million.
Our gross profit in the third quarter of 2008 was $780,000, which was lower than last year’s third quarter despite higher sales. Gross profit margins decreased to 5.8% compared to 10.1% in the third quarter of 2007. The primary reason for the decrease in gross profit was due to the tremendous increase in prices for key commodities, particularly diesel fuel that increased dramatically in the third quarter.
Of the absolute decrease in gross profit of $341,000, diesel fuel alone increased by more than $380,000. The average cost of diesel fuel has risen by over 51% since the third quarter of 2007. We expect to see our overall distribution and operating costs decreasing by $200,000 to $300,000 in the fourth quarter from the third quarter level.
Our gross profit for the first three quarters of 2008 increased by $573,000 or 26.6%, while margins improved modestly to 7.2% from 6.9%. Improvement in gross profit was due to a combination of higher prices, increased volume of products sold in 2008, and the positive impact of $0.5 million in facility relocation costs incurred in the first quarter of 2007.
Our price increases have only partially offset the key cost increases, and our key cost driver is material and fuel. We expect to improve margins by continuing to raise prices and we expect to encourage the migration of our product mix to more cost-effective powder products from liquid products, which are much more expensive to deliver. We expect to see improving margins in the next two quarters ahead.
Our selling, general and administrative expense increased by $1.5 million compared to the third quarter last year. Half of that increase was due to the legal settlement I mentioned earlier. Other operating costs increased by $750,000 as well compared to the third quarter last year, and that included non-cash charges for employee and director stock options and warrants, which aggregated about one-third of a million in the third quarter.
Other increases and operating expenses included increased personnel costs of approximately $300,000. Higher costs were also incurred for computer operations expenses, legal services and intellectual property development. SG&A costs increased by $2.9 million in the first nine months of 2008 compared to last year, and that included non-cash expenses for employee and director stock options and warrants, which aggregated $1.1 million.
The legal settlement I mentioned earlier represented $750,000 of the increase, while increased personnel costs were $800,000, and that was in support of our growth which in retrospect, our third quarter sales were 80% higher than they were two years ago in the third quarter of 2006. We also incurred higher costs to support information technology improvements aggregating an increase of $100,000, and we also incurred higher costs for legal services and intellectual property maintenance and development.
Our R&D expenses for the quarter were $1 million compared to $735,000 last year. In the first nine months of 2008, total R&D spending was about $250,000 higher than the first three quarters last year with total R&D spending just over $2.5 million compared to $2.3 million last year. Spending in 2008 was primarily for human clinical testing and other development expenses. For SFP, we anticipate total SFP-related development and regulatory approval spending to be approximately $4 million to $5 million in the year ahead.
Our net loss for the quarter was $2.5 million and our year-to-date loss was $4.8 million, which is $2.3 million more than the first three quarters of last year. In comparison with last year, our year-to-date loss was higher due to non-cash charges for stock options and warrants, $1.1 million; about $250,000 more in R&D; legal settlement, $750,000; and additional personnel and infrastructure investments we’ve made to support our dramatic growth over the last two years. Our Q3 net loss per share was $0.18, which is $0.14 higher than last year’s third quarter loss of $0.04. And year-to-date, our loss per share was $0.35, compared to $0.22 last year.
As of September 30, we had $7.5 million in cash. In the year ahead, we expect SFP related spending to be in the $4 million to $5 million range. We project the core business to generate positive cash flow again going forward. And overall, we believe our current and prospective sources of liquidity and capital resources will be adequate to fund our cash requirements for the year ahead.
Thank you for your interest. I’ll now turn the call over to our operator for some Q&A.
(Operator instructions) We’ll have our first question from Todd Lewis [ph], South Street Capital [ph].
Todd Lewis – South Street Capital
Hey, guys. Good quarter. Thanks for taking my call. Just a quick question for you. You mentioned the potential for SFP extensions and opportunities in other markets. Are there any that you would carry higher priority in evaluating over others?
Really, we see significant opportunity in each application I mentioned. We have already received results from a study completed at Harvard, demonstrating that SFP is the only iron soluble in TPN solution, and we are about to start a clinical study demonstrating SFP’s effectiveness in PD solution, but probably the market will move on the quickest in that group in the oral iron prescription market. We’ve done a fair amount of diligence in that area and its potential is very large. It’s a very large market in which our USP grade formulation of SFP appears to have a solid opportunity in. The oncology market is also very attractive.
(Operator instructions) We’ll go next to Laura Jennings [ph] with Strategic Investments.
Laura Jennings – Strategic Investments
Hello. Thanks for taking my call. I just have a quick question. You said in the past that SFP has patents issued in the US, Europe and Japan, I believe. Do you plan on taking SFP into Europe and Japan yourself or will you look for a partner?
We have made the decision to work with a pharma partner in those countries and we’ve already begun preliminary discussions with a few potential partners. A partnership would allow us to gain an experienced partner in a territory that they’re established in with an established clinical and marketing team, so that’s really why we’re going to go that route overseas or abroad.
Laura Jennings – Strategic Investments
We’ll go next to Tom Andrea [ph] with TD Ameritrade.
Tom Andrea – TD Ameritrade
Hello, guys. Nice quarter. I have a question. There is currently a firm out there that is looking for marketing approval on another iron drug called Ferumoxytol. I’ve got a couple of parts to this question. Are they addressing the same market in dialysis as we have? And also, should they not gain marketing approval here near-term, does that have any effect at all on Rockwell?
Tom, the Ferumoxytol product is based on the company’s own public disclosing is primarily going to be used or targeted to Stage III and Stage IV CKD, Chronic Kidney Disease. They will, I believe – if they get approval, I believe they’ll attempt to do some business in Stage V. As far as their effect on us, whether they get approval or not, we do not think it will have an impact on SFP one way or another. It’s an IV-iron product. It has – it’s more similar to the current IV-irons on the market than it is to our product. And again, SFP is a totally different technology that will maintain iron balance as opposed to replete iron balance, which is what the IV-iron products do.
Tom Andrea – TD Ameritrade
Okay. Basically, I mean, what is the difference or the method of action on the SFP versus Venofer or the different irons that are being used now? What advantages do we feel that will make the nephrologists take a look at Rockwell’s product and say, this is definitely a far superior product?
Well, I mean, I think we’re seeing that being demonstrated currently in our clinicals but the main difference – there’s a handful of differences. The main difference is the way the product is delivered through the dialysate while the patient is sitting in the chair, getting their regular treatment. They get treatment three times a week. And currently, today, when they’re sitting in that chair, every couple of weeks, the doc will – or an anemia manager, a nurse will give them a bolus of IV-iron, and they have to take their time and do it over 15 minutes with a needle and a syringe.
With SFP, the product is delivered through the dialysate. It’s replacing the blood that’s being lost during that treatment, which is about 5 mg to 7 mg of blood and therefore, maintaining the balance. It’s like dietary iron. It’s constantly maintaining their iron balance. The other difference is it does not trail up to the liver. It doesn’t store in the liver. It’s not toxic to the liver. It goes direct to the bloodstream. It also should have a significant advantage in the bundling environment that will go into effect in 2011 for CMS reimbursement.
Tom Andrea – TD Ameritrade
Okay. Just a question for Tom Klema. Tom, we’ve stated here again with these narrow margins we’re looking at right now and I realize that diesel fuel and the commodity prices have had an effect. Now, going forward, when contracts renew or new contracts were writing, do we have any protection that, say, the economy covers and oil goes through the roof again, do we just have to eat that or do we have any protection or anything against it?
Well, Todd, I think they are sort of few things. One is on the material side, we’ve entered into shorter-term contracts and there we locked in our costs for the year ahead, so we’ve got some visibility. And then, we’ve added fuel surcharges in a number of cases with our customers and we also have kept the pricing contracts fairly short term, so we’re not exposed on a longer-term agreement with the customers. And on the fuel, it’s a bit of a rollercoaster. It looks like it’s headed to a favorable change this quarter. It looks like our cost is going to be down fairly significantly. As I mentioned, we think the overall operating cost will be down between $250,000 to $300,000 range, maybe a little bit more but it is a difficult environment. We haven’t seen high inflations since the 80s and we’ve been in a high inflation environment for the last – really for the last year here.
Tom Andrea – TD Ameritrade
Okay, one last question, Tom. Are we seeing people go over from the liquid concentrate? Are they moving toward the dry seat among even existing clients or are we flat in that area?
No, we’ve seen a steady migration to dry. Just in really the last quarter, we saw the dry vines go up again and the liquid drum volume go down a little bit.
Tom Andrea – TD Ameritrade
Okay. I think that pretty much covers what I have to say. Thanks guys.
And that does conclude the question-and-answer session. I’ll turn the conference back over to Mr. Chioini for any additional or closing remarks.
Thank you for listening today. Thanks for listening to our third quarter earnings call. We will keep you updated as we look forward to continuing success with the SFP development program. Thanks.
That does conclude today’s conference. You may disconnect at this time. We do appreciate your participation.
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