Rockwell Medical Technologies: Improving Margins, Banking on SFP

| About: Rockwell Medical, (RMTI)

In mid-March, Rockwell Medical Technologies (NASDAQ:RMTI) reported 4Q and FY08 results which included revenue of $13.5M (up 13.3% from year-ago quarter) and $51.6M (up 20% compared to 2007). The net losses were ($3M) and ($7.9M) for 4Q and FY08, respectively. Despite solid sales growth, RMTI has posted losses as margins have suffered due to higher raw material/fuel costs and other investments in personnel, information technology (IT), and clinical development costs for its water soluble iron replacement therapy for dialysis patients called SFP for short (Soluble Ferric Pyrophosphate).

During 4Q08, the Data Safety Monitoring Board (DSMB) recommended continuation of an ongoing Phase 2b clinical trial for SFP as no safety concerns were observed in the study. Also, RMTI added three new members to its Scientific Advisory Board and hired Dr. Richard Yocum to lead the clinical development of SFP. Finally, the one-time quality/IT system investments and reversal of rising raw material/fuel costs are expected to materially improve margins and operating cash flow for RMTI during 2009.

RMTI ended 2008 with $5.6M in cash and negligible debt of $0.2M, and the Company expects its liquidity and cash flow from operations will be adequate to fund development of SFP through the start of a Phase 3 clinical trial. Due to the increased cost associated with Phase 3 clinical trials, RMTI is open to a licensing agreement to fund SFP through its expected market launch in 2011. The Company also expects to generate $80M in sales from it core business at the time of SFP launch.

Results are expected during 1Q10 for a nine-month NIH study in 30 patients which compares SFP to IV iron replacement therapies. However, this is a non-FDA study and the data will not be considered as part of the application for marketing approval of SFP. The Company's primary focus is completing enrollment in the Phase 2b study of SFP (expected by the end of March), which is a six-month, dose-ranging study in 100-120 patients to determine the safety parameters and optimal SFP concentration to maintain normal levels of iron and hemoglobin.

The Phase 2b trial should be completed by the end of September and data should be released about 60 days later, which should occur in late November or early December. The Phase 3 clinical trial for SFP should begin some time during 4Q09-1Q10 and RMTI has guided for adequate cash flow and liquidity to reach this point without the need for raising cash.

The Company's current line-up of dialysate products are designed to be the delivery vehicle for SFP, providing the chance for RMTI to expand upon its current market share by offering a value-added, high margin iron replacement therapy option for its customers while improving the clinical outcomes for anemic dialysis patients. The Company's core business includes the following: RenalPure (Liquid Acid and Powder Bicarbonate Concentrates), Dri-Sate (Dry Acid Concentrate and Mixing System), SteriLyte (Liquid Bicarbonate Concentrate), blood tubing sets, and fistula needles.

The U.S. market for IV iron replacement therapy is estimated at $500M per year while the global market is about $850M. SFP is a unique, water soluble form of iron which bypasses the liver and results in higher absorption to maintain normal iron/hemoglobin levels and replace the iron that is lost through dialysis. SFP is distributed directly into the blood so that the iron uptake occurs naturally at the cellular level. Because SFP is designed to be administered with dialysis, it complements the Company's existing product line-up and is convenient to ESRD patients who must undergo dialysis on a regular basis.

Currently marketed IV iron replacement therapies are processed through the liver, which results in variable and delayed processing of the iron in order to deliver it in a useful form to the body. SFP is differentiated from IV iron therapies because it is delivered directly in a useable form through dialysis and can be used by the bone marrow to produce new red blood cells while maintaining a steady, normal level of hemoglobin and iron. Also, oxidative stress on the liver is avoided since SFP bypasses this route of processing and about 2,000 human doses of SFP have been administered with zero safety concerns.

RMTI supplies products and services for the kidney disease and dialysis market, which is dominated by DaVita (NYSE:DVA) and Fresenius Medical (NYSE:FMS). The Company's reach includes 37 states and foreign countries located in Latin America, Asia, and Europe. The three major dialysis markets include the U.S., E.U., and Japan, which account for about 55-60% of treatments on a global basis.

RMTI holds a market share of about 26-27% for its core business, which provides hemodialysis concentrates (dialysates) to dialysis providers and medical distributors. Dialysis is required for patients (typically three times per week) with end-stage renal disease (ESRD) to remove toxins and replace nutrients, replacing the function of the kidneys in this patient population. The ESRD patient population includes about 375,000 people in the U.S. (growing at a 4% annual rate and likely to increase with rising incidence of diabetes) and about 2 million people on a global basis (with a 6% annual growth rate).

Rockwell's major competitor is FMS, which is a vertically integrated dialysis provider that manufactures its own dialysis products and supplies in-house. Excluding FMS, Rockwell has a market share of about 40% since the Fresenius clinics are not available to outside suppliers such as RMTI. DaVita is Rockwell's largest customer and operates 1,400 dialysis clinics which serve over 100,000 patients.

AMAG Pharma (NASDAQ:AMAG) has a pending decision for FDA approval of Feraheme (ferumoxytol), which is designed to be an IV iron replacement therapy that can be administered rapidly to patients with chronic kidney disease (dialysis and non-dialysis) in the treatment of iron-deficiency anemia. Watson Pharma (WPI) markets two IV iron therapies, including Ferrlecit and IN-FeD. Swiss-based Galenica markets the global leader in IV iron therapy market share, Venofer, and is seeking FDA approval for a new product, Ferinject (aka Injectafer outside of the U.S.), along with Luitpold Pharma and FMS.

Changes in Medicare/Medicaid (CMS) reimbursement to dialysis providers will involve fully bundled payments starting in 2011 with a full implementation in 2014. These changes are expected to benefit Rockwell's efforts to market an iron-supplemented dialysate versus providers of IV iron therapies on a stand-alone basis. Full details will be released next year, but the change is expected to involve a single composite rate per treatment rather than receiving reimbursement for individual drugs. This will encourage dialysis providers to use Rockwell's all-in-one, economical solution for iron-supplemented dialysate, in addition to the safety/efficacy parameters for SFP.

RMTI operates in a steadily growing, niche market segment for dialysis concentrate solutions and related supplies with a key growth driver ahead in the form of SFP. SFP has demonstrated a low clinical risk profile due to the lack of any safety issues through 2,000 human doses and RMTI has guided for adequate liquidity and cash flow to fund operations through Phase 3 clinical trials. A licensing deal would be idea to fund the Phase 3 study and meet the goal of a market launch for SFP by 2011.

Rockwell's market cap of about $50M is just a fraction of the estimated $500M market in the U.S. alone for IV iron therapies, and the Company's core business is expected to generate $80M in annual sales by the time SFP makes it to the market in 2011.

Disclosure: no positions