Treating anemia in CKD patients requires the use of ESAs and supplemental iron. The first step is to increase the number of red blood cells in the body which is done by injecting ESAs. However, this process falters when the patient becomes iron-deficient, and so supplemental iron is provided to maintain hemoglobin levels. An additional benefit of supplemental iron is that it leads to a reduction in the needed dosing of ESAs.
IV Iron Therapy vs ESAs
There has been an ongoing debate in the dialysis industry about whether or not more IV iron therapy is preferred to a higher ESA dosing. A solution is only determinable with a long-term, large-scale, randomized trial where 1 arm is permitted IV iron, and the other isn't. Such a trial would be very costly due to the size and duration, unethical due to the restriction against IV iron use in the ESA-only arm, and produce confounding results. Regardless, what ESA or IV iron producer is going to finance this study if they aren't sure they would come out on top? What non-producer has the financial ability to execute such a grand trial?
The market cannot determine the right answer, which means that the choice between higher ESA dosing and more IV iron therapy will continue to be left to the judgment of dialysis providers. If a patient is susceptible to more risks, or in need of the additional benefits, of either ESAs or IV iron, then providers will act accordingly.
Consider this: When a provider is dealing with an issue in a patient, who hasn't taken IV iron before, what might be the more responsible solution? Introduce an entirely new drug along with its own associated risks, or simply increase the dosing of the already applied ESAs? Probably the latter, and the low use of IV iron therapy in the CKD demographic seems to support this reality.
For the most part, IV iron is used as a weapon of last resort, which is greatly hindering the market potential of current IV iron therapies. Recently, such drugs, along with ESAs, have been under-fire by the FDA due to increasing safety concerns.
The Solution for Dialysis Centers
Is there a drug that can perform the functions of supplemental iron without the safety concerns of current IV iron therapies, while still reducing ESA dosing? Yes, it's called SFP, and it has showcased superb clinical results this year.
The chemical properties of SFP make it safer than current IV iron therapies, while still retaining the functions of supplemental iron. Here is an excellent video that compares SFP with current IV iron therapies. The video goes into detail with regards to the advantages of SFP over current IV iron therapies. From recent clinical results, we know that continuous use of SFP does not lead to tissue iron overload or cause TSAT levels to exceed normal ranges. In addition, SFP has been shown to maintain or slow down the reduction in group ferritin levels, and maintain CHr levels. These endpoints have been crucial in distinguishing SFP's superiority over current IV iron therapies. The trials have confirmed SFP's ability to be continuously applied in the targeted demographic without concerning doctors with whether or not patients are being overloaded with iron. Using current IV iron therapies can lead to tissue iron overload, and to dangerous increases in TSAT and ferritin levels... They simply cannot be continuously applied.
With the results of the PRIME study, combined with the results for the primary endpoints of the CRUISE studies, SFP has proven that it will significantly reduce ESA dosages by 37.1%, while maintaining hemoglobin levels. Doing the PRIME study was quite a shrewd tactical move by management which will allow them to better negotiate with dialysis providers.
In conclusion, SFP is providing the benefits of supplemental iron without the risks that come with current IV iron therapies. SFP's convincing efficacy and safety data will encourage dialysis providers to use SFP across the board, since it's a low-risk method of consistently reducing their own operational costs.
Market potential for SFP
Rockwell Medical will be paid an approximate percentage of the savings associated with the reduction in ESA costs for dialysis centers. Since SFP can be applied continuously and consistently for any anemic CKD patient, the pricing scheme will be quite simple. Current IV iron therapies cannot operate in this stream-lined fashion due to their inconsistent application and risks associated with continuous use. As a result, using the market size of the current IV iron therapies does not provide an appropriate base for which we can estimate potential SFP sales. A better method would be to determine the percentage of expected savings dialysis providers will achieve if they use SFP.
Approximately 436k chronic kidney disease patients in the US are being treated for anemia with ESAs that cost around $8.5k/yr. This places the domestic market size of the ESA market for anemia at about $3.7B. Since SFP can reduce dosing by 37.1%, Rockwell Medical could save dialysis providers $1.37B each year in ESA costs. If we assume they share the savings 50/50 with the dialysis center, then that leaves SFP with potential domestic sales of $690M per year. Currently, Rockwell Medical has an established working relationship with DaVita (DVA) which owns a third of domestic dialysis centers. As a result of this partnership, Rockwell Medical already has access to potential sales of $227M/yr.
Earlier this year, Rockwell Medical's stock price was negatively impacted from a depleting cash supply and dwindling profits from their base products. They have since raised money with dilutive and non-dilutive financing, and, in addition, the base revenues have bounced from their lows and look to be returning to previous highs.
After the successful CRUISE-1 results, short interest more than doubled, and, given post-CRUISE-2 price action, it's likely to only keep increasing. The shorts have done their best to keep price down despite the fair value being far higher. Clearly the shorts are expecting an imminent financing, but the company is not going to do a poorly-priced financing in the near-term.
The cash balance at the end of the 13Q2 was $42M, with a net loss of $11.9M/qt. At this rate they would deplete their cash reserves before the second half of 2014. However, during the second quarter both CRUISE trials were on-going. Management has guided that R&D expenses will drop as the clinical programs wrap up during the 13Q3-Q4 period. This will extend the life expectancy of the current cash supply to well into the second half of 2014, and perhaps to 14Q4. By then Calcitriol and increasing base product profits should start reducing the quarterly net loss to the point that the cash supply shouldn't dry up before Rockwell Medical starts operating at a net profit. This doesn't mean financing won't happen, only that if it does it will not be at a meaningful discount because Rockwell Medical will be raising from a position of strength, unlike earlier this year. If the company feels that they can get a fairly priced financing in the near-future, they may be motivated towards canceling their Hercule's debt which burdens the company with interest expenses. Financing or not, shorts are not going to be saved by a repeat March 2013 financing.
Finally, institutional ownership doubled during the second quarter of 2013, which suggests smart money believes Rockwell Medical will become a profitable enterprise in the near future with the launch of SFP and Calcitriol.
- Current base revenue will peak at $60M with 20% profit margins
- Calcitriol is approved this quarter (very unlikely it isn't), leading to $25M in peak sales (<7% market capture) with 55% profit margins
- SFP revenue operating at a 90% profit margin
- Initial revenue growth for SFP is dramatic given the pre-existing network with DaVita
- Assuming initial Calcitriol sales underperform, no more than 5M additional shares will be added in second half of 2014.
- Overlap in marketing and commercialization costs between the 3 distinct revenue streams
- Drastic reduction in R&D expenses due to ended CRUISE 1 & 2 trials.
- Rockwell Medical does not expand SFP outside of DaVita's domestic dialysis market (Quite unreasonable, especially considering Keryx (KERX) is trading as if it will tap into the entire market with their phosphate binder)
- Near-term target: $11 (Calcitriol approval)
- 6 month target: $15 (NDA submission and safety trial results)
- 12 month target $20 (Initial Calcitriol sales and SFP approval)
- 24 month target: $25
The day after CRUISE-2 results, Summer Street raised their price target from $20 to $25. It seems clear to us that they did not limit their projections by assuming Rockwell Medical does not expand outside of DaVita's market. Thus, our price targets should be considered conservative.
Note: Most of this article, including this price target section, was written while the stock was still trading at $6.