Rockwell Medical: Significant Growth Potential With New State-Of-The-Art Dialysis Drug

| About: Rockwell Medical, (RMTI)

Call: Buy Rockwell Medical, Inc.
Recent Price: $10.11 (9/16/2013)
Target Price: $24

Rockwell Medical, Inc. (NASDAQ: RMTI) markets kidney dialysis products. The company's lead drug currently in development is soluble ferric pyrophosphate (SFP), which serves as a replacement for intravenously delivered iron in iron deficient, anemic dialysis patients with chronic kidney disease. SFP is currently in phase III clinical trials (named CRUISE-1 and CRUISE-2).

Currently, intravenous iron is given to patients undergoing dialysis in order to replace lost iron. While effective, this treatment is costly and carries significant side effects. Patients can develop an immune response to the infused iron particles. Further, the intravenous iron can be sequestered in the liver, rather than being used to generate red blood cells to address the patient's anemia. SFP is a unique compound that acts as an iron replacement for red blood cell generation in anemic patients, but it does not carry the drawbacks of IV iron.

Rockwell's drug SFP is a more cost-effective, safer alternative to current iron replacement therapy in dialysis patients. Last week, Rockwell reported positive results for the first half of its phase III trial, CRUISE-1. Results for CRUISE-2 are expected to be released in October 2013. If SFP passes its Phase 3 trials and attains FDA approval, it would drastically increase Rockwell's earnings. SFP would address an unmet need in up to 400,000 patients per year, and this represents a $600M market in the USA and $1B market worldwide. Due to the large market potential for this drug, and in light of positive CRUISE-1 results, we believe Rockwell's stock price is undervalued with significant upside potential.

Clinical Trial Results:
The Phase II PRIME study yielded positive results, showing that SFP usage demonstrated a 35% reduction in ESA, thereby showing that SFP can be used as an ESA-sparing iron replacement. Positive top-line Phase III results (CRUISE-1) were reported on July 11, 2013. The primary (change in hemoglobin) and secondary (reticulocyte hemoglobin and serum ferritin) endpoints of the study were both met.
The results of CRUISE-1 are very positive and the likelihood of positive results for CRUISE-2 is high. CRUISE-2 is run the same way as CRUISE-2 with a different group of patients and the study is expected to finish and report results in October 2013. If CRUISE-2 results are positive, Rockwell should be able to file for FDA approval and NDA within about 6 months following the end of CRUISE-2 (1H2014).

Market sizing:

More than 30 million people in the USA are affected by chronic kidney disease. On top of that, about 110,000 people in the USA suffer from end stage renal disease. About 400K chronic kidney disease patients are anemic and therefore require iron replacement in dialysis. SFP offers a cheaper, safer alternative to IV iron, the current standard of care. The potential for SFP represents a $600M market in USA and $1B market worldwide (see table 2).
Furthermore, the U.S. market for chronic kidney disease dialysis is projected to grow by a compound annual growth rate of 4% per year through 2014 . If this trend continues, the market for SFP will be projected to increase by a similar amound.
Other revenue streams:
Current hemodialysis products: Rockwell currently manufactures hemodialysis concentrates (CitraPure and Dri-Sate).
Calcitriol: Rockwell's drug Calcitriol (generic vitamin D) has been FDA approved and just needs to have its manufacturing protocols FDA approval. This should happen in 2H2013 and commercial launch of Calcitriol should happen at the earliest in 2H2013. The current Calcitriol market in the USA is $350M .

If SFP is FDA approved, we assume that it should be available to market by 2H2014. Since SFP does not have direct competitors other than the current IV iron treatment, it should be able to capture a substantial market share. We project that SFP will hit the market by 2H2014 or 1H2015. Peak penetration of the CKD market could be achieved by the year 2020. This is assuming an increase in CKD patients of 4% per year (in line with recent trends), and assuming that patients with stage 5 of CKD (end-stage renal failure) will require dialysis.
If SFP proves to be the new standard of care, we assume that SFP can capture at least 50% of the anemia of chronic kidney disease dialysis market (Davita alone has 40% of the dialysis market) by 2020. Further, assume that Rockwell's Calcitriol can capture 15% of the market by 2020. Then, by 2020 Rockwell could generate $1.7B in total revenues, compared with the $29.8M they posted in 2012.
Rockwell's stock price should reach a terminal value of $24.12 per share. This represents an upside of $390% from the current stock price of $4.92 per share.

Factors affecting valuation:
Several factors were not included in the valuation, although they are important to consider.
Partnerships: Rockwell has an ongoing partnership with Davita Healthcare, one of the 2 major dialysis providers in the USA. This would facilitate the adoption of SFP into a large patient base and would help SFP capture a significant portion of the market for iron deficiency anemia in dialysis patients.
Clinical trial results: The second half of phase 3 clinical trial (CRUISE-2) has not been finished. There is significant risk involved at this point due to the risk of CRUISE-2 failing.
FDA approval: The valuation assumes that SFP meets endpoints for CRUISE-2 and that it gets FDA approval.
Potential as an acquisition target: If Rockwell succeeds in bringing SFP to the market, big pharma companies may be interested in acquiring Rockwell.

Rockwell Medical, Inc. has a promising new drug, soluble ferric pyrophosphate (SFP), which could serve as a cheaper, more effective alternative to current intravenous iron given to dialysis patients with iron deficiency anemia. SFP meets an unmet need for dialysis treatments, and has the potential to address a $600M market. Due to its vast potential, we give a price target of $24/share for Rockwell Medical, which represents over 390% upside from the current share price of $4.92.

Note: This is a reduced version of a full report. Most of this article was written when the stock was trading at a share price of $4.92, on July 22, 2013.

Disclosure: I am long RMTI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.