Rockwell Medical's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Rockwell Medical, (RMTI)

Rockwell Medical Inc. (NASDAQ:RMTI)

Q3 2013 Earnings Conference Call

November 5, 2013 04:15 PM ET

Executives

Paul Arndt - MD, LifeSci Advisors

Rob Chioini - President and CEO

Tom Klema - VP and CFO

Ray Pratt - CMO

Analysts

Charles Haff - Craig Hallum

Annabel Samimy - Stifel

Carol Werther - Summer Street

Natasha Esman - Safira Fund

Operator

Good day ladies and gentlemen and welcome to the Rockwell Medical Tech Inc's Third Quarter Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions to be given at that time. (Operator Instructions). I'd now like to turn the conference over to your host for today, Mr. Paul Arndt, Managing Director of LifeSci Advisors.

Paul Arndt

Thank you Ben and good afternoon. And thank you for attending the Rockwell Medical third quarter financial results conference call. I am Paul Arndt, Managing Director of LifeSci Advisors. On the call this afternoon are Rob Chioini, Chairman and CEO; Tom Klema, Chief Financial Officer and Ray Pratt, Chief Medical Officer.

Before we begin, I'd like to remind everyone that various remarks about future expectations, plans and prospects constituent forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Rockwell cautions that these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated.

Among the factors that could cause actual results to differ materially include risks related to the timing for submission of the Triferic NDA and whether the FDA will accept such submissions for review following submission and ultimately approve them, whether the FDA will concur with Rockwell's interpretation of its Phase 3 study results or the conduct of the study, the Company's ability to successfully and cost effectively complete clinical trials, submit new drug applications and obtain marketing approvals for Triferic.

Top-line results are based on a preliminary analysis on then available data for both safety and efficacy and there is a risk that such findings and conclusions could change following a more comprehensive review of the data. The Company's ability to meet anticipated development timelines for Triferic due to clinical trial results, manufacturing capabilities or other factors, uncertainties related to the regulatory process and other risk factors identified from time-to-time in reports filed with the Securities and Exchange Commission.

Any forward-looking statements made on this conference call speak only as of today's date Tuesday, November 5, 2013 and the Company does not intend to update any of these forward-looking statements to reflect events or circumstances that occur after today's date. This conference call is being recorded for audio rebroadcast on Rockwell's website at www.rockwellmed.com. All participants on this call will be in listen-only. The call will then be followed by a brief Q&A session.

I'll now turn the call over to Rob Chioini, Founder, Chairman and CEO of Rockwell Medical.

Rob Chioini

Good afternoon. Thank you, Paul. Thank you everyone for joining us. Today I will briefly cover third quarter numbers and also provide a corporate update, including the highlights of the highly successful CRUISE -1 and CRUISE -2 clinical trial results that were recently released. Joining on the call today will be our Chief Financial Officer, Tom Klema, who will discuss our financial results in more detail. Our Chief Medical Officer, Dr. Ray Pratt, is also on the call and can address any clinical questions you may have.

Starting with the third quarter numbers, sales were $13 million. Domestic sales were up a healthy 5.3%. CitraPure sales continue to climb significantly. Third quarter CitraPure sales more than doubled over second quarter sales. CitraPure is our innovative dialysate concentrate. It improves patient outcomes in lowers provider cost. As a result it continues to gain new and existing customer conversion. We expect this product to continue to gain sales momentum.

Gross profit for the quarter was $1.6 million. We expect sales and profit to move higher going forward. Research and development cost was $10.6 million for the quarter, a significant reduction, compared to $16 million reported in the third quarter 2012. As our large clinical trials for Triferic come to a close, we expect to see R&D costs continue to drop. Net loss for the quarter was $13.2 million, significantly lower than the $17.8 million reported a year ago.

As we move forward, our clinical studies come to an end; we expect our net loss will continue to drop. We had $31.2 million in cash September 30th. Our cash resources are sufficient to get Triferic to commercialization.

I will now move to our clinical program. Early in the third quarter, we released positive clinical data from the pivotal CRUISE -2 study of Triferic formerly known as SFP. Triferic, as most of you know, is our novel investigational iron delivery drug for iron replacement in hemodialysis patients.

Like the CRUISE -1 pivotal study before it, the CRUISE -2 study met its primary endpoint and achieved statistical significance with a p-value of 0.011. This was an identical p-value to the CRUISE -1 result. Triferic also met key secondary endpoints, including maintenance of hemoglobin, maintenance of reticulocyte hemoglobin and an increasing serum iron pre-to-post treatment, without an increase in ferritin, again confirming the earlier CRUISE -1 results.

The CRUISE -2 safety data also confirmed the CRUISE -1 safety results. Triferic demonstrated excellent safety data. There were no differences in frequency or severity between the Triferic and placebo group with respect to AEs or serious adverse events. Overall, the adverse events reported were consistent with those that would be expected in the chronic hemodialysis population.

Importantly over the entire clinical program to-date of more than a 100,000 drug doses, we have not seen a single anaphylactic event attributed to Triferic. This is a great safety result. Our clinical team is very pleased with the highly successful safety and efficacy result that the Phase 3 clinical studies have delivered, and we feel very confident that Triferic is likely to receive FDA marketing approval upon FDA review. We expect to file our new drug application with the FDA in the next few months.

Now, I want to talk about Triferic's commercial potential. As investors who have been following Rockwell, you understand that we are ideally built to capture a large portion of the U.S. dialysis market rapidly. Upon FDA approval and commercial launch of Triferic, we have great confidence this will occur because, first, our customer base in the U.S. is highly concentrated. Nine dialysis providers control 83% of the patients in the market. Two control 71% of the market.

Think about this for a minute. We need to sell just nine customers to capture 83% of the market. And we have relationships with almost all of them now. This consolidated customer base is a great opportunity for Rockwell to capture a large percentage of the U.S. market quickly.

Secondly, the government implemented a new bundled reimbursement system for dialysis providers in 2011. This new system gave providers even greater incentive to purchase products that lower their cost of specialty drugs. Under the old reimbursement system, drugs were profit centered; now they are cost centered, so dialysis providers are very driven to purchase products that lower their cost per treatment.

This has been highlighted as we speak, as we wait to hear from final CMS ruling on the proposed reimbursement cut to the bundled payment. At Rockwell we have an existing operating infrastructure and a paradigm shifting drug in Triferic. We are ideally suited to capitalize on our highly consolidated market that is reimbursed by government bundled payment system, that places an emphasis and purchasing products that can lower cost.

Our existing operating business currently supplies about 30% of the market with Rockwell concentrates. So we already have operating infrastructure in place. We already have the relationships with the right people and we understand the sales process. We have launched new products and sold them effectively into this market for close to 20 years now. We are very experienced at launching new products and capturing market share.

Our drug Triferic has demonstrated strong clinical benefits and significant cost savings in clinical study results. The clinical results show that Triferic safely delivers iron to the bone marrow, maintains hemoglobin, does not increase iron stores and significantly reduces ESA use 35%.

Triferic lowers other current IV iron administration costs as well. So we have the operating infrastructure in place, we have a drug that can deliver clinical benefits with a much lower cost than the current standard IV iron product, we have a highly consolidated customer base who is incentivized the purchased products that lower their costs. We feel very confident that upon FDA approval, Triferic has great potential to capture a large part of the U.S. market in a very quick timeframe.

I want the highlight the upcoming ASN Conference, which will begin in Atlanta, Georgia later this week. This is a very exciting and active conference for us. Triferic will be featured in five different presentations scheduled on November 7th and 9th. These will include detailed results from the Phase III CRUISE studies and one will also highlight exciting new ESA sparing results from the PRIME study.

We will also be showcasing Triferic at ASN Innovator's Place exhibit. Innovator's Place is a forum where selected companies are able to discuss in further detail investigational products at a great potential within the Nephrology community. ASN is obviously an important event for us. We look forward to seeing those of you who will be attending.

Now turning our attention to Calcitriol. Calcitriol is our FDA-approved generic vitamin D injection. And as you know we are waiting on the FDA to complete the review our manufacturing data, which was submitted in July of this year. At this time, I don't have any new guidance to share. Ideally we will receive FDA manufacturing approval shortly.

Once we do receive FDA approval and launch Calcitriol commercially, we expect rapid uptake. As I mentioned a moment ago, the CMS bundled reimbursement system has provided great incentive for providers to purchase products that reduce their cost and Calcitriol is the lowest cost vitamin D injection compared to the two current brand of drugs.

We expect to gain sales from both our existing customer base and the remaining $350 million market in the U.S. Also our launch and marketing effort will require minimal additional SG&A expense. We expect Calcitriol will enable us to increase our sales and profit margins considerably, while strengthening our existing business and providing further leverage to our planned offering of Triferic upon FDA market approval.

Lastly, our business development efforts continue to be robust. We are evaluating partnerships and licensing opportunities in the U.S. and abroad. The main focus is Triferic however we are actively evaluating other opportunities as well.

I'll now turn the call over to Tom for his comments on the financial results.

Tom Klema

Thank you, Rob and good afternoon everyone. I'll provide you with the review of the third quarter and year-to-date results along with our capital resources.

I'll start with our financials for the quarter and our third quarter sales. Sales in the third quarter 2013 were $13.1 million, up 3.2% compared to the third quarter of 2012. Domestic sales increased 5.3%, compared to the third quarter of last year, sales increased due to growth in our CitraPure product line which increased significantly, reflective of increased market adoption.

Sales in the first nine months of 2013 were $38.4 million, up 4.3% compared to the same period last year. Domestic sales accounted for the majority of increase with sales up 4.5%. Gross profit dollars in the third quarter of 2013 were $1.6 million, same as the third quarter of 2012.

Gross profit dollars year-to-date were $4.6 million and gross profit margins for the first nine months of 2013 were at 12%. Gross profit margins were impacted by higher material, operating cost and government regulatory cost, compared to the same period last year.

And SG&A expense during the third quarter was $3.4 million compared to $3.3 million in the third quarter last year. Non-cash equity compensation was $1.9 million in the third quarter compared to $2 million in the third quarter last year. Costs were higher due to the mandated medical device tax in the third quarter. SG&A expense in the first nine months of 2013 was $10.5 million compared to $9 million in the first nine months of 2012.

We incurred a non- cash charge of $900,000 related to warrant costs, with a remainder of the increase due to the Medical Device Tax that was enacted this year. On research and development, our costs were $10.6 million in the third quarter of 2013 compared to $16.2 million in the third quarter of last year. R&D costs in the first nine months were $33.6 million compared to 36.5 million in the first nine months last year.

Spending in both years was primarily due to clinical testing and development of Triferic. We expect our R&D burn to continue to decrease as we complete clinical development work. Once our new drug application for Triferic is submitted to the FDA, we expect to see R&D costs drop off significantly

Net income for the quarter, we reported a loss of $13.2 million or $0.34 per share, compared to $17.9 million and $0.86 per share last year in the third quarter. For the nine months ending September 30th, Rockwell's loss was 40.5 million or $1.32 per share, compared to 40.3 million or $1.99 per share in the first nine months of 2012.

Non- cash charges for equity compensation and one revaluation expense were $5.9 million. Turning to our capital resources we had $31.2 million in cash at the end of the third quarter. We believe our cash resources are adequate to commercially launch Triferic. We expect our business operations to continue to improve in the year ahead. We anticipate continued drill in CitraPure sales upon FDA approval and a successful launch of Calcitriol. We anticipate a solid increase in our operating income and positive cash flows overall in 2014.

I will now turn the call back to our operator for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today comes from the line of Charles Haff of Craig Hallum. Your line is open. Please go ahead. Ensure that your line is not on mute.

Charles Haff - Craig Hallum

My first question is regarding a poster presentation for ASN that I saw talking about the hypo responder population and potential ESA savings of 75%. I realize it's only 103 patients. But can you talk a little bit about that and if you think that the data is valid enough to sway investigators or you are going to need to do more work here?

Ray Pratt

Yes this is Ray Pratt. We are going to be presenting that data in an oral session at the ASN next week. Again it's a planned sub-group analysis from the PRIME study which reflects the population of hypo-responders there and we will be happy to answer any questions after the presentation at ASN. We are still currently embargoed from releasing further information.

Charles Haff - Craig Hallum

Okay. And then can you talk about the current market potential for CitraPure as you see it today?

Rob Chioini

Well. When you look at the concentrate market, there is awesomeness [ph] for sinuous and for sinuous has a 37% market share of clinics in the U.S. So we don't service those clinics. We service a handful of them but nothing really to write home about and we don't really expect to. But for the rest of the market, we expect to get a high percentage of that market converted to CitraPure. Like I said on the call, that product is doing extremely well and my personal belief is by the end of maybe next year we may not see the old acetate based product around at all from our source for sinuous or anyone else.

Charles Haff - Craig Hallum

Okay. And then my last question is regarding the overall business trends. Obviously CitraPure you mentioned grew over 100%. You had revenues of $13.1 million, a 3% increase. So what contracted this quarter? Could you give us some additional color on that?

Tom Klema

We had some international sales that would normally show up in the fourth quarter. I think some of those might have shown up in Q3 and then we usually see a flurry of those at the end of the year.

Charles Haff - Craig Hallum

I am sorry, I don't understand. You said they usually show up in the fourth quarter and they showed up in Q3 for the international sales?

Rob Chioini

Well yes. Some of the sales that may have been pushed into Q4 might have shown up in Q3 but most of the sales we see at the end of the year coming in for the international business. In other words there will be a rush, not so much in the U.S. but more so on international space. Historically we see sales try to get in before end of the year.

Charles Haff - Craig Hallum

Okay. So there wasn't any material contraction in the Dri-Sate business or anything this quarter?

Rob Chioini

No, that business continues to grow. I didn't mention it on the call but the Dry Acid business also grew significantly.

Operator

Thank you. Our next question comes from the line of Annabel Samimy of Stifel. Your line is open. Please go ahead.

Annabel Samimy - Stifel

Yes, thanks for the color around how you think the launch might proceed. Is it possible that we might see some pilot testing of the product before you actually get full buy-in from a number of dialysis providers? I just want to talk about how you think the early months of the launch could go?

Rob Chioini

Yes, that's a good question. Here is how I kind of look at it with the CitraPure product for example. We had our largest customer evaluate that product for six months and then after the evaluation decided they like the product and since then is converting 1000 clinics to it.

Now that was a product that hadn't been used in 30 years in the industry. When I look at Triferic, it’s a product that most of the, the nine I mentioned, almost all of them are participating in the study and have been for two years. I think they're very familiar with it and how it's used in the clinic. And so I don't know if there will be a significant evaluation period. It may very well be -- my view right now is it will be much shorter, maybe more like two to three month period once they take a look at it and decide to go with it.

And another example of that would be, if you look at the Vitamin D market, when we went into the bundle, we saw one large provider convert all of their clinics to Hectorol after using Zemplar for many, many years within 60 days. So I think we'll see something similar with the Triferic drug coupled with the fact that these clinics all have very good familiarity with it.

Annabel Samimy - Stifel

Okay. And did you mention all nine have been in the clinical trials, all nine of the providers?

Rob Chioini

Most of them might. There might be a few that might not have participated.

Annabel Samimy - Stifel

Okay. So, since you mentioned the Vitamin D market, it slowly leads to the Calcitriol question. I know you don't have an update but is there anything? This is an approved product. Is there anything specific in the manufacturing that has caused such a hold-up with the marketplace? You think it's a pretty straight forward, simple product. So, can you just give a little color around some of the complexities around that?

Rob Chioini

I don't see any complexities. I agree it's a straight forward simple product. We submitted the data and the FDA hasn't come back to us and told as if there was any issues or problems. They just haven't got it reviewed yet and they don't, just in general they don't have enough people over there to begin with. We were fortunate enough to get an expedited review and I think it’s just a matter of the reviewer and maybe now they are reviewing it as we speak. I don't know they haven't given us any clarity on that but certainly they haven't told us anything about the chemistry and there is no hold up because of that.

Annabel Samimy - Stifel

Okay. And just of course I have to ask your classic SFP question or Triferic question, when might we see the extension data and you mentioned in the past you will be able to submit that to the FDA before final regulatory review is completed and if that's the case, does that potentially hold up the one year clock that's on us because they tend to, when they get new data, they tend to look for excuses for delays. So how might that be viewed by FDA?

Ray Pratt

No, I mean, this is Ray Pratt. Currently the extension studies are scheduled to end towards the end of this year, early next year. And as part of the submission process for the NDA, you're required to put in a 120-day safety update after you file your submission. We anticipate that the majority of the safety data from the extension studies will be included in that 120-day safety update at that time.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Carol Werther of Summer Street. Your line is open. Please go ahead.

Carol Werther - Summer Street

Thanks for taking my question. Could you just elaborate a little bit more about what data we'll see from CRUISE 1 and 2 at ASN this week?

Rob Chioini

Yes, CRUISE -1 and 2 studies as a group were accepted for the late breaking clinical trials presentation on Saturday. Steve Fishbane and us will be there to present the study design, the primary and secondary end points of the safety data and we will be available to answer any questions from people coming by over the two hour period where authors are going to present to discuss the findings.

Carol Werther - Summer Street

So in the presentation, will we have a sense of how much IV iron was needed during the trials?

Ray Pratt

Again, remember, during the randomized treatment phase of the CRUISE -1 and CRUISE -2 study, IV iron was not allowed to be administered during the study. We presented the data on how many patients left or actually advanced to the open label study because of requirement for IV iron and that will be summarized in the poster at ASN.

Operator

Our next question comes from the line of Natasha Esman of Safira Fund. Your line is open. Please go ahead.

Natasha Esman - Safira Fund

I was wondering if you can give us some guidance in terms of the NCE status for Triferic? Thank you.

Rob Chioini

Sure. We are certainly going to try to request the FDA to give us an NCE status and that's the latest update that we have at the moment here. We won't hear from that until after we actually make the final submission of our package.

Natasha Esman - Safira Fund

Okay.

Rob Chioini

We certainly hope to get NCE status.

Natasha Esman - Safira Fund

That's understood. And then maybe I can ask a follow-up? What data should we expect from the extension study in terms of or -- will there be any additional data regarding the use of IV iron in terms of economic data, reduction or and the same for ESA?

Rob Chioini

Yes, of course during the open label extension studies ESA dose can be titrated and IV iron can be administered according to a established protocol as part of the studies. So at the end of those periods there we will be able to see it.

Just remember however that all the patients in the extension studies will be receiving SFP or receiving Triferic during that time. So there is no active comparator group such as placebo in the extension study. So while we have that data, it will again be historically compared to what the people have otherwise administered.

Natasha Esman - Safira Fund

So each patient will be his own control or your talking in general/

Ray Pratt

Half of the patients in the extension studies received placebo during the randomized treatment phase. The other half were on Triferic during the entire randomized treatment phase. So we'll know those patients that actually ran placebo who then went to Triferic and we'll get an idea of what their response will be over the time and how long it takes them for perhaps to catch up to the patients who are on Triferic for the randomized treatment phase of the study.

Natasha Esman - Safira Fund

Okay, thank you. And if I can ask one more question. You mentioned that partnerships and licensing opportunities both in U.S. and ex-U.S. Can you maybe elaborate on that a bit? When should we expect a partnership announcement or what kind of deal are you looking, because in the U.S. it sounds like you have a substantial or consolidated client base. So what exactly in the U.S. are you looking for and the same for ex-U.S. Thank you?

Rob Chioini

Yes, as expected, I can't really give you any detail on those on that question, I can't give you a timeframe and once we have something obviously and it's in place and it’s a decision we’ve made then we'll be happy to share that.

Natasha Esman - Safira Fund

Okay just what kind of view are you looking for in terms of retaining rights or backend loaded, content loaded?

Rob Chioini

Right so we have more than one discussion going on. All the discussions are a little bit different, some are similar but many of them are different, and like I said some are strictly ex-U.S. and there is a few inside U.S. that we're looking at, and I really can't get into detail with you on that.

Operator

Thank you. And I’m showing no additional questions in queue. And would like to turn the conference back over to Mr. Rob Chioini for any closing remarks.

Rob Chioini

Thank you for joining us today. We appreciate your time and your continued support.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of your day.

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