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Rockwell Medical, Inc. (NASDAQ:RMTI)

Q1 2014 Earnings Conference Call

May 12, 2014 4:30 p.m. ET

Executives

Paul Arndt - MD, LifeSci Advisors

Rob Chioini - President and CEO

Tom Klema - VP and CFO

Analysts

Annabel Samimy - Stifel, Nicolaus & Co.

Carol Werther - Summer Street

Operator

Good day ladies and gentlemen and welcome to the Rockwell Medical First Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Paul Arndt, Managing Director of LifeSci Advisors. Please go ahead.

Paul Arndt

[Hey Stephanie] Good afternoon and thank you for attending the Rockwell Medical first quarter 2014 financial results conference call. I’m Paul Arndt, Managing Director of LifeSci Advisors.

On the call this afternoon are Rob Chioini, Founder, Chairman and CEO; Tom Klema, Chief Financial Officer.

Before we begin, I'd like to remind everyone that various remarks about future expectations, plans and prospects constitute 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 actual results to differ materially from those indicated.

Among the factors that could cause actual results to differ materially include risks and uncertainties related to the regulatory process for Triferic, including review of the Triferic NDA, the FDAs decision on whether to approve Triferic, the company's ability to successfully commercialize Triferic, manufacturing capabilities 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, Monday, May 12, 2014 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 listen-only mode. The call will 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

Thanks, Paul. Good afternoon. Thank you for joining us. Today I will briefly cover our fourth quarter (sic) numbers and then provide an update on our strategic initiatives. Joining me on the call today will be our Chief Financial Officer, Tom Klema. Dr. Ray Pratt, Our Chief Scientific Officer, is presenting at the Asia Pacific nephrology conference in Tokyo this week and he will not be on today’s call.

Starting with the first quarter numbers. Sales for the quarter were $13 million, a 5.1% increase over a year ago. Gross profit for the quarter increased 31% to $1.7 million.

CitraPure sales continued to grow. First quarter CitraPure sales increased 428% and units shipped increased 566% over a year ago. We expect CitraPure will continue to capture both new and current sales. Going forward, we expect our operating business to grow.

R&D expense dropped significantly. We spent $4.6 million in the first quarter, a reduction of 64% compared to last year and a 21% reduction from the fourth quarter in 2013. Included in the $4.6 million first quarter R&D expense was a $2.2 million new drug application fee. This is a one-time fee that we anticipated would be waived due to [ph] meeting the criteria for small business submitting their first NDA.

The Small Business Association, reviews the criteria, determined that we do not meet the waiver requirement due to their belief that Rockwell is affiliated with DaVita, our largest concentrate customer and therefore we are not a small business. We feel strongly that Rockwell is not affiliated with DaVita and that the SBA’s ruling is incorrect, we believe we meet the criteria for the NDA fee waiver and we’ve appealed the SBA’s decision. We hope to win the appeal and recover the $2.2 million fee we paid to file our NDA.

Regardless we expect R&D expense in total for the last three quarters of 2014 to be approximately $4.5 million, which is an average of $1.5 million per quarter. So consistent with our guidance, the cash burn this year will be significantly lower.

Net loss for the first quarter was $7.8 million, 49% less than a year ago. We expect net loss to continue to improve quarter to quarter. Our cash position was just under $15 million.

Now an update on our clinical progress regarding Triferic. As you know we completed our clinical studies and submitted our NDA to the FDA on March 24. The Triferic NDA submission marked a major milestone for Rockwell. Approximately 1,500 patients were dosed with Triferic and more than 100,000 separate administrations were given during the clinical program.

The clinical results have demonstrated the drug is a safe and effective iron delivery therapy that can maintain hemoglobin without increasing iron stores and significantly reduced ESA use. The benefit to risk ratio for Triferic appears favorable and we expect FDA approval, which generally occurs about 12 months from the time of the NDA submission.

As I mentioned on the last earnings call, we -- once we gain FDA approval, we are highly confident in successfully launching Triferic commercially. Rockwell is ideally built to succeed in selling products in the U.S. dialysis market. We have a successful business infrastructure that has been operating in the market for many years and we have developed solid customer relationships.

Over that time we have launched several new products, two of which became the new standard of care for hemodialysis treatment and now a third in CitraPure, which is fast becoming the standard of care.

Also, in our favor is the fact that our customer base is highly concentrated. Just nine dialysis providers control 83% of the patients in the U.S. It should lead to rapid uptick in sales and market share upon drug launch. Moreover our customers have lengthy first-hand experience with Triferic’s clinical benefits. The 4 largest providers in the U.S. have participated in our clinical studies dosing Triferic to their patients for approximately 24 months.

The bundled reimbursement system under which the dialysis providers are paid further plays into our favor. It incentivizes dialysis providers to use our products that deliver quality patient outcomes and that reduce their cost for treatment. And this is exactly what Triferic has repeatedly demonstrated.

Rockwell and Triferic are positioned perfectly to succeed in this highly concentrated customer market under a bundled reimbursement system. And we’re excited about the success we believe this drug will have once FDA approved.

Regarding Calcitriol, we’ve checked in with the FDA recently and the ball is now in their court. As you know, approval is on their timeline and there is no calendar deadline with the generic drug application, unlike with an NDA application. We do remain optimistic and gain approval soon.

We have done a lot of prep work and we continue to do so. Upon approval, manufacturing will proceed and when inventory is sufficient, we will launch Calcitriol into the commercial market. Our launch expectation is currently sometime in the second half of this year. For all of the same reasons, we anticipate commercial success with Triferic, we expect commercial success with Calcitriol. And like Triferic, our launch and marketing effort with Calcitriol will require minimal additional SG&A expense.

Lastly, an update on our business development. Our efforts have been ongoing and continue to be productive. We have 3 assets: our base concentrate business and two drugs under FDA review. We are evaluating numerous opportunities which are on the table for all three assets, both in the U.S. and internationally. We continue to look for the best value for Rockwell and to ultimately do what we believe is best for our patients, our employees and our shareholders.

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

Tom Klema

Thank you, Rob and good afternoon. Provide you with a review of our first quarter results starting with sales.

Sales in the first quarter of 2014 were $13 million, up 5.1% over last year's first quarter. The sales increase was due to a mix of domestic and international growth, including conversions to our CitraPure product lines. We experienced strong conversions of CitraPure in Q4 and that carried over to Q1 and CitraPure continues to grow as a percentage of the acid concentrate product sales.

As Rob mentioned, we continue to see significant increased growth in our CitraPure product line and primarily our dry powder concentrate product. Conversion to dry product is attractive to the customer as it offers a lower cost for treatment. While resulting in lower sales revenue compared to liquid product, it provides us with a much lower distribution costs and higher gross profit.

Our gross profit margin in the first quarter 2014 increased 2.6 percentage points to 13%, up from 10.4% in the first quarter of 2013. Gross profit dollars in the first quarter were $1.7 million, an increase of 31% or 400,000 compared to the first quarter last year. The increase in gross profit was mainly due to the favourable impact of higher sales of our CitraPure product lines. Higher operating and delivery costs were largely offset by higher prices in the aggregate.

Our selling, general and administrative expense during the first quarter was $4.1 million compared to $3.9 million in the first quarter last year. Non-cash equity compensation was $2.2 million in the first quarter of 2014 compared to $1.3 million in the first quarter of 2013.

On our R&D, we incurred product development and research costs primarily related to our investigational iron delivery drug Triferic aggregating approximately $4.6 million this year and $12.8 million for the three months last year.

Development costs in the first quarter of 2014 were related to Phase 3 longer-term safety study work and related documentation, NDA preparation and the NDA submission. First quarter 2014 expense included a $2.2 million fee paid to the FDA in connection with the NDA filing for the review of Triferic.

As Rob mentioned, we have appealed the non-waiver of the fee as we believe we meet the criteria for small business exemption. At this time we've completed the clinical trials related to our Triferic FDA submission.

Net loss for the quarter was $7.8 million or $0.20 per share compared to $15.4 million or $0.72 per share in the first quarter of 2012. R&D expense was $4.6 million compared to $12.75 million in the first quarter last year. R&D decreased $8.1 million and the operating loss decreased $7.6 million. We expect the net loss to continue to decrease as R&D expense drops off each quarter.

On our capital resources, we had $14.7 million in cash at the end of the first quarter. As I mentioned, our cash requirements have decreased substantially following the filing of the NDA and that will continue throughout the remainder of the year.

We anticipate R&D spending of about $4 million to $4.5 million in total for the last three quarters of 2014 with Q2 R&D costs in the $1.8 million to $2.0 million range and then to be about $1 million in each of the third and fourth quarters. We expect cash flow from business operations, excluding R&D, to be positive in 2014 and upon commercialization of Calcitriol, we anticipate a significant improvement in cash flow.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Annabel Samimy of Stifel.

Annabel Samimy - Stifel, Nicolaus & Co.

Hi, thanks for taking my question. I apologize but you were cutting off on [ph] some of the numbers, I just wanted to clarify. You expect $4 million to $4.5 million in R&D for the rest of the year 1.8 million to 2 million in the first quarter, then 1 million thereafter?

Tom Klema

1.8 million to 2 million in the second quarter and then about 1 million in each of the third and fourth quarter.

Annabel Samimy - Stifel, Nicolaus & Co.

Okay. Did you mention you’re going to be cash flow positive in 2014?

Tom Klema

If you – our core business, excluding R&D, should be cash flow positive.

Annabel Samimy - Stifel, Nicolaus & Co.

I guess on to the separate questions, just want to clarify when you expect FDA acceptance of the filing, is that going to be around the 60-day timeframe or do you expect some give or take around that time?

Rob Chioini

No, we would expect that by that 60th day, we’d either hear some from the FDA or if that 60th day occurs then our understanding it’s been accepted.

Annabel Samimy - Stifel, Nicolaus & Co.

And then can you tell us – you’d mentioned that you expect a pretty rapid launch. I know we’ve been through this before. But given that all of the dialysis providers have tried your product under pretty strict clinical I guess limitations, do you expect them to have to pilot the product to a certain degree before they are convinced of its pharmaco-economic benefit?

Rob Chioini

The randomization study -- which you’re referring to, as you had to lock the ESA dose. And so that was the strict criteria. But then they moved into an open label study where they were able to dose ESA as they want. As you know, they also were able to do that in the prime study. I think given the fact that they've been dosing patients for up to two years now, they’ve got a very clear view of how the drug works and the benefits it provides, that I don't think any kind of – I think there’ll be very long evaluation periods but with some of the bigger providers they certainly may want to put it into the protocol and evaluate it for a few months before they do a full launch scale change.

Annabel Samimy - Stifel, Nicolaus & Co.

If that’s the case, how do you expect to price if you can’t fully establish that – establish, let’s just say the ESA bearing [ph] effect under the regular – under their criteria?

Rob Chioini

Well, I don’t think the evaluation and the pricing will be related. I mean obviously if they don't have a good price, they won’t evaluate it. But there's lot of creative things we can do. We've been selling CitraPure in the market now for a few years, having very good success with that product and capturing it at a premium through our other concentrates and the competing products in the market. And we do that with simple showing of the clinical benefits and then the simple showing of the economic benefits both coming from some clinical studies. The economic benefits for the CitraPure product, when we looked at that study it was about 21 patients over five months. When we looked at the prime study, we had 100 patients over nine months in a controlled setting. It's a much more robust study with results and I don't really envision too many issues with using that data to get the pricing at a premium.

But with that said, there are some creative things we can do with that [ph], we run into a situation where somebody wants to get some data, some further data on ESA experience.

Annabel Samimy - Stifel, Nicolaus & Co.

Okay. That creativity I assume bundles to other products in the whole arrangement, correct?

Rob Chioini

I mean that might be part of it. There's just some other ways to price the product and still let the -- and still have the provider achieve a significant reduction on an annual basis for the cost -- to their patient for the anemia costs.

Annabel Samimy - Stifel, Nicolaus & Co.

And then one more question if I may. Is there any further – are there any further developments on I guess the medical society side in terms of revisiting the iron guidance and developing some more strict criteria or strict adherence to the criteria?

Rob Chioini

Well, I mean we know and as many -- as you may know also, KDIGO got a lot of focus on ferritins right now. Their last meeting was centered completely around lowering the ferritins. The view with a lot of the KOLs in the industry is that in the U.S. we may have an epidemic with an average ferritin of somewhere around 950 where 20 years ago it was 180. So there is definitely some protocols that are being re-evaluated and adjusted and moving ferritins down. KDIGO right now recommends not giving iron unless the ferritin is below 500.

Regardless of that and I think that actually plays into our favour. But regardless the drug Triferic should fit really well into the space because as you know it lowers ferritins, it doesn’t increase iron stores and at the same time it maintains the haemoglobin very effectively.

Operator

Thank you. Our next question comes from Carol Werther of Summer Street.

Carol Werther - Summer Street

So Triferic, exactly what market – what’s the market expectations for launch [ph] of the product, because it says in the press release $600 million, I am just trying to reconcile that?

Rob Chioini

Sure. The expectation is that all patients on dialysis will use the drug. So as you know, when a patient sits in a dialysis chair for 4 hours and they get their treatment, they lose on average 5 to 7 milligrams of iron [indiscernible]. And so Triferic gets delivered through the dialysis during that same four hour time period and replaces that 5 to 7 milligrams of iron. And so every single patient on dialysis will get Triferic.

The estimate on the market really covers a pretty vast range of $300 million to $2 billion and it's all based – and really it will be driven by what kind of premium we get in the marketplace. So that the $600 million is a combination of what the market currently does and then averages in some possibility of not getting a full premium but some premium.

Carol Werther - Summer Street

Okay. And then we’re expecting a 10 months review?

Rob Chioini

Yes.

Carol Werther - Summer Street

For Triferic. Okay. So we should hear very soon that it’s accepted and with a 10 month review, [indiscernible] prior meeting on that?

Rob Chioini

We don't know at this time.

Carol Werther - Summer Street

Okay. All right. Great, thank you.

Operator

Thank you. And I am showing no further questions at this time. I would like to turn the call back over to Rob Chioini.

Rob Chioini

Well, thank you for joining us today and we appreciate your time and your continued support.

Operator

Ladies and gentlemen thank for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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