Rockwell Medical's (RMTI) CEO on Q2 2014 Results - Earnings Call Transcript

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 |  About: Rockwell Medical, Inc. (RMTI)
by: SA Transcripts

Rockwell Medical Inc. (NASDAQ:RMTI)

Q2 2014 Earnings Conference Call

July 31, 2014 4:30 PM ET

Executives

Paul Arndt – IR

Robert Chioini – Founder, Chairman, CEO and President

Thomas Klema – VP, CFO and Secretary

Analysts

Annabel Samimy – Stifel, Nicolaus & Co.

Jim Molloy – Summer Street

Charles Haff – Craig-Hallum

Daniel Bailey – SOURCE Capital Group

Operator

Good day ladies and gentlemen and welcome to the Rockwell Medical Second Quarter 2014 Financial Results 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’d now like to introduce your host for today’s conference, Paul Arndt, Managing Director of LifeSci Advisors. You may begin.

Paul Arndt

Thank you Ashley. Good afternoon everyone and thank you for attending the Rockwell Medical second quarter 2014 financial results conference call. I am Paul Arndt, Managing Director from LifeSci Advisors.

On the call this afternoon are Rob Chioini, Founder, Chairman and Chief Executive Officer; and 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 the 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, Thursday, July 31, 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 question-and-answer session.

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

Robert Chioini

Good afternoon. Thank you for joining us. Today I will briefly cover our second quarter results and then provide an update on our ongoing clinical and strategic progress. Joining me on the call will be our Chief Financial Officer, Tom Klema.

Starting with the second quarter numbers, sales were $13 million slightly higher than a year ago. Gross profit increased 20% totaling $2 million for the quarter. Gross profit margin rose 15.5% compared to 13% a year ago. As mentioned previous, we convert more customers to our dry concentrate product line, our sales dollars will be lower but our gross profit will increase. To give you some perspective every time we convert a customer to dry product compared to our liquid product we experience a 10% to 12% sales dollar reduction. This trade-off for higher profit margin is however is preferable.

CitraPure sales continued to grow. And as we expand our current customer base we continue to convert existing customers. We expect CitraPure will dominate the market.

As we stated prior R&D expense in Q2 dropped substantially and was just $200,000 for the quarter, a 98% reduction compared to a year ago, and 96% less than first quarter this year. The second quarter R&D expense included a $2.2 million credit for the refund on our new drug application fee. You may recall that we appealed the FDAs decision when they did not allow our NDA fee waivers and we won that appeal. We expect R&D expense to remain low for the rest of the year, approximately $3 million in total. Cash burn going forward will be minimal. Net loss for the quarter dropped 73% to $8.7 million compared to a year ago. We expect net loss to continue to decrease quarter-to-quarter. Our cash position was just under $12 million.

Moving to our clinical progress in Triferic, our NDA was accepted by the FDA on May 28th this year. The acceptance of this NDA is another significant step forward in our plan to bring Triferic to the market and to offer dialysis patients a significantly better treatment option for addressing their iron deficiency. We have been given a PDUFA date by the FDA of January 24, 2015. We are confident our Phase 3 clinical results demonstrate that Triferic is a safe and effective iron delivery therapy that can maintain hemoglobin without increasing iron stores and significantly reduce expensive ESAU.

We are convinced the benefit to risk ratio for Triferic is favorable and we believe that the drug meets all the requirements for FDA approval. Upon FDA approval we are highly confident in executing a successful commercial launch with Triferic. We [have built] to succeed in selling the drug in the US dialysis market. Over several years we have created a successful business with our high quality innovative products three of which have become the new standard of care and together with the exceptional customer and delivery service we provide, we have developed solid customer relationships.

In addition our customer base is highly concentrated. As you may know non-dialysis providers control 83% of the patients in the U.S. And the four largest providers in the U.S. participated extensively in our clinical study. All of these factors coupled with the clinical benefits and cost saving advantages Triferic offers, gives us great confidence that we will have rapid off take and sales upon commercial launch.

Regarding Calcitriol we received FDA manufacturing approval. As a result of manufacturing process has started and when inventory is sufficient we will launch Calcitriol. Our estimate for launch is year-end. We anticipate commercial success with Calcitriol and like Triferic, our launch and sales effort will require minimal additional SG&A expense.

Lastly an update on our business development. On the last earnings call I’ve stated our efforts have been ongoing and productive. I stated we were evaluating numerous opportunities that were on the table both in the U.S. and internationally. Process has been ongoing since that last call and we have made significant progress. We will continue to work towards securing the best value for Rockwell and ultimately do what we believe is best for our patients, employees and shareholders.

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

Thomas Klema

Thank you, Rob and good afternoon. I’ll provide you with a review of our second quarter and year-to-date financials and results starting with sales.

Sales in the second quarter of 2014 were $13 million, an increase of 0.4% compared to the second quarter of last year. Domestic sales increased 1% partially offset by reductions in sales to accounts acquired by a competitor aggregating 1.2% of domestic sales. International orders were slightly lower than the second quarter of last year due to timing of orders between periods.

Sales for the six months of 2014 were $26 million, an increase of 2.7% compared to the first half 2013. International sales were up 18.1% and domestic sales were up 1%. Product mix improved in the first half of 2014 largely due to CitraPure products, new sales and conversion. CitraPure products accounted for 63% of acid concentrate gallons sold in the first half of 2014 compared to 15% in the first half of 2013. Majority of those sales were dry concentrate product.

Gross profit in the second quarter increased 19.8% totaling $2 million up $300,000 compared to the second quarter last year. Gross profit margin in the second quarter of 2014 increased 2.5 percentage points to 15.5% from 13% in the second quarter of 2014.

Gross profit in the first half of 2014 increased 24.7%, $3.7 million compared to $3 million in the first half of 2013. Gross profit margin for the first six months of 2014 was 14.2% compared to 11.7% in the first half of 2013. The increase in gross profit this year was due mainly to the favorable impact of higher sales of our CitraPure product lines coupled with efforts to reduce operating distribution costs. SG&A expense for the second quarter was $4.2 million compared to $3.3 million second quarter last year, increased cost for marketing and personnel accounted for half of the increase and other half was due to the non-cash equity compensation.

Selling general and administrative expense for the first six months was $8.3 million compared to $7.2 million last year, non-cash equity compensation expense was $4.4 million compared to $3 million in the first six months of 2013. 2013 there was non-recurring and non-cash expense aggregating $900,000 related to equity warrants. We also incurred a higher cost in support of current and prospective increase of business activity first half this year.

R&D expense in the second quarter was $200,000 compared to second quarter last year where we spent $10.2 million on R&D and that was mainly for the Triferic clinical program. First quarter this year we paid a $2.2 million fee to the FDA for our Triferic NDA filing after being denied a small business waiver of the fee by the small business administration.

We appealed that determination and won FDO reversed its position on appeal and during the second quarter U.S. Treasury refunded $2.2 million to us in July. We recognized the initial fee payment as an expense in the first quarter of 2014 and we reversed that expense in the second quarter. First half 2014 R&D expense was $4.8 million compared to $23.million last year. Second half R&D expense is expected to continue to diminish and to be substantially less than last year.

Net loss for the quarter was $3.2 million or $0.08 per share compared to $11.8 million or $0.38 per share in second quarter last year. Net loss decreased $8.7 million. Net loss year-to-date was $11 million first six months compared to a net loss of $27.2 million in the first six months last year. Net loss for the first half of 2014 was $0.28 per share compared to $1.04 per share last year. Net loss continues to decrease as a result of the significant decreases in R&D expenses following the completion of our clinical program. We expect net loss to continue decrease.

Now Regarding our capital resources we had $11.9 million in cash at the end of the second quarter. In addition we received $2.2 million in July as a result of the FDA refunding our PDUFA fee. Our R&D cost will continue to decline. On commercialization of Calcitriol we anticipated significant improvement in cash flow to achieve a profitable level of operations. We expect cash flow from business operations including R&D to be positive in 2014.

Now I’ll turn the call back to the 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, guys. Thanks for taking my questions. Just several here, I wanted to just check with you on the R&D number, the $3 million that you mentioned, was that a total for the year or for the second half and where are you capturing the manufacturing expense for Calcitriol? And I have some other follow-ups.

Thomas Klema

Okay. Hi, Annabel, this is Tom. The $3 million is what we would expect to spend little bit plus or minus in the back half of the year. So the total for the year would be sort of in the $7.8 million to $8 million. And then in terms of the manufacturing cost for Calcitriol we will accumulate some inventory, build some inventory in an advance of launching the product and that will show up as inventory on the balance sheet.

Annabel Samimy – Stifel, Nicolaus & Co.

Okay, so it’s not going to – it’s not any expense in the P&L line.

Thomas Klema

It’s a nominal amount.

Annabel Samimy – Stifel, Nicolaus & Co.

Okay, and then separately on, I guess you mentioned that you’re in the process [inaudible] trial, have you just started any discussions with dialysis providers in terms of patient orders when this is approved and on the same token have you started any kind of discussions with dialysis providers with regard to Triferic given that, it seems that you’ve got at least one contract that sort of captures dialysis products in general. So can you just help us understand where you are with any kind of discussions? And then on the BD front, the BD you’re talking about is that in-licensing new product or out-licensing of Triferic?

Robert Chioini

All right. So let’s – this is Rob. Let’s start with Triferic and talking to customers. We’re not actively marketing the drug at this point. It hasn’t been approved yet by the FDA. However we are actively talking to providers that are interested about the clinical data, just like we do at the tradeshows. So there is a lot of activity around that and educating among the data and walking them through that.

With Calcitriol, yes, we’ve had conversations and continue to have conversations with customers about the possibility of them purchasing that drug. We actually are have those – fielding those enquiries even before we got the manufacturing approval. So again when we look at Calcitriol we maybe, we’ve said this in the past, for us to have this product be beneficial we really need to just go out and capture 50% of our current customer base and we should generate approximately an additional $50 million of sales or so in addition to our operating business revenue, the sales revenue.

And then your last question on I believe it was the BD?

Annabel Samimy – Stifel, Nicolaus & Co.

Yes.

Robert Chioini

Right. As we’ve outlined before, our goal is to enter into a strategic partnership. We want to maximize the drug’s value and we’re looking at this internationally. We plan on retaining the commercial rights in North America as we feel we’re ideally suited to sell that drug in the market here. And so we’ve got significant interest from partners. We have opportunities that are on the table that we are evaluating and having discussions with and I would say there are serious discussions and they’re ongoing and our goal is to get one that’s highly valuable for the company simply.

Annabel Samimy – Stifel, Nicolaus & Co.

Okay, and if I can ask one more question with regard to co-locations, where are you in terms of publishing the data that you’ve put out there in any kind of medical journal and also has there have been any further discussion regarding guidelines on ferritin or holding dialysis, dialysis providers to this ferritin guidelines more religiously? Thank you.

Robert Chioini

Sure, so on the publications, a lot of publications have been prepared and they’ve been submitted and I think it’ll be a matter of time till we get some responses on those. And then what was that last piece you were asking about the guidelines, holding providers to guidelines.

Annabel Samimy – Stifel, Nicolaus & Co.

No, any further discussions among industry folk regarding ferritin iron guidelines, where just practice habits in general in terms of guiding, not guiding but targeting certain ferritin levels?

Robert Chioini

Right, well I mean, the issue of ferritin, high ferritin levels in the U.S. has certainly been high on the list of [Kdiago] this year. I would say most of if not all of the iron experts in the field, you and you can look this up on the [Kdiago] yourself that they view ferritin, high ferritin as potentially an epidemic that’s going on here in the U.S. and there is real focus on why are they so significantly higher and we’re talking about maybe 900 to 950 on average versus 200 to 300 in all the other countries.

And so I think is becoming clear, we feel is becoming very – or more clear that the higher the ferritin it necessarily is not a good thing. It means that irons are being stored, it’s not been utilized efficiently in the body and so when we look at that and we look what Triferic can do from the clinical data, it can deliver iron, maintain hemoglobin, lower ESA and it can do all that while lowering ferritin. We think that just another significant clinical benefit, very tiny as we move towards hopefully an approval here and a launch.

Annabel Samimy – Stifel, Nicolaus & Co.

Okay. Thank you.

Operator

Thank you. Our next question comes from Jim Malloy of Summer Street. Your line is open.

Jim Molloy – Summer Street

Hey, thanks for taking the question. So I was looking at the $7 million to $9 million R&D, $7 to $8 million R&D in fiscal 14 that all gets in the wash, is that the rate you said or is your thinking it’s going to be coming down substantially from there next year.

Thomas Klema

Yeah, Jim we would expect sort of the ongoing R&D to be below $1 million per quarter in the future.

Jim Molloy – Summer Street

Okay, and then on the G&A, I know you just mentioned earlier you’re not expecting any significant tick up in G&A with the launches. It’s always good to hear. Is there – is this G&A level the right level or do you think it needs to get to another some higher level or maybe some lower level going forward?

Thomas Klema

What level? Is it the SG&A level, is that what you’re asking?

Jim Molloy – Summer Street

SG&A yeah.

Thomas Klema

I think it’s going to be, the reason it’s going to be minimal for us Jim is we’re already in the market, we’re already selling to all these customers. The markets very concentrated as you know or may know you’ve got Fresenius DaVita, U.S. Renal, DCI couple of others, they make up almost the entire market. And you just don’t need a lot of sales people especially for the way reimbursement change in this market, put a lot of emphasis on costs. Obviously you have to have a clinical benefit or it’s got to be at least equivalent patient clinical outcomes out have to be looked into and there is incentive to improve those also financially. And you’re just not going to need a lot of sales people and a whole lot of infrastructure around that. So the SG&A is going to be minimal for that both for the Triferic and Calcitriol.

Jim Molloy – Summer Street

And last question looking on the top line of your current product line, it looks like second half you’re again little bit of boost couple of years, you anticipate something like that coming in, in the second half 14 again?

Robert Chioini

I mean historically that appears to be the case and we’ve got a lot of activity going on with new customers and new customers starting up. So I would say it’s probably something that was – is more likely to happen than not.

Jim Molloy – Summer Street

Thank you for taking the questions.

Robert Chioini

Thanks.

Operator

Thank you. Our next question comes from Charles Haff of Craig-Hallum. Your line is open.

Charles Haff – Craig-Hallum

Hi. Thanks for taking my questions. I appreciate the detail on CitraPure penetration. Did I hear you say correctly 63% penetration on the first half of 14?

Thomas Klema

That’s correct, Charles.

Charles Haff – Craig-Hallum

Okay, and how about the second quarter?

Thomas Klema

It was about in the same range.

Charles Haff – Craig-Hallum

Okay, and then where do you see that kind of peaking out at for relative to all your dialysis business?

Robert Chioini

Charles, we see CitraPure ultimately be the only product that we will probably be supplying here in another year or so. There is really no reason to use the acetate-based product. More and more awareness is out there in field and more and more customers convert, other countries are using citric product and I think it’s just a matter of time before really you don’t see acetate in the marketplace at all anymore.

Charles Haff – Craig-Hallum

Okay. So for trying to model out your dialysate market over – business over the next year, we can just simply do the math there and use your 11% to 12% lower sales dollar for dry and then use the margin to kind of predict out where your dialysate revenue should be a year from now, is that right or is there some other factors in here I am not thinking about?

Robert Chioini

I mean you can go through that model. It’s not going to be completely accurate because there is a combination of new business coming on and conversions with existing business. Some new business will come on as liquid then it will convert to dry. So there is some noise in there that won’t make your model exact but that but that’s something that you can work on.

Charles Haff – Craig-Hallum

Okay, thanks. And then for Calcitriol manufacturing, can you just remind us how many sub-contractors are you planning on using there and what kind of redundancies and what type of safety stock are you trying to build and all that kind of stuff?

Robert Chioini

So I don’t have too much detail that I want to share there but I can tell you we’ll use two to three distributors and we’ll get it out into the market, very similar to how almost identical to how the other drugs are being moved through the market.

Charles Haff – Craig-Hallum

And would those be domestic distributors?

Robert Chioini

That’d be correct, yeah.

Charles Haff – Craig-Hallum

Okay, see if there is anything else. I think I covered it all. Thank you very much.

Robert Chioini

Thanks.

Operator

Thank you. (Operator Instructions). Our next question comes from Dan Bailey of Source Capital Group. Your line is open.

Daniel Bailey – SOURCE Capital Group

Hey, guys. Thanks for taking the phone call. Can you let us know again and you may have stated this in the last quarterly conference call, what are the margins going to be, the gross profit margins for Calcitriol once you start selling it?

Thomas Klema

I don’t think we’ve shared those Dan.

Daniel Bailey – SOURCE Capital Group

Okay.

Thomas Klema

They will be significantly higher than our current gross margins.

Daniel Bailey – SOURCE Capital Group

Okay. Thanks guys.

Thomas Klema

Yeah.

Operator

Thank you. That’s all the time we have for questions. I’d like to turn the call back over to Rob Chioini for any further remarks.

Robert Chioini

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

Operator

Ladies and gentlemen thank you for participating in today’s conference. That concludes today’s program. You may all disconnect. Everyone have a great day.

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