Rockwell Medical, Inc. (RMTI) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Rockwell Medical First Quarter Earnings Conference Call. [Operator Instructions] I would now turn the conference over to your host, Mr. Paul Arndt, Managing Director for LifeSci Advisors. You may begin.

Thank you, Mimi, and good afternoon, and welcome to Rockwell Medical's First Quarter 2013 Conference Call. I am Paul Arndt from LifeSci Advisors, and I would be introducing today's call. Thank you for listening to our call today. We appreciate your continued interest in the company. Today from Rockwell Medical are Rob Chioini, Chairman and Chief Executive Officer; and Tom Klema, Chief Financial Officer. Before we get started, I would like to remind everyone that this conference call may contain forward-looking statements. All forward-looking statements involve risks and uncertainty including, without limitation, the risks detailed in the company's filings and reports with the Securities and Exchange Commission. Such statements are only predictions and actual results may differ materially than those projected. I will now turn the call over to Mr. Rob Chioini, Chairman and Chief Executive Officer of Rockwell Medical. Go ahead, sir.

Thanks, Paul. Good afternoon. Thank you for joining us. Today, I'll briefly cover our first quarter numbers, the DaVita supply agreement and then discuss our clinical development progress and financial resources. Starting with the first quarter. Sales were $12.3 million, 2.6% higher than Q1 2012. Domestic sales were up 5.5%. Gross profit was $1.3 million, slightly lower than a year ago due primarily to higher material and operational costs. We expect Q2 sales and profit to return to normal levels. R&D for the quarter was $12.8 million, where we expected it to be. Net loss for the quarter was $15.4 million compared to net loss of $10.6 million a year ago. The loss is a result of our clinical development work. We had a $5.8 million balance in cash at the end of the quarter. We expect our business operations, excluding R&D, to continue to be cash flow positive and to build momentum throughout 2013. The DaVita supply agreement. We just announced a long-term product supply agreement with DaVita. This product supply agreement spans a 5-year period. Included in the agreement is a significant increase in a number of DaVita clinics that will purchase product from Rockwell. Additionally included is the conversion to our CitraPure concentrate line, and it provides for future sales of new Rockwell products. We are pleased to announce this agreement. It strengthens and expands our business relationship with DaVita, one of the largest dialysis providers in the world. Now for our clinical development progress. Let's start with Calcitriol. We submitted our manufacturing data to the FDA during the first quarter. Once the FDA approves that submission, we will launch Calcitriol into the commercial market. Calcitriol will be the lowest-cost vitamin D injection available, and we expect to gain considerable market share selling it to our existing customer base, as well as the rest of the $350 million U.S. market. The launch and marketing effort will require minimal SG&A expense. We expect Calcitriol to enable Rockwell to increase our sales and profit margins significantly while strengthening our existing business and providing further leverage to our planned offerings of SFP upon FDA market approval. Turning to SFP, our investigational iron delivery drug designed for the treatment of iron deficiency in hemodialysis patients. As you know, in February, we announced positive data from our PRIME study. This study was designed to demonstrate that when dialysis patients receive SFP in their dialysate during their dialysis treatment, they will use less ESA, which is better known as EPO, the drug marketed by Amgen. The PRIME study met its primary endpoint and achieved statistical significance, showing that SFP reduced ESA use 35% compared to placebo. $2 billion was spent on EPO use litho [ph] dialysis during 2012. A 35% reduction equals $700 million in cost savings. This significant reduction in use is also important because lower ESA use potentially reduces the serious risks associated with the dosing of ESAs. As a result of this data, we expect SFP will command a premium price once FDA approved and launched into the commercial market. The PRIME data supports our belief that the Phase III CRUISE clinical studies will meet their primary efficacy endpoint. In the PRIME study, had the ESA dose not been allowed to be adjusted, the 35% increase in ESA would be equivalent to a 1- to 1.5-gram decrease in hemoglobin. And in the Phase III CRUISE studies, the ESA dose is now allowed to be adjusted. We need just a 0.5-gram change in hemoglobin to meet efficacy in the Phase III CRUISE studies. So based upon the PRIME data, we expect the Phase III primary efficacy endpoint will be met. The CRUISE studies are on track to finish in May and August of this year, so we should see the efficacy data in the first study in July and the second study in October. Regarding our financial resources. We expect our operating business to gain momentum throughout 2013 and to generate cash, excluding R&D. We also anticipate that once we are selling Calcitriol, it will generate additional cash. Currently, we are evaluating several financing and business development options, and we expect to conclude our capital requirements shortly. I will now turn the call over to Tom for his comments on the financial results.

Good afternoon, and thank you, Rob. I'll provide you with a review of the first quarter 2013 results, and I'll also talk to you about our liquidity and our outlook. Let's start with our financials for the quarter. Sales in the first quarter totaled $12.75 million, up 2.6% over last year's first quarter. Domestic sales were up a more vigorous 5.5% compared to the first quarter last year. Domestic sales growth was due to increased sales volumes. International sales were off slightly, about $300,000, which we attribute to order timing. Sequentially, sales decreased from the fourth quarter due to lower order volumes, primarily for international business, following a heavy order cycle in Q4 last year. Second quarter volumes should be back to levels similar to the back half of 2012. On gross profit. Gross profit in the first quarter of 2012 was $1.3 million compared to $1.6 million in the first quarter last year. The reduction in gross profit was the result of higher raw material cost and increased operating cost. We anticipate offsetting these costs with higher product prices and improving our product mix in the back half of the year. Selling, general and administrative cost in Q1 were $3.9 million compared to $2.9 million in the first quarter last year. We incurred a noncash charge of $900,000 related to the extension of expiring common stock purchase warrants. Noncash equity compensation was $1.7 million in the first quarter compared to $1.5 million in the first quarter of last year. We also recognized an increase in cost related to the recently mandated medical device tax of about $200,000 in the first quarter. Research and development cost was $12.8 million compared to $9.4 million in the first quarter of 2012. The higher R&D in Q1 this year was due to increased cost related to clinical studies for the SFP Phase III program. The net loss for the quarter was $15.4 million compared to a loss of $10.6 million in Q1 last year, an increase of $4.8 million. Our loss per share was $0.72 compared to $0.54 per share in the first quarter last year. The increased loss was due to higher expenses but primarily in R&D, where R&D increased $3.4 million. The remainder was due to a noncash charge for warrant grade evaluation, medical device excise tax and inflationary cost. Now on our capital resources and outlook. Our business operations are expected to improve throughout 2013. We anticipate a successful launch of Calcitriol upon FDA manufacturing approval, in which we believe will increase our operating income and cash flow from operations. We expect our operating income to improve significantly in 2014, and we project that we will be profitable before SFP is approved. We have been exploring financing alternatives to supplement our prospective financial requirements, if necessary. We are progressing toward completion of a financing to fund our development efforts and expect to conclude our capital requirements shortly. I will now turn the call back to the operator for some Q&A.

[Operator Instructions] Our first question comes from Annabel Samimy of Stifel. Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: Just a few, first one on the DaVita expansion agreement. Was this an expansion beyond what you're currently providing to them in terms of the products you're providing? Or was it an extension of the agreement? Can you just characterize it a little bit and how much more access do you have to the DaVita dialysis centers? Can you quantify that for us?

So yes, I would say, Annabel, that it's a combination of both. So we had a current agreement with DaVita that was expiring at the end of the year. We then took that agreement and amended it and extended it and added a few things to it, which includes an increase in business. It covers the convergence to our newest product called CitraPure, and it also provides for future sales of new products. Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: And these new products being in SFP test trial or new dialysate products?

So I think any product that we have in the renal space -- it provides for any product that we have in the renal space, and it doesn't specify one over the other. So as we move forward and we pick up new products and we bring them to the market either via Rockwell or other companies, we'll be able to run them into the contract or through the contract. Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And can you give us a sense of how many more clinics you have access to? I think in the past you said, stripping out the percentage, you have about 40% market share. What does this do in terms of your market share, if you've got these new dialysis centers?

Well, I won't give you a hard number. But it increases our -- it will increase our business considerably, and I think it will grow that percentage considerably. Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: Okay, all right. Now On SFP, obviously, you had the data out there for a little bit now, the ESA-sparing data. Can you share with us any feedback that you've gotten from thought leaders, from any of your clinicians or just anyone in general that has seen the data?

Well, I mean, so we've gotten -- specifically to the PRIME data, we've gotten only good comments and, I think, excitement from caregivers, providers, not necessarily just for a cost reduction because it reduces ESA, but also because you're able to lower that requirement. We've gotten and continue to receive positive feedback all through the clinical study even before we started the Phase III studies on this drug. So we've always gotten very positive feedback. We really haven't received anything negative. Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: Is there any specific comment you can make to, I guess, the data that people took issue with, which was showing a little bit of an increase in ESA use versus the significant increase in ESA use in the other arm? Was there any commentary around that, that you could share it with us?

Well, I think when we get a question like that, it's better to have, say, Dr. Gupta or Dr. Pratt address that. But there is an inherent variability in hemoglobin. It's not -- so when the FDA comes out in the old guidelines and they said keep it between 10 and 12, you've got a 2-point range because there's an inherent variability that everybody in the industry, in the practice understands. You can't say, let's just keep it at 11%, it's impossible to do because of that variability. So that variability carries over into ESA, and so there's an inherent variability there. What -- there's more data that will be presented at the EDTA next week, I think next weekend, out in Turkey. But as we've gone through the data, we've been able to see more stuff. And really, I guess, specifically to that question, the study was 9 months. We saw separation start to occur around month 5 between the 2 groups with ESA dose, and the separation continued to widen every single week, every single month. And so the study was halted at 9 months because that was the protocol. But if you cut off at that point, you can see that the trend in the placebo group was that the ESA dose was continuing to increase, and this is baseline. And the SFP dose in the SFP group -- or ESA dose in the SFP group was continually declining. And if you stretch those trends or kept those trends going, it certainly looks like that the ESA dose baseline in the SFP group was going to dip below baseline. Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then just a couple of quick follow-up questions on Calcitriol. Is there any timing on approval you could give us? And then separately, can you tell us what share count we should be considering going forward?

Right. So yes, I can't -- I mean, it's impossible for me to give you, obviously, as you know, with the FDA, any kind of specific time or date. I can tell you, we are communicating with them. We are -- we've asked for an expedited review. We're hopeful that we will get that granted. And at this point, we're just hopeful that we're going to get this Calcitriol into the market this year at some point. As far as -- I think you're asking me maybe about -- what was the second question, was it about demand? Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: The share count, what was the current share count and what -- I mean, should we -- what share count should we be assuming going forward?

With just the Calcitriol product? Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division: No, overall. This is corporate share count, shareholder, ordinary shares count, shares outstanding, what is that number?

Shares outstanding, right. That's hard to say. I don't -- I can't really give you a number there. I think we got about $25 million or $26 million out. It's impossible for me to predict, but we've managed the share count really, really well. We've kept it very low, and our intention is to continue to do that.

Our next question comes from John Rick of Rochester Wealth.

Rob, have you seen any demands from the market regarding the Calcitriol prelaunch?

When we licensed Calcitriol, we had done a lot of work with our current customer base, and we saw demand then. As we have progressed and since we submitted the manufacturing data to the FDA, we've continued to see increased demand and interest. And without getting too specific, I would feel comfortable saying that somewhere in the neighborhood of probably a couple of hundred clinics or so has shown demand -- interest and demand for getting -- for purchased net product once it's approved.

Our next question comes from Dan Bailey of Rochester Wealth.

A couple of questions. One is -- and I don't know how much you can speak of this, but on the -- there's a public website, just the -- and I see that there was a -- you guys had filed or the attorneys had filed for a motion for summary judgment against Dr. Yocum with the wrongful-termination suit. That was granted. Can you kind of go into that a little bit? I think that's kind of a big positive for you guys.

Well, we probably look at it a little different than you. That was an employee, in our view, that was disgruntled, tried to extort the company and ended up losing, and the judge ruled against that employee. And that's really the end of that story.

Okay. Second is, obviously, you're working on the financing still. You did a little bit about a month or so ago with whatever's done going forward. Personally, what I would like to see -- and obviously, you guys are going to pursue on the path you think best. But to do something and kind of won and done and have yourself fully financed, is that kind of the goal here? Are you going to kind of piecemeal it? Do you have kind of a game plan or idea kind of what you're looking to do? Because it would be something, I think, that will be helpful, and I'm sure you guys would agree just have that behind you and have everything you need in the bank to move forward with.

Certainly, we have a game plan. And like I mentioned, we've been evaluating numerous options, but that's about as specific as we'll get with you.

Okay. And lastly, the DaVita news is great. My only concern for the individual or casual investor, it was kind of lumped in to the press release and there's not a lot of detail. We got quite a bit more detail on the call here. Is there a way to put something else out, so if someone happens to see it and link to you, they can see something more and provide them a little more information than just a little blurb in the press release. I think having something a little more substantial out there, considering who it is, I think would be extremely helpful to the investing committee.

So there was 2 press releases. There was the earnings press release.

Okay. I may have missed the other one then.

Yes, and you might have missed the other one. The other one must have went out a little bit after that one, the press release specifically on the DaVita supply agreement.

Thank you. Ladies and gentlemen, that's all the time we have for questions today. I'll hand the call back to Rob for closing remarks.

Well, thank you for joining us, and thank you for your support. We appreciate your time, and we look forward to talking to you in about another quarter or so.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect, and have a wonderful day.