Rockwell Medical, Inc. (RMTI) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Rockwell Medical Fourth Quarter Fiscal Year 2014 Earnings 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, today's conference is being recorded. I would now like to turn the call over to Paul Arndt.

Thank you. Good afternoon and thank you for attending the Rockwell Medical Fourth Quarter and Fiscal Year 2014 Financial Results Conference Call. I am Paul Arndt, Managing Director of LifeSci Advisors. On the call this afternoon are Rob Chioini, Founder, Chairman and CEO; Tom Klema, Chief Financial Officer and Ray Pratt, Chief Medical Officer. Before we begin, I would 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 Triferic, including 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, February 26, 2015, 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. The call will be followed by a brief question and answer session. I will now turn the call over to Rob Chioini, Founder, Chairman and CEO of Rockwell Medical

Thank you, Paul. Good afternoon to everyone joining us today. Joining me on the call today is our Chief Financial Officer, Tom Klema; our Chief Medical Officer Dr. Ray Pratt is also on the line to address any clinical question. Looking back 2014 and the first part of 2015, have really been a transformative period for Rockwell. Consequently, we are well-positioned to execute and deliver considerable growth over the next several years. Rockwell as many of you know has a reputation as an industry innovator. Since the company was founded, we have a history of successfully launching new products, products that address unmet need in the renal market and that deliver economic benefit. I am pleased to report that we are continuing this tradition and we are making progress on all fronts. First, let me briefly review our financial results. Sales in the fourth quarter increased to $14.5 million, up 3.5% over a year ago. Sales for the year increased to $54.2 million, up 3.5% over 2013. Gross profit improved considerably. Gross profit in the fourth quarter increased to $2.6 million, up 25% over a year ago, gross profit for the year increased to $8.5 million, up 28% over 2013. On the financial front, we strengthened our balance sheet considerably in the fourth quarter. We received $35 million in cash from Baxter, $20 million related to our exclusive commercialization agreement and $15 million in the form of an equity investment, which was at a premium to our stock price at the time the deal closed. We also received $8 million in cash from a warrant conversion. Additionally, we netted $54 million in cash in a successful public offering. All of these actions coupled with paying off our $20 million note, left us with $86 million in cash and investments and no debt. We are starting 2015 in a very strong financial position to execute our strategic initiatives and to achieve our goals. Our strong financial position will enable us to launch two drugs this year Triferic and Calcitriol, which includes spending for manufacturing API, packaging finished product, inventory, marketing and sales among other things. We also are pursuing potential new drugs and drug products for development. Additionally, we are initiating clinical programs for delivering iron via Triferic and TPN total parenteral nutrition solution, PD, parenteral dialysis solution and an orphan indication. We are also moving forward in pursuing regulatory approval for Triferic in several international markets. Before I discussed Triferic, I will touch on our Baxter partnership and our progress on the Calcitriol launch. As you know, in October, we entered into a long-term agreement with Baxter Healthcare to market our hemodialysis concentrate products. Baxters are exclusive agent for marketing, sales and distribution activities for the next 10 years. This is a seamless transition for our customers as we continue to support the marketing, sales and distribution activities as well. We received $35 million in cash from Baxter for this partnership. When we expand our operations to the West Coast, which we currently intend to do this year, Baxter will pay Rockwell up to $10 million for the manufacturing plant that we will own and operate to support Baxter's commercial efforts in that region. If our partnership is extended for another five years, Baxter will pay Rockwell an additional $7.5 million. This was an excellent partnership for us. It allows Rockwell to maintain our strong brand recognition and our presence in the renal space while benefiting from the additional resources, a global scale partner such as Baxter brings. It is exclusive to our concentrate assets. It does not include our drugs, Triferic or Calcitriol. This arrangement with Baxter monetizes and de-risks our operating business and enables us to expand without deploying our capital resources, while we continue to focus strategically on building our drug Pharma business in the U.S. and around the world. Moving to Calcitriol, the most potent Vitamin D injection available and therefore the lowest dose and lowest-cost product. We have been working diligently towards commercial launch. The gating factor at this point is to ensure that we have sufficient inventory upon launch and then consistently afterward so that we are able to supply our customers without interruption. To that end, we are working towards building an adequate supply structure which includes having redundancy with high potency drug suppliers, we are able to manufacture anticipated volumes post launch. This is very important and requires significant pre-launch work. We currently estimate launching Calcitriol near the end of the second quarter possibly at the same time we estimate launching Triferic. Calcitriol and Triferic are two of the big three injectable drugs used in dialysis, the third being Amgen's Epogen. We anticipate solid commercial success of Calcitriol and we will provide you further updates as we progress. Now, let us talk about Triferic. Most of you know that about four weeks ago, we received that FDA marketing approval for Triferic. This approval is a major event for Rockwell and it marks the combination of 10 years of development work. This is Rockwell's first ever drug taken through clinical development and to have succeeded in gaining FDA approval the first time obviously it is a very exciting and satisfying accomplishment. Triferic was approved with an indication for iron replacement to maintain hemoglobin in adult patients with hemodialysis-dependent chronic kidney disease. Triferic is the first and only FDA-approved drug to safely replace ongoing iron losses and to maintain hemoglobin levels in hemodialysis patients without the need for IV iron. Its structure and unique mode of action enables it to deliver iron via dialysate and defined immediately to transparent or it is incorporated in the hemoglobin while avoiding any increase in iron stores. These attributes, combined with the cost savings, Triferic offers dialysis providers, makes it very special. Triferic has great potential to become the market-leading iron maintenance treatment for hemodialysis patients. There is no other drug on the market that can compete with Triferic for this indication. Our goal is to launch Triferic commercially in approximately four to five months. We have been working diligently on numerous pre-launch tasks and we will continue to do so. We already have the infrastructure and customer relationships in place to sell Triferic successfully and we have considerable experience launching products into the renal market. Coupled with this drug's clinical and cost saving benefits, a favorable bundled reimbursement structure and a consolidated customer base, we have confidence that we will have great success selling Triferic in a dialysis market. Every patient receiving hemodialysis experiences consistent blood loss and every patient needs consistent iron replacement. We are not going to discuss Triferic pricing for obvious reasons other than to say that we will negotiate favorable prices with individual customers benefiting both, the customer and Rockwell. I will conclude with our business development efforts. We have been evaluating multiple opportunities for licensing Triferic to potential partners for commercialization in several international markets. The discussions and negotiations are in various stages of progress and some include indications outside of hemodialysis. The number of interested parties in licensing Triferic has increased significantly post-FDA approval. Our goal is to obtain the highest value partner and highest economics in each appropriate territory per indication. Before turning the call over to Tom, I would like to take the opportunity to once again thank the patients and physicians who participated in a Triferic clinical program as well as our highly skilled team of clinical, manufacturing and regulatory professionals, including doctors, Ray Pratt and Ajay Gupta, all of whom played a key part in getting this important drug approved. I will now turn the call over to Tom for his comments on the financial results.

Thank you, Rob. Good afternoon. I will provide you with review of the fourth quarter and year-to-date results along with our liquidity and capital resources. I will start with sales. Sales in the fourth quarter 2014 increased to $14.4 million, up 3 5% over the last year's fourth quarter. Sequentially, fourth-quarter sales were up 700,000 or 5.1% over the third quarter. For the year, sales increased to $54.2 million or 3.5% increase over 2013. Both, domestic and international sales made notable gains. We continue to see significant increased growth in our CitraPure product line and primarily our dry powder concentrate product. As we have mentioned in the past, conversion of dry powder is attractive to the customer as it is offers to lower-cost for treatment, it results in lower sales revenue for Rockwell, but provides us with a lower distribution costs. The growth of and conversion of, to our higher margins CitraPure dry acid concentrate product line contributed to improving gross profit margin while moderating the sales increase. CitraPure products represented 63.5% of gallons sold in 2014 compared to 32.5% of gallons sold in 2013. Gross profit in the fourth quarter was $2.6 million, up 25% over the fourth quarter last year. Gross profit margins in the fourth quarter were 17.8%, an increase of 3.1 percentage points over the fourth quarter of 2013. Our CitraPure product line growth and distribution agreement with Baxter contributed to margin improvements, offsetting the negative impact of rising raw material and operating costs. Our gross profit was $8.5 million in 2014, an increase of $1.9 million or 28.3% compared to 2013, gross profit margins increased to 15.8% in 2014 compared to 12.7% last year. Increase in gross profit was primarily due to the favorable impact of higher sales of our CitraPure product lines, strong sales of other high-margin products and efforts to reduce operating and distribution costs. We also realized approximately $300,000 in additional gross profit as result of the execution of the distribution agreement with Baxter in the fourth quarter. SG&A expense during the fourth quarter of 2014 was $5.9 million compared to $3.8 million in the fourth quarter of last year. Non-cash equity compensation accounted for nearly all of the increase. Selling, general and administrative expense for 2014 was $18.3 million compared to $14.3 million last year the $4 million increase was primarily due to an increase of $2.4 million in non-cash equity compensation expenses, increased cash compensation of $600,000 and increased marketing, legal and regulatory expenses related to Triferic of $600,000. Research and development cost was $1.7 million in the fourth quarter of 2014 and that was in line with our earlier projections and guidance. R&D was down 71% or $4.1 million compared to the fourth quarter last year. We incurred product development and research costs related to the commercial development, patent approval and regulatory approval of new products, primarily Triferic aggregating approximately $7.8 million in 2014, a significant decrease from the $39.4 million in 2013. Future R&D spending on Triferic is expected to include clinical testing in connection with peritoneal dialysis, total parenteral nutrition and orphan indication and a pediatric indication. Spending on product development and research activities is not expected to be significant in 2015. Net loss for the quarter was $6.4 million or $0.14 per share compared to $8.3 million or $0.21 per share, last year. For of all 2014, Rockwell's loss was $21.3 million or $0.52 per share compared to a loss of $48.8 million or $1.48 per share, last year. As of year-end, we are at 50.3 million shares outstanding. Now regarding our capital resources and liquidity, we have $85.7 million in cash and short-term investments at the end of the year, $65 million of that was in cash. During the fourth quarter, we strengthen our balance sheet considerably. We received $20 million from Baxter related to our distribution agreement and we received $15 million from a private placement with Baxter $11.39 per share. We realized $8.4 million from expiring warrants we raised $55 million with Bank of America Merrill Lynch and we paid off $20 million in high interest longer-term debt. We now have a debt-free balance sheet and we have no interest expense going forward. Our current cash resources are sufficient to commercially launch Triferic. Our launch spending is primarily related to working capital and marketing expenses for which our resources are ample. Our expected R&D spending in 2015 should not be significant in relation to our cash resources. Our balance sheet is very solid. We are well-positioned financially to execute our strategy. I will now turn the call back to our operator for Q&A.

[Operator Instructions] The first question comes from Steve Byrne from Bank of America.

Rob, I was wondering if you are intending to or at least hopeful of being able to negotiate with your customers to how you get access to data post the use of Triferic on the impact of ESA use and IV iron use. Do you think you can get those data?

Steve, the answer to that is the discussions we are having with providers in that we will have here with other providers in the future as we get closer to launch, we will include those data.

Do you think that it is possible to get it from all of your customers or a couple of the key ones?

Well, I do not think we need it from all of our customers. I think with the key ones we have relationships with them, there is a partnership here where they want a lower cost per treatment, we want to help them do that and we are not seeing any resistance to that at that time.

What is your sense now as to how they might rollout their use of it or at least test it, do you think that they will run some pilot studies on some portion of their centers to assess the impact before gauging further use?

I believe they will run some pilot studies, but the study will be around the protocol for using the drug on-site at the clinic. In other words, when you use this drug, you are doing things different than when you administer IV iron and you are actually free up a lot of time, but there is a couple steps that the nurse will take in the morning and I think most of these providers, certainly the four biggest have used the drug through the clinical trial, but they have used it with a handful of patients and a handful of clinics. What I expect is they will grab a couple of clinics and they will convert them patient-wide and they will nail down the protocol. They will ride it, they will tweak it and then they will move it out or roll it out through the rest of their clinics.

Okay. Thank you.

The next question comes from Ling Wang from Oppenheimer.

Thank you for taking my question. Rob, you mentioned that Triferic will launch will probably in about four to five months. Can you talk about the type of pre-launching activities you are doing right now?

Yes. Sure, Ling. It is very similar to most drug launches. I would imagine there is a lot of manufacturing activity around the API, getting enough of that made then getting it packaged, you have got marketing activity, you have got building inventory activity, just stuff like that.

Okay. My second question is that, I just wanted to get a sense of how you can utilize sort of the ESA sparing benefit, the data you got from the PRIME study, whatever in the public domain, in what way can you kind of utilize your data in your negotiation or is it just a matter for those dialysis centers to try on their own in order for them to try Triferic?

I will answer that in two ways. First, I am not going to discuss pricing. We have got several options and have some strategic go ways to price the product with providers that maximizes what each party wants. For us, the highest price possible and for them the lowest price possible. With that said, when we talk about ESA, Ling, the data out there really speaks for itself. In this industry, these providers, especially the big ones, but all of them are very focused on lowering cost per treatment. They have seen the Prime study, they have seen the 35% reduction overall, they have seen the 74% reduction in hyper responders, they have seen the CRUISE studies where when you look at the Triferic patients in the CRUISE studies, the great majority of them completed the study, the efficacy study, when their hemoglobins reached to 12. In that study, those patients once they entered the randomization phase or stage they were unable to have their ESA titrated, so you can imagine that had been the doctor been allowed to titrate that ESA as their hemoglobin approached to 12, the doctor would have lowered the ESA dose and the providers all have access to that data, they have seen that data and they will figure out ways on how to bring savings out of this drug above and beyond what we have shown. I am not concerned about trying to maximize ESA savings related to pricing the product. We will price the product with a couple of strategies that we have and our goal will be to price this high as we can and still save the customer cost per treatment or lower cost per treatment above and beyond that price.

Great. That is helpful. Thank you, Rob.

Sure.

The next question comes from Charles Haff from Craig-Hallum.

Hi. Thanks for taking my questions. A couple here in terms of your infrastructure costs, I know you detailed a lot, Tom, for some of the specifics. What do you think the total was in terms of pre-launch costs for Calcitriol and Triferic in the fourth quarter and where do you anticipate those going in the first and second quarter? Thanks.

Charles, this is Tom. I guess in the fourth quarter, most of the spending was related to regulatory approval that obviously is behind us now and we are taking place as we are spending and preparing to spend money on marketing and advertising going forward here and through the rest of the year, I do not do that as being particularly significant in terms of dollars for us. As I mentioned the R&D is not going to be significant in relation to our resources overall this year probably would be same range as last year and we will also be building inventory. We did the build inventory in the fourth quarters as you saw our inventory numbers went up $1.1 million and we have more inventories to follow. The train cycle in this business is fairly quick, so depending on how fast we ramp up but we should be in pretty good shape and our working capital standpoint. Does that answer your question?

Yes. I was just trying to get a little more granularity. I mean are we talking $1 million or $2 million per quarter or something less than that? Any help on?

I think on the infrastructure selling general and administrative, that would be a good range to be thinking in terms maybe $1 million to $2 million.

Of incremental?

Yes. Incremental.

Okay. Sounds good, and the R&D were set there based on your comments, okay. Then in terms of cash burn, are there any other uses that you can see in the first half beyond what you have mentioned here?

I think that covers it pretty well.

Okay. Great. Thanks a lot guys.

The next question comes from Jim Molloy from Summer Street.

Hey, guys. Thanks for taking my question. Just could you talk a little bit about sorry, I got on the call late, so apologies if this has already been asked? Can you talk a little bit about how the hemodialysis integration with Baxter is going and expectations for do you have any expectations for 2015 on how that will look? I guess the other thing would be Calcitriol, the expeditions for the launch is that still Q1 2015?

The integration for Baxter it is moving fine and it has been a good relationship. I did cover it on the call. You probably did miss some of that, but they have got a global presence and resources that we tapping into. They are working with our folks here and we are still really supporting them in marketing and sales. We plan to get plants on the West Coast this year and then start selling product in that region as well. All-in-all it has been a good beginning to the partnership. With Calcitriol, we talked about the launch. We anticipate the launch. We currently estimate the launch to be end of the second quarter, possibly around the same time we launch Triferic, and we are working towards building adequate supply and adding redundancy in that supply post-launch.

Great. Thank you. Then I know that the launch of Triferic and Calcitriol certainly should help turn the corner for you guys from losing money to making money. Internally do you have any thoughts on when that will happen? We have got our own projections out here, but what do you guys think?

I will let Tom handle that one. When do you think?

Yes. I think once we have adequate inventory and we can launch. The company will be profitable shortly after that. It will not take much volume. The margins on these products will all be much better than our concentrated.

Excellent, [ph] One last follow-up, I guess, we be expecting typical drug margins on Calcitriol and Triferic?

Yes. Triferic has got higher drug margins, but typical drug margins for branded drug and a generic drug.

Great. Thank you for taking my question.

The next question comes from Annabel Samimy from Stifel.

Hi. Thanks for taking my questions. I had a few. I know that you are not discussing pricing, but maybe you can help us understand the estimated annual cost of IV iron for a patient just so we can sort of like get a gauge of that. We know the cost has been going down over time, but usage has been going up, so maybe you can give us sort of an average annual cost for iron?

What for the patients?

Yes.

Is that what you are asking?

Yes.

Right, I think the figures or range anywhere from about $525 a year up to $655 a year per patients.

Okay. When you think about price variance of the overall cost of treatment in general and the savings there that a dialysis provider will see or are you just thinking mainly in the iron world?

No. What is the question exactly you are asking me?

When you are negotiating with the dialysis providers, are you thinking about the overall cost per patient they have right now and basing pricing off of the savings that they are going to get based on overall cost?

Well, we are going to negotiate a price with the customers. It is going to be individual with each one like we have done for the last 20 years and we are just going to maximize the price. Now, well, we will certainly take into all the cost reductions that we think are available that this drug brings to the table.

Okay. Just to understand how you are going to be using the data, is pricing going to be dynamic for a period of time or are there going to be set renegotiations once they see how the savings are playing out or are you just assuming a savings upfront? Can you just sort of help us understand how this might change over time?

Yes. I am not going to get into the details on that. That is probably a little bit of everything in there, but that is something we will do one-on-one with the customer.

Okay. Maybe we can go quickly to the Baxter deal. I just want to understand, in the fourth quarter, I guess the way I understood it is that you are giving up some top-line revenues for profit margin in terms of the way it was structured, but it seems like the revenues had grown anyway, so was that misunderstood or is it just that the volumes had already increased under the Baxter deal?

Annabel that was a function of timing. There is a time difference between when we did the deal and when Baxter can take over the full administration of the customer relationship, so in this interim period, this transition period, we are continuing business as usual, so what you saw in the fourth quarter was pretty much business as usual the way it had been and we will see that again here in the first quarter, where the sales will look much like they have in the past.

Okay. So in the second quarter is when we should start seeing that impact on the top-line?

Yes. I think during the second quarter we will see that. Yes.

Okay. Then one other question on additional, I guess R&D. Can you just go through some of the different areas you are looking at for clinical testing? I know you mentioned peritoneal dialysis, pediatric. Are these just all uses for Triferic or you are looking for products in these different areas?

Well, no. The money we will spend on the clinical part for Triferic, for TPN and PD and this orphan indication that I mentioned. That will be strictly for Triferic. We are also pursuing other products, some that would need development, others that would not and that may be complementary to what we do today.

Okay. The guidance or the color that you gave around incremental R&D is, I guess, at a similar level that we saw in the fourth quarter and sort of incremental from there or is that appropriate relative to your cash position or your cash position changed pretty significantly. Maybe you can give us just a better idea there.

Annabel, I think the way to look at it is, we are going to somewhere around what we spent in 2014 and 2015 and that would be indications around Triferic. It maybe a little bit less than that. It maybe a little bit more, but not materially more either way. It does not include any additional new products that we might add, but we don't have any plans for R&D spending on other new products at this point.

Okay. Great. Thank you.

Ladies and gentlemen that is all the time that we have for questions today. I would now like to turn call back over to Rob Chioini for closing remark.

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