Rockwell Medical, Inc. (RMTI) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Corporate Update 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 follow at that time [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Paul Arndt, Managing Director. Sir, please begin.

Thank you, Shady, and thank you, everyone. Thank you for attending the Rockwell Medical Second Quarter 2015 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 and Tom Klema, Chief Financial 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 could 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, Tuesday, August 4, 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, and good afternoon to everyone joining us. On the call with me today is our Chief Financial Officer, Tom Klema; our Chief Medical Officer, Dr. Ray Pratt; and our Chief Scientific Officer, Dr. Ajay Gupta. Before I get into the details of the quarter, I'd like to give you some insight on where we intend to go as a company. As a company we have achieved numerous important milestones over the past 20 years, and certainly over the past 18 months. Today as we approach commercialization, we are positioned to achieve great success with Triferic, as we have success with Triferic, and take advantage of additional opportunities. We intend to build Rockwell into a leading dominant pharma company in the renal space. With that, I will highlight our Q2 financial results and then provide an update on our continued progress with Triferic and our preparations for the upcoming commercial launch. Sales in the quarter were $13 million, in line with what we reported in the second quarter last year. Gross profit continues to improve, we reported $2.1 million in gross profit, an increase of 2.3% year-over-year. At the end of June, cash and investments were over $77 million and we have no debt. Our strong financial position gives us ample resources to launch both of our drugs, Triferic and Calcitriol. We continue to invest in API manufacturing, final product packaging, inventory, and marketing and sales. On our previous call, we stated that based on our prelaunch activity at that time, our commercial launch for Triferic and Calcitriol was estimated for the July-August timeframe. As of today, August 4th, I'm happy to tell you we remain on-track. Regarding Triferic, we expect pilot programs to begin within the next few weeks. Calcitriol will closely follow Triferic in availability, and we may see a few pilot programs as well. As Triferic launches in the next few weeks for commercial use, we are educating customers on the clinical and economic benefits of the drug, and how it is administered in the dialysis center. As we've mentioned, the larger dialysis providers will conduct pilot programs. First, to learn how to administer Triferic, and second, to write a standardized protocol for clinical wide use. These pilot programs are set up where Triferic will be administered in approximately three to ten clinics, and run for about four weeks. After that process is complete, we expect commercial roll out. During roll out, estimate clinic wide conversion to occur over a 60 to 90 day period. We will provide updates of these pilot program commenced. I'd like to make an important point regarding the Triferic commercial launch, and that is that we know the renal market extremely well. We've been successful in this market launching, selling, and delivering products for 20-years. We understand the customer base, we know we need only a handful of sales people, there are nine customers that we need to negotiate with, who control about 85% of the market, and we have relationships with them that have been built and maintained over 20 years. Negotiations with these customers are being handled directly by senior management. I can tell you that the interest from renal providers in gaining access to Triferic is very strong. As we've stated in the past, this is not a typical drug launch that involves trying to convince individual doctors to write weekly prescriptions, Triferic is part of the bundled reimbursement. Therefore it is already accounted for in the bundled payment, and as you know, it's reimbursement code became effective July 1st, this year. The dialysis providers conclude their product programs, we anticipate broad adoption over a short period of time. Additionally, I'd like to note that in July we had two very important medical journals publish the Triferic clinical studies. The Phase 3 studies were published in nephrology dialysis transplantation and the prime study which demonstrated a significant 35% reduction in ESA use was published in Kidney International. The publication of these data in Peer Reviewed Journal is significant, and will help in our effort to further communicate the important benefits of Triferic to the broader nephrology community. As we approach this commercial launch, we become more excited about the opportunity for Triferic. It's unqiue mode of action enables it to donate iron immediately to transferrin, and travel directly to the bone marrow for red blood cell generation, without increasing iron stores. There is no other iron product available to dialysis patients that can do this. Triferic delivers iron and maintains hemoglobin in a safe cost effective manner, it benefits patients providers and physicians. We expect Triferic to become the standard of care for treating anemia and hemodialysis patients in the U.S., and ultimately worldwide. Regarding our business development efforts, we continue to make good progress. We continue to have productive discussions with potential partners for commercializing Triferic outside of the U.S. We are also having discussions for Triferic related to achieve some peritoneal dialysis and for the application outside of dialysis with TPM, total parenteral nutrition. We intend to secure the highest value partner in the most favorable terms in every application. I will now turn the call over to Tom to discuss the financials in more depth.

Thank you, Rob and good afternoon. I will provide you with the review of the second quarter and first six months results, along with a brief review of our key financial metrics. As you know we entered into an exclusive U.S. distribution agreement for our concentrated products with Baxter this past October. We mentioned at that time that as we transitioned customer invoicing to Baxter, revenue from our concentrated business would adjust to the wholesale prices Baxter pays Rockwell. While at the same time gross profit margins to Rockwell would increase due to Baxter assuming the distribution cost associated with delivery of our products. Baxter again invoicing in June, and as a result our sales in Q2, partially reflect that. Our sales in the second quarter of 2015 were $13 million, essentially unchanged from the second quarter of last year. Sales in both period consisted of dialysis concentrates and other dialysis related ancillary products sold domestically and internationally. Our worldwide domestic revenue on the business distributed under the Baxter distribution agreement increased $200,000, or 2.3% in the second quarter, and included amortization of deferred license over $0.5 million. Our international sales were $1.6 million in the second quarter of 2015, and in line with 2014. Our sales in the first six months of 2015 were $26.8 million compared with $26 million in the first six months of 2014. Sales increased $800,000 overall, largely due to $1 million in revenue resulting from the amortization of deferred license income related to the Baxter distribution agreement. Revenue around the business distributed under the Baxter distribution agreement increased $900,000 or 4.1% in the first six months of the year. Our international sales were $3.7 million, an increase of 4.1% for the first six months of last year. Gross profit in the second quarter of 2015 was $2.1 million, a 2.3% increase over the second quarter of 2014. Gross profit margins increased to 15.9% from 15.5% in the second quarter of last year. Gross profit for the first six months of 2015 was $4.4 million, compared to $3.7 million in the first six months of last year. Gross profit was favorably impacted due to the elimination of distribution related expenses, as well as deferred license revenue under the distribution agreement. Gross profit margin was 16.3% for the first six months compared to 14.2% for the first six months of last year. Selling, general and administrative expenses were $3.8 million in the second quarter, compared to $4.2 million in the second quarter last year. The SG&A decrease was primarily a result of $0.5 million decrease in non-cash equity compensation. And the decrease was partially offset by increased cost for personnel, marketing, and intellectual property related expenses related to preparation of our anticipated drug product launches. Selling, general and administrative expenses for the first half of the year were $9.2 million compared to $8.3 million for the first six months last year. The increases was primarily due to an increase in non-cash equity compensation of $600,000, other cost increases were for preparation of our anticipated drug launches including increased expenditures on personnel, marketing and other operating cost. Research and product development costs were $900,000 in the second quarter, compared to $200,000 in the second quarter last year. Of note in the second quarter last year was $2.2 million credit from the refund of the NDA fee repaid in the first quarter last year. R&D cost for the first six months of 2015 were $1.7 million compared to $4.8 million in the first six months of 2014. Future R&D expenses are expected to be primarily related to Triferic indications. Net loss for the quarter was $2.5 million or $0.05 per share, compared to $3.2 million or $0.08 per share in the second quarter last year. Sequentially, net loss improved $0.02 per share from the first quarter. Net loss was $6.2 million in the first half of the year, compared to $11 million last year, a $4.8 million reduction. Net loss per share was $0.12 compared to $0.28 for the first half of the last year. And our capital resources and liquidity, we have adequate capital resources and substantial liquidity to commercially launch our drugs and pursue other business strategies. As of June 30, we have 88.4 million in current assets and 81.4 million in working capital, we had 77.3 million in cash and investments we have no debt. In the first six months of 2015 we incurred 1.7 million in research and product loan cost and we increased our inventory by 2.4 million in preparations for the launch of our drugs product. Capital expenditures on our current facilities and not expected to materially exceed depreciation expenses. Future research and product development spending related to Triferic is expected to include clinical testing in connection with pediatric testing, dialysis and certain other indications and is expected to minor in relation to the company's cash resources. Cash investment for our drug product launches will be primarily related to working capital for inventory and accounts receivable. We expect cash flow from operation to be positive following the launch of our drug products. I will now turn the call back to our operator for Q&A.

[Operator Instructions]. And our first question comes from the line of Ling Wang of Oppenheimer. Your line is open.

So Rob, I was hoping whether you can comment on your pricing strategy and also second question can you comment on the role of physicians in the market and as you mentioned business model typical retail launch, just to wonder it will be a scenario that let's say if some doctors are comfortable with Triferic I mean can they demand [indiscernible].

So for the first question Ling on pricing, we’re not going to get into any details really about pricing other than to say that we will price the product at a maximum level for Rockwell but also at a maximum level for the provider on cost savings. So it will be a benefit for both Rockwell and the providers there. And we will price the product to gain market share. For the second question on the role of the physicians, as you know in this with this customer base under reimbursement for products in the bundle there is an incentive or drive for providers to reduce cost but certainly the physicians have some input into that -- into what products they are going to use. So if in fact we had a doc that did want to give Triferic to payments then that doctor is dependent on the provider certainly has the right to not to do that, not to use Triferic.

If I may have a follow-up, for the pilot study [indiscernible] four weeks, can you comment on whether the evaluation of the cost reduction by Triferic would be factor for the evolution and it doesn’t look like four weeks into that period for that asset center to get some kind of conclusion on that.

Right, so the purpose of the pilot study is specifically to learn or understand how to use Triferic in the clinic which is pretty simple, it's a very seamless process and also then to have a protocol written that can be used across the board for these provider with multiple clinics across the country. The timing or the notion that pilot program might be used for cost savings really doesn’t apply, so there is some immediate cost savings with the drug one of them would be the cost of purchasing a needle and syringe, the needles and the syringes that are used by the nurses to administer IV-Iron and the cost disposal and then there is other benefits so nursing time is a clinical and an economic benefit, there is a lot of nursing hours that are saved with the use of this drug and you’re not going to get rid of nurses but what you’re going to do is you’re going to have more time and more hours in the day for these nurses to deliver patient care in exchange for not using those hours with delivering IV-iron, you may also see some reduction in some overtime costs for the overtime hours they lost. And I think all the clinics feel that the drug has the ability based on the prime study data that show a reduction to save them some money there and as you know [indiscernible] not in a label but the prime data is compelling and that economic benefit won't be seen in a four week period, a much like the data shows an economic or a reduction in ESA will occur based on the prime data around 5.5 to 6 months is when that would kick in. You may see that with some individual patients but on average it would be a 5.5 to 6 month period. So you’re not these pilot programs are not designed to confirm or track economic benefit.

Thank you. And our next question comes from the line of Annabel Samimy of Stifel. Your line is open.

I just want to better understand how this all going to proceed? So you’ve some piloting of the product right now for four weeks, are you actually selling the product to these alpha centers, are we then after these four weeks going to see some kind of contract with them or is there going to be some kind of announcement and then separately on pricing and Q-Code so you have the Q-Code, does that imply that the pricing has already being established and if that’s the case is the next five to six months as they set these agreements with you to buy product is this going to be a dynamic pricing environment for them as they replenish their supplies. I'm just trying to understand how this all plays out.

So as far as the Q-Code goes, all that means is that they can now and so nobody, the pricing hasn’t been established we’re going to negotiate that and are negotiate that, are negotiating that now and each group will have a different price and then their Q-Code enables them to get reimbursed via the bundle for that allocated amount that has been set aside, for the anemia, the allocated amount has been set aside in the bundle for anemia products. That’s what the Q-Code is. The pilot programs as I mentioned those are programs that will be commencing in the next few weeks, so obviously there is discussions that are ongoing, that are setup that’s taking place and setup meaning identifying which clinics are going to get the drug for how long, how many, all that work is being done now, then the drug will be shipped in the next few weeks as these pilot programs commence. Does that answer the question?

Yes do you recognize revenues when you ship these pilot amounts and then overtime you form larger more official contracts and then we see some kind of announcement of that like how would we know what happens after these four weeks?

I would say it's highly likely that we will make you aware of pilot programs commencing. When product does shipped in for these pilot programs we will book sales and then as these product programs are complete and conversion starts to occur you know more sales will be booked and then obviously consistently on a forward basis.

Did you say highly likely or highly unlikely that you will see, you will see some kind of booking in the sales?

Highly likely that we will make announcement on the pilot program commencing.

And then separately on the [indiscernible], so you did have that start I guess you mentioned in June, did that come with higher volumes with bigger orders from Baxter or is this still similar volumes but at a gross margin that’s only pro-rated for part of the quarter? I haven't looked into the sales at that level. Baxter certainly has been active in their sales force in working with customers that weren't using our concentrates in getting those customers, some of those customers converted that’s just an ongoing process going on every day but I haven't looked into that detail. I don’t know if Tom has got any more detail on that or not.

I think there was a modest increase in volumes over the -- but we aren't -- that’s really not something we’re spending a lot of time looking into it right now.

And then if I can just jump back really quickly one more time. Once you start, they finish the piloting of the program and these dialysis centers make larger orders. Do they just push it down to all of their dialysis centers or is it only again selective dialysis centers and they roll out it even bigger to more dialysis centers and on and on or is it just like an immediate roll out across the board?

It's a controlled roll out, so much like with our concentrate products when we have a group that’s going to convert to our concentrate, we work with couple of their key people, some of our key people and then there is a control roll out, generally they go by regions but I think with this drug you will see a shorter time period for conversion than you would say with concentrate, it's just a lot easier to do and that’s why we’re have to 60 to 90 day conversion period but it's pushed out all the clinics in a controlled fashion.

Thank you. Ladies and gentlemen that’s all the time we have for today's call. I would now hand the call back over to Mr. Rob Chioini for closing remarks.

So we just want to thank you for joining us today and we appreciate your continued support.