Rockwell Medical, Inc. Q1 FY2022 Earnings Call

Good afternoon, everyone, and welcome to the Rockwell Medical First Quarter 2022 Results Call. Please note that this call is being recorded. I would now like to introduce Jason Finkelstein from Investor Relations. Please proceed.

Good afternoon. This is Jason Finkelstein of Argo Partners, the Investor Relations representative for Rockwell Medical. Joining me from Rockwell Medical on today’s call are Dr. Russell Ellison, President and Chief Executive Officer, and Russell Skibsted, Executive Vice President, Chief Financial Officer, and Chief Business Officer. Dr. Marc Hoffman, Chief Medical Officer, and Tim Chole, Senior Vice President of Sales and Marketing, will be available for Q&A. Before we begin, I would like to remind everyone that this conference call and webcast will contain forward-looking statements about the company within the meaning of the federal securities laws, including but not limited to, the types of statements identified as forward-looking in our annual report on Form 10-K and our subsequent periodic reports filed with the SEC, which are all available on our website in the Investor Relations section. These statements are subject to risks and uncertainties that could cause actual results to differ. Please note that these forward-looking statements reflect our opinions and expectations only as of today. Except as required by law, we specifically disclaim any obligation to update or revise these forward-looking statements in light of new information or future events. Factors that could cause actual results or outcomes to differ materially from those expressed in or implied by such forward-looking statements are discussed in greater detail in our periodic reports filed with the SEC. This conference call could be accessed on Rockwell Medical’s Investor Relations web page. The call is being recorded for audio rebroadcast, which can also be accessed on the same web page. At this time, I would like to turn the conference call over to Rockwell Medical’s President and Chief Executive Officer, Dr. Russell Ellison. Russell?

Thank you, Jason. Good afternoon, and thank you for joining us. Rockwell Medical is a biotech company, but with revenue, and that makes us fairly unique. We have a proprietary drug technology called ferric pyrophosphate citrate, or FPC, which is a next-generation therapy for iron deficiency. Iron deficiency is a significant problem in many different patient populations. We believe we have a significant opportunity with FPC in the rapidly growing area of home infusion therapy, where we are confident that there’s a large unmet need for effective iron therapy that FPC can effectively address. FPC can be safely administered in the home setting, and based on our prior experience, we can efficiently navigate the clinical and regulatory process. Finally, we are reengineering our dialysis products business, which will generate a gross profit for the first time in several years. This is a business that Rockwell was originally founded on. This is a business that we believe may be able to generate a modest amount of cash flow to help fuel our growth opportunities for FPC. We have made meaningful progress to improve this business, which we expect will reduce our cash burn in dialysis by about $15 million on an annualized basis. With respect to home infusion therapy, we are pleased to be soon beginning our Phase 2 clinical trial with FPC in patients receiving infusion therapy in the home setting. Health care is increasingly shifting to the home. It was recently reported that Medicare is providing funding for states to expand home and community-based health care services and to increase access. McKinsey & Company reported in February that up to $265 billion worth of care services for Medicare beneficiaries could shift to the home by 2025. This rapid growth is driven by a lower cost of care and higher patient satisfaction. Home infusion therapy, where various medications are administered by IV infusion at home rather than in infusion centers, is a rapidly growing segment of health care. Many patients receiving infusion therapy at home suffer from diseases like GI disorders, heart disease, and cancer, which are associated with iron deficiency, a condition that is extremely difficult to treat with the traditional forms of iron. Iron deficiency is serious because iron is critically important for the body. It’s a necessary building block for red blood cells, and it serves as a fuel for muscle energetics, both for organs like the heart as well as skeletal muscle. Mild iron deficiency may sometimes be treated with oral supplements or dietary changes, but moderate to severe iron deficiency is typically accompanied by inflammation, which blocks the absorption of oral iron. Untreated iron deficiency is associated with serious health complications, including organ dysfunction, infection, extended hospital stays, severe fatigue, and depression. Prescription IV iron is the most common treatment for addressing more severe cases, but the current products have limitations. They require an outpatient visit for administration and are associated with the risk of rare but severe reactions. Because of inflammation, the iron can be stored in the liver and not be readily accessible to tissues, necessitating high doses. However, even with the limitations of current iron therapy, the global IV iron market exceeds $1 billion annually. In December, we received feedback from the FDA regarding our investigational new drug application in support of our proposed Phase 2 trial of FPC as home infusion therapy. The study proposal includes a novel dosing regimen fine-tuned to match the preferences of caregivers and patients receiving health care at home. The FDA requested additional preclinical data related to the chemical stability and microbiology of the administration materials proposed for the study. We have successfully completed these lab experiments, and on May 6, we provided the FDA with the requested supplemental data. Rockwell must wait 30 calendar days from the day of submission before initiating any clinical trial while the FDA reviews the submission. We do remain confident in the potential of FPC and are prepared to move forward with the initiation of the Phase 2 trial in June, pending the review and clearance of our application by the FDA. Our planned Phase 2 trial in home infusion will be the first randomized controlled trial of IV iron ever conducted in the home setting, representing a true blue water opportunity. For the development of FPC in its indication, we plan to leverage the predictable kinetics of the drug along with its excellent safety profile, which has been established in randomized trials and subsequently in more than 1.5 million doses administered in hemodialysis patients in clinical practice. This trial will be our first step towards bringing FPC to a broader group of patients, separate and distinct from the dialysis population. We estimate the total addressable market for FPC in the home infusion setting to be over $600 million in the U.S. alone. Now turning to dialysis, we are reengineering our dialysis concentrate business, which in the second half of this year is expected to generate a gross profit for the first time in several years. This is a business that we believe may be able to generate a modest amount of cash flow in the future to help fuel our growth opportunities for FPC. We have made meaningful progress to improve this business, which we expect will reduce our cash burn from these activities by about $15 million on an annualized basis. Additionally, we have some protection against inflationary price increases in certain key supply costs. The supply chain problems the U.S. has experienced over the past couple of years have severely impacted the supply of concentrate to dialysis clinics, causing some clinics to encounter serious shortages. However, Rockwell Medical has been working to revise certain terms of its supply contracts with customers in an effort to stabilize its concentrates business, and last month we announced an amended and expanded agreement to supply our concentrate products to our long-time customer and partner, DaVita Inc., which is a leading provider of kidney care in the U.S., with a market capitalization of approximately $10 billion. The amended supply agreement is designed to enable Rockwell Medical’s concentrate business to potentially operate profitably in the future with the aim of building a steady, reliable supply of life-saving concentrates in the U.S. With dialysis concentrates accounting for approximately 98% of our 2021 revenue and with approximately 90% of our 2021 sales coming from distributors and customers for use in the U.S., this new agreement is a significant milestone for Rockwell. In addition to the revised agreement, DaVita will also invest up to $15 million in Rockwell. $7.5 million has already been funded and is convertible at $1 per share. DaVita may potentially invest another $7.5 million. Next, I’ll turn to our pharmaceutical products, Triferic and Triferic AVNU, which is Ferric Pyrophosphate Citrate for use in dialysis patients. Since the commercial launch of Triferic in 2019 and the launch of Triferic AVNU in 2021, market adoption has been limited. Despite our sustained efforts to market the products, sales in the U.S. have not met our expectations, especially considering what we believe is a differentiated product profile. Dialysis is paid for under Medicare’s bundled and capitated reimbursement scheme, which discourages clinics from adopting innovative products. We also faced significant competition from other forms of IV iron that have been well-established in the market. Due to these headwinds, we have curtailed our investment in the promotion of Triferic and Triferic AVNU in the U.S. and instead have been seeking a commercial partner for these products that has a more diverse portfolio and the commercial horsepower to drive Triferic adoption. For the right company, we believe that Triferic and Triferic AVNU have strong potential to grow. In the meantime, Triferic and Triferic AVNU continue to be supported by Rockwell Medical and are commercially available to clinics and patients. Despite our challenges with these products domestically, we believe that international sales of Triferic can ultimately be a strong source of revenue and value in the coming years as dialysis payer models in many countries outside the U.S. are more accommodating for innovative products. Our international partners continue to make solid progress with Triferic. In South Korea, JL Pharmaceutical received regulatory approval in January from the Korean regulatory authority and is preparing for commercial launch. In Turkey, our partner, Drogsan, has initiated the process required to gain regulatory approval from the Turkish authorities. In China, our partner, Wanbang Pharmaceuticals, completed patient enrollment ahead of schedule in its Phase 3 study. And our partner in India, Sun Pharma, has a clear path forward with guidance from the regulatory authority and anticipates launching the required clinical trial in this quarter. I’m pleased with all the progress we have made in a short period of time. We will continue to work to bring value to the healthcare community, to patients, and to our shareholders. With that, I’ll turn the call over to Russell Skibsted, our Chief Financial Officer and Chief Business Officer, for a brief financial overview. Russell?

Thanks, Russell. We ended the first quarter of 2022 with cash and cash equivalents of approximately $9.9 million. Of course, this figure does not include the $7.5 million investment from DaVita, which closed in April. Revenues were $16.1 million in the first quarter of 2022 compared to $15.5 million for the same period last year. The increase of $0.7 million was primarily due to an increase in sales of dialysis concentrate products from Baxter and our international customers. We expect our concentrate sales to continue to grow due to our new arrangement with DaVita. Our cost of sales during the first quarter of 2022 was $16.9 million, resulting in a gross loss of $800,000 during the period, compared to cost of sales of $15.1 million and a gross profit of $400,000 during the same period last year. Gross profit decreased by $1.2 million due to significant supply chain-related inflationary pressures related to the concentrate segment. As Russell mentioned earlier, our agreements allow us to pass through certain inflationary costs, which help us during this unusual time. As a result of these changes, the company expects an improvement in margins for the remainder of 2022 and 2023. Our cash used in operating activities was about $9.8 million in the first quarter, which included some seasonal items. As I mentioned last year, some of these seasonal items are annual cash bonus payments for our key employees, and these are the employees that produce and deliver our products day in and day out through the pandemic, supply chain disruptions, and ice storms, as well as an increase in accounts receivable due to our annual true-up billing with Baxter and seasonal reductions in certain payables and prepaid items. Due to the updated pricing with Baxter, our updated arrangement with DaVita, and our cost-cutting efforts in relation to our supply chain and seasonal factors, we expect this figure to drop significantly over the rest of the year. Overall, we expect an $11 million reduction in our 2022 cash burn due to our efforts in the concentrate business, which is about a $15 million impact on an annualized basis. I’ll now turn the call back to Russell Ellison for his closing remarks. Russell?

Thanks, Russell. I’ll close by saying that Rockwell Medical, as a development stage biopharmaceutical company, is fortunate to have a steady and ultimately improving revenue stream from our dialysis products, which is an important differentiator compared to many development-stage biopharma companies with no product revenue. In a sense, we’re a biotech company, but with revenue. We have a proprietary drug technology, Ferric Pyrophosphate Citrate, or FPC, which is a next-generation therapy for iron deficiency, a major problem in many different patient populations. We expect to soon begin a Phase 2 study where we believe we have significant opportunities with FPC in the rapidly growing area of home infusion therapy, where we are confident there is a large unmet need for an effective iron therapy that FPC will effectively address. FPC can be safely administered in the home and, based on our prior experience, we can efficiently navigate the clinical and regulatory process. Finally, we are reengineering our dialysis products business, which will generate a gross profit for the first time in several years. We’ve recently taken big steps to improve this business. This is a business that we believe may be able to generate a modest amount of cash flow to help fuel our growth opportunities for FPC and ultimately reduce our need for capital. We have made meaningful progress to improve this business, which we expect will reduce our cash burn in dialysis by about $15 million on an annualized basis. We are making progress at Rockwell. Thank you for joining our call today and for your interest in Rockwell Medical. I want to thank our shareholders for their patience and belief in our efforts to unlock the value of this company. With that, I’ll turn the line over to the operator for questions.

Thank you. Our first question comes from Brandon Folkes with Cantor Fitzgerald. Your line is open.

Hi, thanks for taking my questions and congratulations on all the progress. Can you talk about the implications of the DaVita agreements? And how this could drive others to follow suit and maybe just give you some more pricing power with other customers? And then similarly, how do you think about the impact on your P&L going forward? Can you elaborate on the statement of that business operating profitably in the future? How should we think about timing of achieving that?

Thanks very much, Brandon. I think Russell Skibsted, the other Russell, is well positioned to answer your question. Russell?

Sure. Thanks for the question, Brandon. I think instead of focusing specifically on the DaVita agreement, it makes more sense to focus on the impacts toward our dialysis business of everything we’re doing. Looking at the agreements we have with our customers, the supply chain, and creating efficiencies, as we’ve been discussing for the last year, and also kicking off the cost-cutting efforts regarding our future operations. We’ve been conducting supply chain analysis for a while, and we are starting to see some positive outcomes. But at the same time, global supply chain issues have affected us, as Russell mentioned in the prepared comments, and have had a significant impact on our costs. So, with the new agreement, the joint cost-cutting, and our efficiency efforts, we expect, as Russell mentioned, to see about a $15 million improvement in the economics of our dialysis business on an annualized basis. Although the quarter we just reported showed a small increase in sales already, the updated agreement with DaVita didn’t take effect until May 1. So, we expect to see improvements both on the top line and the bottom line as we proceed throughout this year. All of this is subject to broader macroeconomic issues. Therefore, I will refer back to the forward-looking statements, as global dynamics are changing frequently. However, based on our efforts, we believe these effects will materialize positively in 2022. I expect we will report additional top-line and margin improvement as early as our next quarterly filings. Key to note is that future growth will also be driven by our cost-cutting and efficiency measures, making our products more competitive and allowing us to grow both in volume and price. We are eager to achieve these goals in the upcoming months, quarters, and years. I hope that answers your question adequately.

That was very helpful. Thanks so much, and you addressed my next question because I was going to talk about the OpEx line and the discipline there. So, may I ask another question? On the home infusion trial, you spoke about waiting for feedback from the FDA. Are there any other gating factors before beginning that trial? Once the trial begins, how should we think about news flow from where we sit? Thank you.

That’s a great question. The limiting step right now is the clearance of the IND. The FDA doesn't have any further requirements, and we anticipate clearance by June 6th. In the meantime, we have been working on study startup activities, and we expect to have the first patient enrolled, assuming clearance, in August. We also anticipate having the last patient enrolled in July 2023, assuming everything proceeds smoothly.

Thank you. That’s very helpful, and congratulations again on the progress.

Sure.

Thank you. Our next question comes from Ram Selvaraju with H.C. Wainwright. Your line is open.

Hi. This is Muz on behalf of Ram. Thanks for taking my questions. To follow up on the FPC Phase 2 trial, do you anticipate any impact from COVID-19 on the recruitment process?

That’s a really great question, because actually, if anything really put home infusion on the map and its utility, it was COVID. I can tell you that in the home parenteral nutrition space, the demand has increased significantly, to the point where we are just barely keeping up with supplying the nutrition bags. We firmly believe that the trend toward administering IV medications at home has accelerated, even more than before. Our initial discussions with investigators have been very positive. Our Chief Medical Officer, Marc Hoffman, is on the call. So, Marc, would you like to add any further insights?

The only thing I would add is that because this is a home-setting study, everything is designed to be remote. In a traditional clinical trial, patients would typically need to visit the office frequently for assessments. However, this study has been specifically designed to emulate the use of the product in the home, which has the advantages of minimizing exposure to other patients and diseases. Specifically, regarding COVID, we are aware that it hasn’t disappeared, but in recent clinical trials over the past 18 months, a positive COVID test is typically one of those factors where you can re-screen someone if it is the only reason a patient misses eligibility. This factor was considered in our study design.

Great information. Thank you. We read your presentation with interest, revealing deficiencies in the management of IDA and the consensus among healthcare providers regarding hemoglobin levels that should trigger therapeutic intervention. Are you planning any campaigns to communicate this data to healthcare professionals?

That’s an excellent question. Currently, regarding the launch of the Phase 2 trial and the recruitment of investigators and patients, the answer is no. I think the appropriate time for that campaign will be in parallel with Phase 3, as we will have a lot of peer-to-peer interactions to raise awareness of iron deficiency anemia among physicians who prescribe home infusion treatments. The clear focus will be gastroenterologists, who manage home parenteral nutrition for specific conditions, but several other specialties are equally crucial. Patients with inflammation treated at home, whether from oncology drugs or other causes, have a high prevalence of anemia due to inflammation, which reduces iron absorption. Increasing awareness among these physicians that this is a significant issue for their home infusion patients, as well as presenting this potential solution, will be strategic with the launch of the Phase 3 program.

Okay. Thank you for the insights. Finally, from a strategic perspective, do you plan to monitor the ongoing ex-U.S. clinical trials of Triferic with FPC? Has there been any interest from your partners in Canada and Asia in pursuing similar studies?

Not yet. Our partner in Korea is just starting, and our partner in India is still engaged in the regulatory process for dialysis and is preparing for a trial. These are two significant markets, and they are currently focused on dialysis. The positive news is that Korea is certainly moving quickly, but we are very willing to keep them updated on the home infusion situation, so they can advance this as needed locally. The same applies to India, although it's a market that hasn’t received much focus from us yet. I don’t see any near-term international activity on this front. However, once we progress into Phase 3 with solid proof-of-concept data, I expect our partners to become more active.

Okay, great. Thanks for addressing my question and congratulations on your progress.

Sure. Thanks a lot.

Thank you. This concludes the Q&A session. Now, I will turn it back to Dr. Ellison for closing remarks.

I want to thank you all for joining us. I appreciate your excellent questions and your patience with us and support as a company. I look forward to our next quarterly call and any individual discussions you may wish to have. Thank you very much.

This concludes today’s conference call. Thank you for participating. You may now disconnect.