Paul Arndt - Managing Director, LifeSci Advisors Robert Chioini - Founder, Chairman and CEO Thomas Klema - VP of Finance, CFO and Secretary.

Andrew Ang - Stifel Nicolaus Charles Haff - Craig-Hallum Daniel Bailey - Source Capital Group.

Good day and welcome to the Rockwell Medical Second Quarter 2016 earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Paul Arndt, Managing Director of LifeSci Advisors. Please go ahead, sir..

Thank you, Melissa, and good afternoon, everyone. Thank you for attending the Rockwell Medical’s second quarter 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’d 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, Monday, August 8, 2016 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. Thank you for joining us. Joining me on the call today is our CFO, Tom Klema; and Dr. Pratt will be available for Q&A. Starting the numbers. For the second quarter, our sales increased 3.8%. Gross profit dipped primarily due to manufacturing and regulatory expenses related to manufacturing of our drug products.

SG&A and R&D expense was higher due to the marketing and commercial work for Triferic in the U.S. and the clinical work for Triferic in the U.S. and abroad. Tom will provide greater detail shortly. On our last call I explained why we are extremely excited about the future of Rockwell Medical.

It’s because we believe we are on the cusp for a new multiyear growth phase driven by the commercial success of Triferic, our innovative iron replacement drug. Triferic is the only FDA approved drug indicated to replace iron and maintain hemoglobin.

It is unique because when it enters the blood, it finds immediately and completely the transferrin, the carrier of iron in the body and it’s transported to the bone marrow to help generate healthy red blood cells. There is no other iron product that has this mode of action. Triferic addresses a very significant unmet need.

It effectively treats the severe anemia that dialysis patients suffer from. We estimate worldwide market potential for Triferic at over $1 billion with the initial hemodialysis indication. In regards to other Triferic clinical indications, we are working on peritoneal dialysis or PD, total parenteral nutrition, TPN, and orphan indication called IRIDA.

On the last call I also mentioned that we are working to obtain the optimal reimbursement for Triferic here in the U.S. I am pleased to report that we have made considerable progress. We have been working with members of Congress to secure their support. Our efforts have been successful.

A letter has been drafted and signed by several members of Congress and sent to CMS requesting specifically the transitional add-on reimbursement be given to Triferic.

Additionally, Triferic has received further support from patient advocacy groups, dialysis providers, nephrologists, and large nurse associations by the way of numerous letters being sent to CMS requesting transitional add-on reimbursement for the product. We've made very solid progress since our last update.

As I have stated previously, this is not a formal process, and there's no set date for an answer or conclusion. But we are far along into the process, and we believe we are getting closer to our goal of obtaining the appropriate reimbursement for a new innovative therapy like Triferic.

To explain again exactly what transitional add-on reimbursement is, it allows for separate reimbursement of a drug to be set at approximately 106% of the average sale price or ASP for approximately two years. This reimbursement enables dialysis providers to cover the costs associated with obtaining and adopting a new therapy such as Triferic.

Its ultimate purpose is to ensure that patients have access to new and innovative therapies that may improve their lives. At the same time, it ensures that companies will innovate in the renal space by knowing that the new drug they spend significant time and money on developing will have a pathway for payment.

As many of you may recall, prior to 2011 the bundle payment did not exist. All drugs were reimbursed at 106% of ASP. So if you were a dialysis provider, every time you treated a patient, you receive a 106% on all drugs you purchased that were used in that treatment, plus a composite rate payment of approximately $125.

But in 2011 that changed when the bundle went into effect. CMS determined the bundle payment by looking at the ASP of every injectable drug in use at that time, and then allocating a per treatment dollar amount for each to the new bundled payment. So, for example, $60 was allocated for ESA, $20 for Vitamin D and so on.

These allocations were then added to the $125 composite rate payment and that grew to the $245 bundle payment. The issue then and still today is that CMS did not put a process in place to address drugs that had not been on the market prior to 2011. So, any drug that was not yet approved at that time was left out of the calculation for the bundle.

There was no ASP to look at over 2009 and 2010 for Triferic and no calculation could be made for it to be included in the bundle payment. Triferic, as you know, was still in clinical development at that time. CMS is aware that they need to address this issue for drugs like Triferic.

They need to create a pathway for new innovative therapies to receive add-on reimbursement, so that patients will have access to these therapies and at the same time, ensure that innovation in the renal space will not be stifled. By 2014, however, there still is no pathway.

And so congressional action gave direction to CMS to find ways to include new injectable and intravenous products into the bundled payment. Triferic is an example that falls squarely into this direction for action by Congress. Obtaining add-on reimbursement for Triferic is a top priority for us, and we will continue to work hard to secure it.

We feel we have moved much closer to a conclusion and I hope to have positive news very soon. While we've been working diligently on the proper reimbursement, we also continue to make very good progress educating the market on Triferic, on both its clinical and economic benefits.

Our focus is on the nurses, doctors and technicians who provide care to the patients, as well as the upper management teams at the dialysis providers. We are also very focused on educating the patient themselves.

To help them understand the benefits of receiving a therapy that effectively addresses their anemia versus a therapy that is not designed nor indicated to treat their consistent iron loss. We're educating patients on the benefits of Triferic and on their ability to have a voice in their treatment.

Our work on reimbursement and marketing of Triferic continues to be a top priority for the company. On the business development front, regarding our progress in China, we have submitted our Triferic clinical trial application to the Chinese FDA and it is being reviewed. We hope to have clinical study approval in China by year-end.

Our efforts are also ongoing on the BD front regarding global licensing and the commercialization of Triferic with potential partners. As usual, there is little we can say until the discussions for the next partnership have been finalized, but we are active and we look forward to giving an update at the appropriate time.

Lastly, I want to update our progress on commercial launch of Calcitriol. We have completed additional manufacture of Calcitriol batches, and the finished product data is within release specifications, setting expectation for near term commercial launch in the U.S.

I will now turn the call over to Tom, our Chief Financial Officer, to discuss the financials in more depth..

Thank you, Rob and good afternoon. I will be covering the financial results for the second quarter and first half of 2016. On sales, our sales in the second quarter of 2016 were $13.5 million, $0.5 million or 3.8% higher than the second quarter of last year.

Domestic dialysis concentrate sales in the second quarter were up $900,000 or 7.7% higher than the second quarter of 2015. International dialysis concentrate revenue was up $400,000 from the second quarter. Our sales for the first six months of 2016 were $27.1 million, an increase of $200,000 or 0.9% over the first six months of last year.

Domestic concentrate sales increased $1.2 million or 5.2% compared to the first six months of 2015. International and concentrate business for the first six months of 2016 was off $500,000 compared to the first six months last year. Our gross profit in the second quarter was $1.5 million and $600,000 less than in the second quarter of 2015.

This was due almost entirely to manufacturing and regulatory expenses related to manufacturing of our drug products. Gross profit for the first six months of 2016 was $3.2 million, $1.2 million less than the first six months of 2015.

Gross profit decreased by $1 million due to higher manufacturing and other direct costs related to our drug products, which also included $300,000 in value added taxes we had to pay on the $4 million Triferic licensing payment we received from Wanbang Biopharma for our partnership in China.

Our selling, general and administrative expense during the second quarter was $5 million same as the first quarter and that compares to $3.8 million in the second quarter of 2015. The increase in expense included non-cash equity compensation, Triferic marketing expenses and legal fees.

SG&A expense for the first six months was $10 million compared to $9.2 million in the first six months of last year. The increase was primarily due to legal expenses of $300,000; personnel cost, $200,000; non-cash equity compensation $200,000; and Triferic marketing expenses of around $100,000.

On our research and development our expense was $2.1 million compared to $900,000 in the second quarter of last year. And year-to-date, our R&D expense was $3.4 million in the first six months compared to $1.7 million in the first six months of last year.

The higher costs are due to additional clinical development work for multiple Triferic indications. On income taxes, we recognized approximately $400,000 in income tax expense in the first quarter of 2016 compared to no income tax expense in the first quarter and first half of last year.

Our income tax expense pertains to foreign income taxes paid related to the license payments received under the Wanbang agreement. The amount of foreign income tax paid can be credited against future U.S. tax liabilities and carried forward to offset future U.S. income tax liabilities.

Our net loss in the second quarter was $5.3 million compared to $2.5 million in the second quarter of 2015 or $2.8 million higher, with increases in R&D of $1.2 million and SG&A of $1.2 million. In addition, gross profit was $600,000 lower. The net loss was $0.11 per share compared to $0.05 per share in the second quarter of 2015.

Our year-to-date loss was $10.2 million compared to $6.2 million in last year's first half. R&D costs were up $1.7 million and SG&A costs were up $800,000 compared to the first half of last year. Gross profit was $1.2 million lower and we recognized $700,000 in tax expenses related to the Wanbang license agreement.

Our loss per share was $0.20 per share compared to $0.12 from the first half of 2015. On liquidity and capital resources, our cash position is solid. We have adequate cash resources to support development of our drug business, operations and the associated working capital.

As of June 30, we had current assets of $84 million and net working capital of $74.8 million. We have approximately $64.4 million in cash and investments as of June 30th. Our uses of cash have been primarily for inventory additions related to our drug business and research and product development and for operating expenses.

Cash flow from operations used $6.3 million in the first half of 2016, which included research and development expenses of $3.4 million and an increase of $3.2 million in inventory. We also received $3.3 million in cash net of tax as pursuant to the Wanbang agreement.

We anticipate that we will increase our inventory and accounts receivable as we increase our drug product sales. We also expect to invest in research and product development in 2016 as we work to expand potential indications for Triferic. However, spending on these indications is expected to be minor in relation to our current cash resources.

And in summary, we have adequate capital resources to make these investments in accounts receivable, inventory and research and product development. I will now turn the call back to Melissa for some Q&A..

Thank you. [Operator Instructions] Our first question will come from Annabel Samimy from Stifel..

This is Andrew Ang for Annabel. Thanks for taking my question. I just had a question on the reimbursement. So, it looks like CMS is active in reimbursement agreements having issued a number as of late.

With respect to Rockwell and Triferic, what are the hurdles you have to go through to get the transitional add-on? And secondly, at what point would you consider just going ahead with fully launching Triferic under the -- under its current bundled reimbursement structure?.

So, we have made as I said on the call quite a bit of progress. And so at this point, our thought isn't at what point we stop and we move forward without it. Our thought is that we're very close to getting it, and our expectation is to continue to move forward and then gain it. As far as hurdles go, there is no hurdles, per se.

I mean, CMS came out with a guidance late last year for 2016, and the guidance is what it is. We feel like no matter what the guidance is and particularly talking about the functional groups, the Triferic is an innovative therapy that was not around prior to the bundle.

And so when you look at or follow what we -- what I spoke about on the call, there is no process in place for new innovative therapies, and Triferic is a new innovative therapy. And we were fully expecting to set precedent and be the first innovative therapy to gain transitional payment.

But we actually had precedent set for us late last year with a drug called, as most people know it, IV Sensipar or calcimimetic, which went through a very similar process that we're going through where CMS first said no. But then after support was gained via Congress and others, CMS came back and reversed that decision and said okay.

And we believe we're on the same path..

Great.

And so, now assuming CMS grants the transitional add-on, what would be your next steps in fully rolling out Triferic after that point?.

Well, the steps won't change that much. I mean, we have got adequate inventory of the product. We have got adequate education that's been ongoing since late last year and continues to go on. We have got a lot of support from the providers that will adopt the product.

And as far as the rollout goes, we'll just continue to do what we're doing and not much will change..

Great. Thank you. .

[Operator Instructions] Our next question will come from Charles Haff from Craig-Hallum..

Hi, guys. Thanks for taking my questions. I had a question for you on the R&D expenses. Tom, you mentioned additional indications for Triferic was the reason for the increase. So, the $2 million that you did this quarter versus my estimate the annual run rate would come out to about $3 million.

Can you kind of detail for us or help us explain a couple of the programs that you have going on there and just kind of the magnitude? You mentioned it looks like you have plenty of cash here to do this, so that's not a concern.

Just trying to understand if you are going for singles and doubles or if you are going more for triples and homeruns here?.

Well, I think, Charles, I will -- Dr. Pratt is here, so, I am going to let him comment on the different programs and different testing that we're doing. In terms of the cost, I would expect to see it run at about the same level you have seen in the first half of the year here, going forward for the rest of the year. And I will let Dr.

Pratt talk about the different indications we have been working on..

Yes, this is Ray Pratt, the Chief Medical Officer. We have been doing some clinical pharmacology work to expand some of the indications, primarily to outline some more of the pharmacokinetics under a variety of different conditions.

And again, beginning to think about -- looking at some of the new indications, particularly peritoneal dialysis and the parenteral nutrition indication. But before we can actually really move forward with a lot of those, we do need to understand a bit more of the pharmacokinetics. And that's precisely what we have been going through.

And there is -- if you're interested in the programs that are out there, there is a listing of the Phase I clinical trials that we have been conducting on clinicaltrials.gov. That's up to date..

Okay.

So, you are doing human trials for PE here?.

Yes, they are all human trials at the moment..

And how many subjects have you evaluated so far for PE?.

For peritoneal dialysis? We haven't started that program yet. That's in the works. We have been -- for the IRIDA program, we have done a number of healthy volunteers looking at absorption of Triferic iron. And then we have also done some work on intravenous administration in hemodialysis patients.

So, this is, you know, totally maybe about 16 hemodialysis subjects and probably about 14 to 16 human subjects at the moment. But we -- again, these are all small scale clinical pharmacology studies..

Okay.

And any other work that you are doing in R&D that added to the expense this quarter, any other new projects?.

We have been working on other product formulations and presentations of the drug..

Okay. Thanks. And then, Rob, I think I heard you mention or may be somebody else mentioned about international revenues. Can you just repeat that again? I didn't understand what you were communicating there for international revenues..

The international concentrate sales were lower, both in the six -- first six months of the year and for the second quarter than they were last year..

Okay.

And was that a distributor issue or what was the reason?.

Yes, it's -- I think -- the distributors ordered last and then I think there is a one or two countries where the volumes just dropped off dramatically..

Okay.

Have you had a chance to kind of investigative that a little bit or what do you think the reasons were that the volumes dropped off so dramatically?.

Yeah, we anticipate it's probably going to pick back up in the second half of the year. We always have some seasonality and cyclicality to these orders..

Okay. Great. Thanks for answering my questions..

And next, we will take a follow-up from Annabel Samimy from Stifel..

Hi. This is Andrew again for Annabel. Just a quick follow-up. On the transitional add-on, assume you -- assuming it's granted.

And I know this is longer term, but would that cover the PD and TPN administrations or would you need to go through the process again?.

Well, those are separate indications. And the reimbursement may be a little different there. So, we don't anticipate it would be covered..

Okay. Great..

We have different reimbursements for those drugs..

Okay. Great. Thanks for taking the follow-up..

Our next question will come from Dan Bailey from Source Capital Group..

Hi, guys. I was wondering about the average selling price for the reimbursement.

How do you come about determining what the average selling price is, and would you be able to give us a range you had in mind possibly?.

So, we won't be able to give you a range, at least not right now. The way that's determined is all these purchases are documented and reported to the government. And then the government will look at the average selling price or CMS will look at the average selling price over time.

And then they will use that data when they make that allocation two years down the road..

Okay. Thank you. .

And that does conclude the time we have for the question-and-answer session today. At this time, I would like to turn the call back to Rob Chioini for additional or closing remarks..

We appreciate your support and we look forward to giving you an update on the next call. Thank you..

That does conclude our conference for today. Thank you for your participation..