Michael Wood - IR, LifeSci Advisors Rob Chioini - Founder, Chairman and CEO Tom Klema - CFO.

Analysts:.

Good day and welcome to the Rockwell Medical Third Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Michael Wood of LifeSci Advisors. Please go ahead, sir..

Thank you, Bethany, and good afternoon. Thanks everyone for attending Rockwell Medical’s third quarter financial results conference call. I am Michael Wood at LifeSci Advisors. On the call this afternoon are Rob Chioini, Founder, Chairman and CEO of the Company; 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 the 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 SEC.

Any forward-looking statements made on this conference call speak only as of today’s date, Monday, November 7, 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 Q&A session. I would now turn the call over to Rob Chioini, Founder, Chairman and CEO of Rockwell Medical. Rob, please go ahead..

Thank you, Mike. Good afternoon. Thank you for joining us. Joining me on the call today will be our CFO, Tom Klema. To begin, our sales for the third quarter were $12.8 million, $1.6 million lower than Q3 2015. This was due primarily to lower contract manufacturing sales. Gross profit was $1.6 million, about $900,000 less than Q3 2015.

This was due to higher manufacturing and regulatory expenses related to our drug products Triferic and Calcitriol, coupled with the reduction in contract manufacturing sales. Tom will provide greater detail shortly. So, let’s talk about our progress with Triferic and reimbursement.

As you know, we are working to obtain transitional add-on reimbursement for Triferic in the U.S. and it is a top priority of ours. Add-on reimbursement means, the customer receives 106% of the sales price of Triferic when they submit for reimbursement to CMS. This reimbursement generally lasts for two years.

Transitional add-on reimbursement given the new innovative therapy like Triferic ensures that patients will have access to improved clinical benefits and that drug companies continue to commit the innovative therapies in the renal space. Both are very important issues for the 470,000 ESRD patients in the U.S. living with this chronic disease.

On the last call, we informed you that we made considerable progress in our reimbursement initiative. Since that time, we have made even greater headway. Our efforts our multipronged and continue to move us closer to achieving our goal. We are having more and more success, and we believe we are closer to gaining add-on reimbursement for Triferic.

Since the last update, we have received additional support and action from members of congress, patient advocacy groups, dialysis providers, nephrologists, nurses and importantly patients themselves on behalf of Triferic receiving add-on reimbursement.

As I have stated previously, this is not a formal process, and there’s no set date for an answer or conclusion. We are dealing with the government, but we believe we are much closer to our goal of obtaining add-on reimbursement for Triferic. We will continue work hard to secure it and we hope to have positive news to report to you soon.

In parallel to our reimbursement effort, we have made great progress in educating our U.S. customer base about the valuable benefits Triferic delivers. The response is strong and Triferic’s unique patient and cost saving benefits are being well-received.

The nephrology community embraces the fact that Triferic is the only FDA approved product to replace iron and maintain hemoglobin and that is able to overcome at the adverse events of high ferritin, inflammation toxicity, infections and functional iron deficiency all associated with IV iron.

Additionally, we have been educating patients directly, so they understand that not only is there now and effective iron maintenance therapy that can improve their lives but that they have a say in their treatment and have the ability to engage their caregivers to learn more about Triferic and its benefit.

We have created multiple marketing tools including a patient profile video. The patient featured in the video was just one of many who have advocated for Triferic. She has continued to be a strong proponent for Triferic. The video is extremely compelling and embodies how numerous patients feel.

I encourage you to view the video that can be found on our Triferic website homepage. The continued work on reimbursement and education and marketing of Triferic is our top priority, and we are really excited with the results up to this point.

Regarding our clinical development with Triferic in China, together with our partner Wanbang, we have submitted our clinical trial application to the Chinese FDA and it is under review. We hope to have an update on its acceptance in the first quarter of 2017.

Our efforts are ongoing regarding global licensing and commercialization with potential partners for Triferic. We have a considerable amount of activity in various stages of development. And as usual, there is little we can say until the next partnership has been finalized. We will update you at appropriate time.

Regarding our progress on commercial launch of Calcitriol. You may recall that we gave an update September 22nd that our stability data for product manufactured and earmarked for commercial sale was in specification at that time. That was 30 day accelerated stability data.

Based on that and our standard filing of that data with the FDA, we anticipate that Calcitriol would become commercially available right about now. The FDA has asked to see the 90-day intermediate and long-term data. We will provide that information to the FDA as soon as it’s available, which should be near the end of this month.

Assuming there are no issues with the 90-day intermediate long-term results, we would expect to make Calcitriol commercially available within a short period of time, after the agency’s response. We will provide you with an update as soon as we have one. Lastly, I want to give you a brief update on our distribution agreement with Baxter.

As you May know, we entered into a distribution agreement with Baxter on October 2014 whereby Baxter become the exclusive distributor for Rockwell concentrate products in the U.S. At this point in time, we have each notified the other of material breach of the contract. We view Baxter’s claim as meritless.

Additionally, we notified Baxter that they haven’t met their minimum order threshold to keep their exclusivity as our distributor, and that they have failed to cure the minimal threshold in the time period allotted for the agreement. And as a result they have lost their exclusivity as Rockwell’s distributor.

All of the issues are currently in an arbitration process for the agreement. In the meantime, Rockwell is committed to continue to work diligently to service customers, consistent with current practice. We will let you know when we have further material updates. As a remainder, our partnership with Baxter did not cover Triferic.

So, this issue will impact sales of Triferic in any way. I’ll now turn the call over to Chief Financial Officer, Tom Klema to discuss the financials in depth..

Thank you, Rob, and good afternoon. I will be covering the financial results for the third quarter and the first nine months of 2016. Our sales in the third quarter of 2016 were $12.8 million off about $1.6 million from the third quarter of last year.

Compared to the third quarter, domestic concentrate revenue decreased $300,000, international concentrate revenue was $200,000 lower and third party contract manufacturing sales decreased $900,000 due to the completion of a manufacturing contract in the second quarter of 2015. All of our product sales were from dialysis concentrates.

Our sales for the first nine months of 2016 were $39.9 million off $1.3 million compared to the first nine months of last year. Domestic concentrate revenue increased $800,000 while international concentrate revenue decreased $700,000, and third party contract manufacturing sales decrease $1.5 million.

Gross profit in the third quarter of 2016 was $1.6 million or $900,000 less than the third quarter of 2015. Higher manufacturing and regulatory expenses related to manufacturing of our drug products, Triferic and Calcitriol, reduced gross profit by $400,000.

The remainder of the decrease was due to lower unit volumes on contract manufacturing sales and on domestic and international business compared to the third quarter last year. Gross profit for the first nine months of 2016 was $4.8 million or $2.1 million less than the first nine months of 2015.

Gross profit decreased by $1.5 million due to higher manufacturing and other direct costs related to our drug products, which also included $300,000 in value-add taxes paid on the $4 million on licensing payments, we receive from our international licensing agreement for China.

Remainder of the decrease was due to lower unit volumes on contract manufacturing sales and on domestic and international business.

Our SG&A expense during the third quarter was $5.1 million compared to $3.8 million in the third quarter of 2015, the $1.3 million increase in expenses was primarily due to non-cash equity compensation cost increasing by $1.5 million in comparison to the third quarter last year.

Year-to-date SG&A expense was $15.1 million compared to $13 million for the first nine months of last year. Again the $2.1 million increase was primarily due to higher non-cash equity compensation of $1.7 million and higher legal expenses of $400,000.

Our research and development expense was $1.3 million and $4.6 million in the third quarter and first nine months of 2016, and that compares to $1.2 million and $2.9 million in the third quarter and first nine months of last year. This reflects additional clinical research work for other our Triferic indication.

On income taxes, we recognized approximately $400,000 income tax expense in the first nine months of the year related to the Wanbang payment. These taxes can be credited against future U.S. tax liabilities and carried forward to offset our future income tax expenses.

On the net loss, our net loss for the third quarter was $4.5 million compared to $2.4 million in the third quarter of 2015 or $2.1 million higher, with decreases in gross profit of $900,000 and an SG&A of $1.3 million. Net loss was $0.09 per share compared to $0.05 per share in the third quarter of 2015.

Our year-to-date loss was $14.7 million compared to $8.7 million in last year’s first nine months. R&D costs were up $1.7 million and SG&A costs were up $2.1 million compared to the first nine months last year. Loss per share was $0.29 compared to $0.17 for first nine months of 2015. On our liquidity and capital resources, our cash position is solid.

We have adequate cash resources to support development of our drug business, operations and associated working capital needs. As of September 30, we had current assets of approximately $80 million and net working capital of $72.5 million. We have approximately $58 million in cash and investments as of September 30th.

Our uses of cash have been primarily for research and product development, investments in inventory to support our drug product launches and for our other operating expenses.

Cash flow from operations used $13 million in the first nine months of 2016, which included R&D of $4.6 million and increases of $3.9 million inventory and $3 million in accounts receivable. We also received $3.3 million net of taxes pursuant to the Wanbang agreement. Our capital expenditures for the first nine months of 2016 were $300,000.

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 additional clinical indications for Triferic.

However, spending on these indications is expected to be minor in relation to our current cash resources over the next year. In summary, we have adequate capital resources to make these investments in accounts receivable, inventory and research and product development. As we get closer, what we expect will be a ramp up in commercial drug sales.

It’s important to keep in mind that we have a significant deferred tax asset that can be utilized to offset future income tax liabilities. We have net operating loss carry forwards of approximately $150 million, and research and development tax credits of approximately $8 million. I will now turn the call back to our operator Bethany for some Q&A..

Thank you. [Operator Instructions] And we will take our first question from Annabel Samimy of Stifel..

This is, [indiscernible] in for Annabel. First, can you discuss the rationale behind not lunching Triferic until this reimbursement, specifically the details on potential scenarios launching under the bundle versus outside the bundle? And then second, as the AP [ph] goes from 6% to 2.5%, is the incentive for dialysis providers gone? Thanks..

Sure. So, as you know when we launched the product commercially, the reimbursement we were giving from CMS was in the bundle. Prior to the 2016 year, when CMS came out with guidance, we spoke to them late in 2015 and then going in 2016 and we have been pursuing the add-on reimbursement.

And the reason for that is because when they put the bundle in place in 2011, they did so with only products or drugs that were available at the time and they stated that. And they said that they needed to address new innovative therapies.

So, our belief is and remains that Triferic is a new innovative therapy and deserves reimbursement on their add-on which is exactly what we continue to pursue.

If we ever got to a point in the future which today I can tell you, I don’t see us getting to where we said, okay, let’s sell drug in the bundle, we believe we’ll have the same type of success in relation to the drug becoming standard of care.

We believe that whether in the bundle or outside of the bundle, Triferic will become standard of care for iron delivery for hemodialysis patients.

With reimbursement add-on, which would be 6%, not 2%, although I understand what you are talking about because there is some language about a 2%, but it wouldn’t apply to this transitional add-on for Triferic, but even with 2%, I think you would see greater incentive. In other words quicker adoption of the drug in the marketplace.

So, our view is either away, the drug will become standard of care, a little bit quicker with reimbursement whether it’s 2% or 6%, although we believe it will be 6%. And then go ahead and ask me your second question again..

That was both of the questions..

That was both them? Okay..

Yes. Thank you..

[Operator Instruction] And ladies and gentlemen, this does conclude today’s Q&A session. I would like to turn the call back over to our presenters for any additional or closing remarks..

So, as always, we thank you for your support in Rockwell and we look forward to talking to you on the next call. Thank you..

And ladies and gentlemen, this does conclude today’s conference. Thank you for participation. You may now disconnect..