Paul Arndt - Managing Director, LifeSci Advisors LLC. Robert Chioini - Founder, Chairman and Chief Executive Officer Thomas Klema - Vice President, Chief Financial Officer, Treasurer and Secretary.

Charles Haff - Craig-Hallum Capital Group LLC.

Good day and welcome to the Rockwell Medical Second Quarter 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Paul Arndt with LifeSci Advisors. Please go ahead..

Thank you, Don, and good afternoon, everyone. Thank you for attending Rockwell Medical's second quarter financial results conference call. I'm Paul Arndt with 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, Wednesday, August 9, 2017, 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'd now like to hand the call over to Rob Chioini, Founder, Chairman and CEO of Rockwell Medical. Rob, please go ahead..

Thanks, Paul. Good afternoon. Thank you for joining us. On the call with me today will Tom Klema, our Vice President and Chief Financial Officer. We had a very busy quarter and have a number of important updates for you.

We also want to be sure our shareholders have the information needed to better understand the strategy we are pursuing, which management firmly believes is the right strategy. First, let me just cover the highlights from the quarter's financial performance. Sales were $13.2 million compared to $13.4 million in Q2 2016.

Gross profit was $1.5 million, unchanged. Net loss was $7.1 million or $0.14 per share compared to $5.4 million loss or $0.11 a share in Q2 2016. This increase in loss was the result of increased in non-recurring operating expenses which were primarily due to arbitration, litigation and Annual Meeting-related costs.

Cash and investments were $43.2 million as of June 30, 2017. Although we burned cash during the quarter, we have adequate cash to execute our strategy.

We anticipate that with positive developments for either Calcitriol or separate reimbursement for Triferic, our cash use will quickly be curtailed and we will be able to generate positive operating cash flow. Regarding Triferic, as most of you know, we are pursuing separate reimbursement for it.

This is a strategy choice that we have very consciously made. The simple fact is that separate reimbursement will ensure that there will be broad adoption of Triferic by providers and doctors, and that all patients will have access to its clinical benefits.

Triferic can improve patients' lives, and importantly, reduce overall health care costs by decreasing the complications associated with the severe anemia that patients suffer from. We are working hard to secure the proper reimbursement.

I have made many trips to Washington, D.C., and I recently met with the highest levels of Health and Human services and Centers for Medicare and Medicaid Services, which oversees the entire Medicare program.

I believe these organizations understand the clinical and cost-saving benefits of Triferic, including the reduction in anemia-related complications, and that there is a critical need for providing a reasonable separate reimbursement for the therapy to ensure doctor and patient access.

I was pleased to learn that HHS and CMS have studied this issue this closely and have recognized the support we have from key members of Congress, along with dialysis providers and patient advocacy groups and patients themselves.

It remains difficult for us to predict the timing of the federal government finalizing separate reimbursement for Triferic and to have 100% clarity on the outcome, but I can tell you that we are working hard on the issue and that the frequency and depth of our communications with CMS has increased considerably.

Our discussions suggest that they understand our position and recognize the importance of benefiting patients clinically and reducing health care costs and of sending a positive signal to would-be innovators in the renal market. We obviously cannot guarantee Triferic will receive separate reimbursement, but we remain confident that it will.

Separate reimbursement would ensure that dialysis providers would be incentivized for broad adoption. Approximately 70 million dialysis treatments occur in the U.S. every year, and if all goes expected, the average net price of Triferic should be in the low double-digit dollars per treatment.

Our expectation is that Triferic should become a standard component of the dialysis treatment for the majority of patients. In the meantime, we continue marketing to and educating customers on Triferic, and we continue to see positive results from our drug sample program in both the clinical and cost-saving benefits that Triferic provides.

Consequently, the medical community continues to show more and more interest in Triferic and is eager to get access to this innovative iron therapy. Once we have reimbursement decisions, it will take us some time to hit our full potential on Triferic.

We do however anticipate a pretty robust ramp in sales based on the consolidated nature of our customer base, where about seven customers make up 85% of the market. Internally, we share a developed - we have developed a commercialization plan and we expect it'll get us into market quickly.

Again, I can't predict exactly when we will secure add-on reimbursement. The government has no regulatory deadline, and this is not a formal process. But as soon as we have something more to report, we will let you know. Calcitriol. We have had a number of challenges with the manufacturing.

As we noted on the last call, our contract manufacturer had some stability issues and we've been working urgently with new manufacturing partners to ramp production so that we can be in the market as fast as possible. And this process is working well. Calcitriol, as you may know, is the most physiologic and most potent vitamin D product.

There is currently no other Calcitriol product in the U.S. dialysis market available in a vial. Rockwell's is in a vial. This provides a significant competitive advantage because customers in the U.S. will not use ampules.

So should we see a Calcitriol competitor enter the market, they will need to do so offering a vial, which is no easy task, and which should take some time. The market opportunity we have for Calcitriol is very encouraging.

And we believe that once we produce sufficient quantities to distribute to our customers, we will successfully launch Calcitriol and generate considerable revenue. It will provide us some diversity of revenue base and further entrench our presence with our customers.

We have traditionally not provided forward-looking guidance, especially for a new product, but I do want you to know that our internal research suggests that once we are able to go to the market effectively, we believe there is a significant untapped demand for Calcitriol.

Obviously, we will not see the full benefits of broad market penetration during Q4 or even Q1 of next year, but we believe we can ramp the revenue and cash flow from this drug once we have general availability. We estimate the vitamin D market in the U.S. to be approximately $200 million annually.

The next step in the process with Calcitriol is a stability reading the first week of September from the manufacturing batches that were produced. And if that goes as we anticipate, then Calcitriol should be available for commercial distribution as early as October this year.

As you may have seen during the quarter, we settled the arbitration proceeding with Baxter. Baxter, as you know, is our exclusive distributor for our concentrate products in the U.S. The settlement included a mutual release with respect to all known claims existing on the date of the settlement.

No payments were made by either party in connection with the settlement. Ultimately, the economics of our relationship with Baxter are largely unchanged. Both remain incentivized to work together and to increase sales.

In regards to our global business development, we continued to be active, both in progress with current partners and new potential partners. We are active in discussions with potential partners in South America, Mexico, Korea and Japan. All of these substantial markets show a lot of interest.

In Europe, the largest existing market outside of North America, we have active discussions underway. We expect our partnering activity to increase here after we receive feedback from our meeting with the European Medicines Agency, which we expect will occur in fourth quarter.

In China, remain on track for our clinical trial to start in Q4 this year, with commercial market entry targeted for the second half of 2020. Anticipate China to be a significant revenue opportunity revenue opportunity as the market there continues to grow at double-digit rates.

There's an estimated 300,000 dialysis patients currently in China, with the market growing at 15% annually. In Canada, where we have a partner, we expect Triferic to enter the commercial market mid-2019. Canada has over 20,000 patients and represents a meaningful opportunity for us.

In India, we are in advanced discussion now with a major pharma company and are working with the government regulatory body there to see if a post-marketing study will be acceptable. India, with a population four times the size of the U.S., is another large dialysis market opportunity for us.

Currently, there about 200,000 patients and they are growing at double-digit rates as well. We recently terminated our agreement with our Saudi partner in the Middle East due to a material breach on their part. And we are evaluating other opportunities now in that territory.

Regarding Triferic clinical development, work on additional potential indications is continuing and we are progressing on all fronts. Intravenous delivery for Triferic is on track to be available for commercial use in mid-2018. This product, when approved will have use in dialysis patients, PD patients and cancer patients.

And as we see in dialysis patients, cancer patients suffer from what's called the anemia of inflammation. In dialysis, IV delivery will be especially attractive to clinics currently using solid bicarbonate cartridges, which is widespread in Europe and also some other markets. IV delivery enables Triferic to markets.

IV delivery enables Triferic to be delivered directly into the bloodstream. Regarding peritoneal dialysis, we completed our dose-ranging study, and that data is currently being analyzed. We expect to present the results at the ASN this November. We also expect to conduct a Phase II/III study mid-2018 and then file the NDA in 2019.

We expect to gain commercial approval one year later in 2020. Regarding total parenteral nutrition, we have received comments from the FDA recently and we are now evaluating elevating the clinical path forward may be. And with our orphan drug, IRIDA, we hope to see data in the next quarter to determine what the clinical path forward may be.

Finally, during the quarter, we held our Annual Shareholders' Meeting. As most of you know, Mark Ravich was elected to the board. We welcome Mark to the Board and know he will be a key contributor of overseeing our strategy and assisting the company to drive shareholder value.

The Board collectively believes that as we get closer to commercializing Calcitriol and Triferic, we should add additional Directors with pharma experience among other strengths. We have been vetting candidates and have engaged our largest shareholders to ensure we identify the best candidates, and ones that meet both our criteria.

We are seeing some great candidates, and I look forward to updating you on the progress we have made in the coming weeks and months. Now Tom will discuss the financials in more depth. Once he is done, we'll open it up for questions..

Thank you, Rob, and good afternoon. I'll be covering the financial results for the second quarter and the first six months of 2017. We will also discuss our capital resources and liquidity. On our sales in the second quarter were $13.2 million, $200,000 or 1.6% last compared to the second quarter of last year.

Our domestic concentrate business sales were $200,000 less due to lower sales volume. Our international sales were $100,000 higher in the second quarter of last year. Year-to-date for the first six months, our sales were $27.8 million, an increase of $800,000 or 2.8% over to first six months of last year.

Our domestic business increased $800,000 over the first six months which was due mainly to onetime additional orders from Baxter. Our international sales were at the same level as the first half of 2016. Our gross profit in the second quarter was $1.5 million, unchanged from the second quarter of last year.

Gross profit margins were 11.3% in the second quarter compared to 11.1% in the second quarter of 2016. Gross profit in the first six months of 2017 was $3.9 million, an increase of $700,000 or 21.1%. Gross profit margins were 13.9% compared to 11.8% in the first half of last year.

The gross profit increase was partially due to higher sales of our concentrate products and partially due to lower cost as a result of the payment of $300,000 in value-add taxes paid in 2016 related to the licensing payments received following the execution of our license agreement with Wanbang Pharmaceutical. On SG&A.

Our SG&A expense during the second quarter of 2017 was $6.5 million compared to $5 million in the second quarter of 2016. The $1.5 million expense increase was primarily due to the higher legal cost relating to outstanding litigation and arbitration expenses and the 2017 Annual Meeting.

A reduction in equity compensation cost of $400,000 was partially offset by higher compensation and benefit cost of $200,000. Year-to-date, our SG&A cost $12.6 million compared to $10 million in the first half of last year.

The $2.6 million increase was primarily due to higher legal and professional costs relating to outstanding litigation and arbitration and the 2017 Annual Meeting. Equity compensation cost decreased $800,0000 compared with the first half of last year, partially offset by higher compensation and benefit cost of $300,000.

Marketing cost for Triferic increased $200,000 compared to the first half of last year.

On our R&D, we incurred product development and research costs related to the commercial development, patent approval and regulatory approval of new products, primarily Triferic, aggregating approximately $1.7 million and $2.1 million in the second quarter of 2017 and 2016 respectively.

Research and product development cost incurred in the first six months of 2017 and 2016 were $2.9 million and $3.4 million respectively. And those were largely related to Triferic testing for us in other indications and other product presentations. Our net loss for the quarter was $7.1 million compared to $5.4 million in the second quarter of 2016.

The increase in loss was largely due to increased SG&A cost. The net loss was $0.14 per share compared to $0.11 per share in the second quarter of 2016. Year-to-date net loss was $11.8 million compared to $10.2 million in the first half of 2016.

The increase in net operating loss was largely due to higher SG&A expenses, partially offset by lower R&D spending. Net loss per share in the first six months was $0.23 per share compared to $0.20 in the first six months of last year.

The increase in loss was a result of increase in non-recurring operating expenses which were primarily due to arbitration and litigation and Annual Meeting-related cost. Turning to liquidity and capital resources. Our cash position is very strong.

We have adequate cash resources to support development of our drug business operations and the associated working capital as well as to continue our research and development investments. As of June 30, we had current assets of $63.8 million and net working capital of $56.1 million.

We have approximately $43.2 million in cash and investments as of the end of June. Our uses of cash have been primarily for research and product development, investments in inventory to support our drug product launches and for operating expenses.

Cash used in operating activities was $12.3 million in the first half of this year, which included research and development expenses of $2.9 million and an increase of $2.5 million in inventory levels.

We increased our Triferic inventory over the last year in preparation for commercialization of Triferic and we believe we have adequate inventory to meet anticipated requirements. We have classified $2.7 million of Triferic's active pharmaceutical ingredient as non-current inventory as of June 30.

Looking forward, we anticipate that we'll increase our accounts receivable as we increase our drug product sales and we may also increase inventories to more modest degree as we commercialize Triferic and Calcitriol.

We also expect to continue investing in research and product development, such as clinical testing in connection with peritoneal dialysis, an orphan drug indication, pediatric indications and certain other indications as we work to expand the potential uses for Triferic.

Future spending on those indications is expected to be minor in relation to our cash resources. We believe that we have adequate capital resources to make these investments in accounts receivable, inventory, research and product development. And we expect to generate positive cash flow from operations when our drug products generate substantial sales.

I will now turn the call back to our operator, Don, for some Q&A..

Thank you. [Operator Instructions] And we will take our first question from Charles Haff with Craig-Hallum..

Hi guys. Thanks for taking my questions. Maybe we could start off with where you left off talking about working capital. So you had a $2.8 million outflow in Q1 and a $2.6 million outflow in 2Q from changes from working capital in assets and liabilities.

Where do you think that may end up in the back half of this year?.

Well, Charles, I think we will continue to invest in research and development. And so we're going to continue to expend probably about the same amount in the back half of the year as we did in the first half of the year in R&D.

And on the inventories, I anticipate a modest build in inventories as we translate the API into finished product for Triferic. And with Calcitriol, we will be building some modest amount of inventory. So the cash burn in the second half of the year, I would expect to be substantially less than what it's been in the first half of the year..

Okay, and specifically on the changes in the assets and liabilities, do you expect those to be similar in the second half and where they were in the first half?.

Yes, I think the inventories will not grow too much now. That was a big user of cash. And then some of the liabilities that we paid down in accrued liabilities and accounts payable, those should not repeat gain in the second half..

Okay. Okay, thank you. And then you talked about the arbitration with Baxter. Congratulations on getting that behind you.

I was wondering, were there any Baxter nonrecurring payments in revenues this quarter? And if so, how much those were?.

There were no unusual payments in the quarter. So I would expect the revenue to look very similar going forward..

Okay, thanks Tom. And then Rob, I had a question for you on the add-on reimbursement.

I think you mentioned on the last call that you were working with CBO on trying to get a CBO score, Any new developments on that front in the last few months?.

Yes, I mean I don't recall mentioning that, Charles. The most I can say is we've had some - like I mentioned some really good meetings with the right people. Those meetings are ongoing, that dialogue is ongoing. We've covered everything, really, from A to Z. And that's probably the most I can say about it right now..

Okay. And then I may have missed this in the past, but this is the first time that I've heard you talk about Triferic price, the way that you characterized it on your prepared remarks, in the low double-digit dollars per treatment.

I'm just wondering how you kind of established pricing level if you can just kind of walk me through the steps in terms of the value and quantifying the value that it offers.

And any idea what your cost of goods sold may be to produce Triferic to generate this type of revenue per treatment?.

Yes, that's a great effort for the question, but I can't really - I'm not really in a position where I feel comfortable talking about how we got there or what the costs of goods are. But as we move forward, we can certainly give you some more clarity on that..

Okay. I think that does it for me. Thanks for taking my questions..

Thanks..

[Operator Instructions] It appears that that's all the time we have for - budgeted for today's call. So at this time, I'll turn the call back to Rob for any closing remarks..

Well, we appreciate your support and we look forward to giving you updates as we get them. Thanks..

This does conclude today's conference. Thank you for your participation. You may now disconnect..