Paul Arndt - Managing Director, LifeSci Advisors Rob Chioini - Founder, Chairman and CEO Tom Klema - CFO.

Charles Haff - Craig-Hallum David Bouchey - IFS Securities.

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

Thank you, operator and good afternoon everyone. Thank you for attending Rockwell Medical's third 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 would like to remind everyone that various remarks of 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 will speak only as of today's date, Wednesday, November 8, 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 and thank you for joining us. On the call with me today will Tom Klema, our Vice President and Chief Financial Officer and Dr. Ray Pratt, our Chief Medical Officer. We had a very busy quarter and have a number of important updates for you.

First, the highlights from the quarter’s financial performance versus the same time last year. Sales for the quarter were up 14% at 14.6 million versus 12.8 million, gross profit was 1.1 million versus 1.5 million, net loss was 5.1 million versus 4.6 million.

Now regarding our pursuit of gaining separate reimbursement for Triferic, as you know this is a top priority for us. We have made substantial progress since our last update and we’ve made considerably closer to what we anticipate will be a favorable outcome.

Over the last several weeks we have had productive meetings with the Centers for Medicare and Medicaid Services, CMS and also with the Center for Medicare and Medicaid Innovation, DMMI. At their request, we prepared and submitted a proposal to the innovation center at CMS.

Among other things the document highlights the improved clinical benefits that Triferic provides to patients, as well as the significant cost savings Triferic delivers to both Medicare and dialysis providers.

Our analysis concluded that 100% of the hemodialysis patients that Medicare is responsible for were given Triferic as part of their treatment protocol, Medicare would save substantially more than $1 billion per year. To put that number in context, Medicare spends approximately $33 billion on services for beneficiaries with end-stage renal disease.

These significant cost savings which are based on our clinical research work and real reviews and which I should carefully note depend on various assumptions that may or may not prove true. But driven by the reduction in other medicines, treatments and medical complications that would occur from widespread adoption of Triferic.

In particular, we aim to show Medicare that the clinical evidence suggests there would be significant reductions in intravenous iron, infection related in patient hospitalizations, medications and blood transfusions among other things in the hemodialysis population if Triferic was widely adopted.

Not only would CMS save real money, but so to with the major providers of dialysis in our opinion. We believe Triferic would reduce various complications that arise today in the treatment of ESRD patients.

With the reduction in those complications, comes a reduction in the administrative burden, supplies and medicines that are a net cost for the dialysis industry. For some of the larger providers in the business, we believe the net savings could exceed $100 million per year.

As importantly, we believe the patients themselves would have a better quality of life. As you probably know, hemodialysis patients of suffer from fatigue, low energy levels, sleep disturbances and other issues that lower their quality of life.

And while we have not completed a peer reviewed study on quality of life benefits for patients using Triferic, data from facilities that are administering Triferic indicate that many patients experience improvements in fatigue symptoms and have increased energy and improved cognition.

It is also worth noting there has not been a single pharmacovigiance that is adverse reaction reported to date. Making Triferic available to patients is a key initiative of our company, and we have a significant support in this initiative.

Our champions in Congress and other influential agencies are encouraging CMS to expedite the approval of separate reimbursement for Triferic. We appreciate the efforts made by these senior congressional leaders on behalf of dialysis patients, and we know that CMS is considering the cost savings in quality of life issues carefully.

We believe we are well positioned to gain a favorable decision from CMS relatively soon. I wish I could be more specific about the timeframe or date as I am sure, that’s what we all want to know, but we simply don’t have one. We know our material is under review and we know that hardworking people at CMS are engaged.

In the meantime, our marketing and educational efforts continue to be robust and generate positive results.

Additionally, we have been participating in industry conferences promoting our patient and healthcare provider centered websites, advertising in relevant journals and speaking with the largest providers of dialysis services in anticipation of separate reimbursement.

Our Triferic drug sample program continues to expand, and is made up almost entirely of clinics using central feed dialysis aid systems. Feedback on the clinical and cost savings benefits continue to be very positive.

We have redundant manufacturing relationships in place and a distribution network ready to go, with a capability to supply the entire US market and more.

Our current belief is, that if and when Triferic receives separate reimbursement there will be a broad adoption of Triferic by US dialysis providers, driven by their own economic incentive, and Triferic demonstrated clinical benefits and we are ready to go.

Regarding Calcitriol, we provided an update two weeks ago that the FDA requested extra time to review our post-approval drug manufacturing submission which we filed with the FDA on September 28.

The FDA was required to provide us with a determination on the submission within 30 days, but let us know prior to that deadline that they needed extra time to review it. We do not have the sense that the FDA has any substantive concerns or issues, they told us simply they needed more time to get our submission and data.

We expect to have answer from the FDA in about four months, assuming FDA has no other issues, we will be prepared to begin commercial sale of Calcitriol. The market opportunity is exciting. We believe that once we can produce sufficient quantities to distribute to our customers, we will generate considerable revenue and cash flow.

We believe the Vitamin D market for dialysis patients in the US is approximately 200 million annually. We’ll provide further update as we get them. We continue to be active with our global business development, with potential partners in South American, Mexico and Russia.

We have moved beyond evaluation or exploratory discussions, and we are now on active due-diligence and preliminary deal discussions working towards final decisions. At the same time, efforts have been initiated to prepare the required regulatory filing in Latin American countries.

Korea and Japan are also substantial markets where we have a lot of interest. In Europe, we have active discussions in due-diligence activities under way. We expect our partnering activity here to increase after we meet with the European Medicines Agency, which we anticipate will occur in the first quarter of 2018.

In China, we are on track for the Triferic clinical study to start first quarter next year. Our expectation is entering in the commercial market in the second half of 2020. We anticipate China to be a significant revenue opportunity as the market there continues to grow at double digit rates.

In recent discussions with strategic partners there, we understand that the patient population is now nearing 0.5 million dialysis patients. In Canada, where we have secured a partner, we expect Triferic to enter the commercial market mid-2019. Canada has more than 40,000 dialysis patients and represents a meaningful opportunity for us.

In India, advance discussions continue with a major pharma company and together we are working with the government regulatory body to achieve the fastest path for a regulatory approval. India is another large market, it’s a good opportunity for us and has over 200,000 dialysis patients growing at double digits.

We’re also in discussion with a new potential Saudi partner for the Middle East. Regarding our clinical development progress, first you may recall that our post-marketing approval commitment for pediatric studies was part of the NDA approval for Triferic. I am pleased to report that Rockwell has completed the first of two required pediatric studies.

We also presented the study data at the American Society of Nephrology Kidney Week meetings just a few days ago. We expect to initiate the second clinical study in pediatric patients mid-2018. We’ve also completed the (inaudible) clinical study of Triferic compared to new dialysis patients.

The data also presented at the ASNA few days ago demonstrate that Triferic added to the peritoneal dialysis fluid results in a dose dependent uptake of iron from the peritoneum to the blood. This indicates that we have a range of doses available.

We had additional studies planned to establish the proper dose for iron replacement in this patient population. Currently we expect to conduct a phase 2 study mid-2018 and a phase 3 study in 2019, file the NDA in 2020 and gain approval for commercial sale one year later in 2021.

Regarding intravenous delivery for Triferic, we remain on track to receive FDA approval for commercial use mid to late 2018. IV delivery will be the product of choice for clinics currently using solid bicarbonate cartridges which is widespread throughout Europe and some other regions.

IV delivery enables Triferic to be delivered directly in to the blood stream by passing a dialysate. Lastly regarding our orphan drug IRIDA, we should data in the next four to six weeks, and we should be able to determine what the clinical path forward will be. With that Tom will discuss the financials in more depth.

Once he’s done, we’ll open up the call for questions. .

Thank you Rob, and good afternoon. I’ll be covering the financial results for the third quarter and first nine months of 2017 and also discuss our capital resources and liquidity. Our sales in the third quarter were 14.6 million, 1.8 million or 14.1% higher than the third quarter of last year.

The increase was mainly due to higher domestic concentrate sales of 1.6 million which included faster delivery across to Baxter which increased approximately 600,000 due to volume growth.

Our international sales were 200,000 higher than the third quarter of last year and revenue recognized from licensing fees was the same as the third quarter last year. Our sales in the first nine months of the year were 42.5 million, an increase of 2.6 million or 6.4% over the first nine months of last year.

Our domestic concentrate sales increased 2.4 million or 6.9% mainly due to increased product volume and additional pass-through billings for delivery services to Baxter. Our international sales were 200,000 higher and our drug business revenue was not significant in either the first nine months of 2017 or ’16.

Our gross profit in the third quarter was 1.1 million compared to 1.6 million in the third quarter of last year. Our concentrate gross profit decreased 200,000 due to lower pricing resulting from modifications to our contractual terms with Baxter. Our net drug business costs were approximately 300,000 higher than the third quarter of 2016.

Our drug business cost in the third quarter included inventory reserves of 700,000 or inventory that was expected to be surplus to our requirements. Gross profit in the first nine months of 2017 was 4.9 million, an increase of 100,000 or 3.4%. Gross profit margins were 11.6% compared to 11.9% in the first nine months of last year.

The gross profit increase was primarily due to 500,000 in lower cost related to our drug business operations, primarily for regulatory fees and value add taxes paid in connection with our execution of the Wanbang license agreement and partially offset by inventory reserves or surplus product.

The increase in gross profit was partially offset by lower gross profit on the concentrate business of 400,000. On our SG&A, the SG&A expenses for the third quarter was 4.8 million compared to 5.1 million in the third quarter last year.

The 300,000 expense reduction was primarily due to lower equity compensation expenses of 900,000 and that was partially offset by a legal cost and expenses related to act of shareholder matters and the contested 2017 annual meeting aggregating 500,000.

Selling, general and administrative expense for the first nine months of 2017 was 17.4 million compared to 15.1 million for the first nine months of last year, a 2.3 million increase was primarily due to higher legal and professional cost relating to legal expenses, the settlement with Baxter and the contested 2017 annual meeting.

Equity compensation cost increase 1.8 million compared to the first nine months of last year, partially offset by personnel and benefit cost of 500,000. Marketing cost for Triferic increased 400,000 compared to the first nine months of last year.

We incurred product development and research costs related to the commercial development, patent approval and regulatory approval of new products, primarily Triferic, aggregating 1.3 million in both the third quarter of 2017 and ’16.

Research and product development costs incurred in the first nine months of the year were 4.2 million compared to 4.6 million last year, and in both years were largely related to Triferic testing and development cost were used in other indications and other delivery presentations.

Our net loss for the quarter was 5.1 million compared to 4.6 last year. The increase in loss is mainly due to lower gross profit. The net loss was $0.10 per share compared to $0.09 last year. Year-to-date net loss was 16.9 million compared to 14.8 million in the first nine months of last year.

The increase in net operating loss was mainly due to higher SG&A expenses and partially offset by lower R&D spending. The net loss per share in the first nine months of 2017 was $0.33 per share compared to $0.29 per share in the first nine months of last year.

In terms of our liquidity and capital resources, our cash position is adequate to support development of our drug business operations, and the associated working capital, as well as to continue our research and development initiatives. As of September 30, we had current assets of 61.2 million and networking capital of 53.6 million.

We have approximately 39 million in cash and investments as of the end of September. Our uses of cash have primarily been for R&D, investments and inventory to support our drug product launches and for our operating expenses.

Cash used in operating activities was 16.3 million in the first nine months of 2017, which included R&D expenses of 4.2 million and an increase of 2.4 million in drug inventory levels. We have increased our Triferic inventory in preparation of booking sales for Triferic post separate reimbursement approval.

We believe we have adequate inventory to meet anticipated demand. We’ve classified 1.5 million of Triferic’s active pharmaceutical ingredient as non-current inventory as of September 30, based on the expected Triferic demand and production plans during 2018.

The amount of non-current inventory declined from the second quarter of 2017, mainly as a result of the conversion of API in to finished goods during the third quarter. We believe our capital resources are adequate.

As we generate drug sales, we anticipate we’ll increase our accounts receivable and we expect to also increase inventories to a more modest degree from their current levels. We expect to continue investing in R&D during 2018 and spending on R&D in 2018 is expected to be minor in relation to our cash resources.

We believe we have adequate capital resources to make these investments in accounts receivable, inventory and R&D as well as fund our operating expenses. With that I will now turn the call back to our operator for some Q&A..

[Operator Instructions] We’ll take our first question from Charles Haff with Craig-Hallum. Please go ahead sir. .

I noticed on the cash flow statement under financing cash flows, you had a 40.1 million inflow from sale of investments held for sale and 34.2 million outflows for purchase of investments held for sale.

Could you kind of describe that for us a little bit?.

We repositioned the portfolio of investments to be somewhat of a less risky portfolio in light of the expected interest rate increases that may come years ahead. We’re not an investment company and what we did with our excess cash was to invest it to achieve a modest rate of return versus leaving it at the bank.

And what we’ve achieved over the last three years is a net return of approximately 122 basis points as oppose to getting almost nothing by keeping the cash in the bank. So we’re ahead about 1 million bucks and the intent was to reposition our portfolio and leave our self very liquid going forward so that we’re not exposed to principal risk. .

And then Rob on Triferic (inaudible) reimbursement so now you’ve met with CMS and CMMI and you’ve had some discussions there, and I’m not going to ask you about timing because it’s impossible to predict timing for FDA or for CMS both of them.

But I’m wondering in terms of the discussion you said you expect a favorable outcome but the cost savings is very compelling.

What do you think maybe if there is any sticking points on their end, what do you think there may be in terms of sticking points based on what you submitted and based on the meetings that you’ve had so far?.

Well we had multiple discussions with the groups I mentioned and there really hasn’t been a sticking point. There’s been no single issue that’s been brought up in any kind of opposing view. Again we can’t guarantee anything, we feel very confident.

All the body language, all the discussions have been very proactive on their part and we certainly get the sense they’re helping us not taking an opposing view. .

And then when you think about getting additional reimbursement, I assume, correct me if I’m wrong, this would be outside of the bundle, is that right?.

That’s correct. .

And then so if CMS under the ESRD program is in a bundle payment scheme and this is additional cost for Triferic, can you walk us through or help us understand the $1 billion of savings, were that savings accrued to the provider that’s getting the ESRD bundle payment or are you saying like down the road this goes in to the bundle or just help us understand that $1 billion number a little bit better.

.

Without getting in to the detail, that $1 billion number represents savings across the board and it covers savings to the provider and also savings to the government, to Medicare and it covers savings within the ESRD world and then outside the ESRD world.

For example, when a patient has to go to a hospital for a blood transfusion or an infection in their blood, hospitalization costs are significant, days in hospitals are significant So the cost savings in the – there’s a lot more detail in the submission and it drills down to provider to CMS and then within CMS in the bundle and outside the bundle in each category.

Basically what it says is Charles the money set aside could give Triferic separate reimbursement is covered and then some with the savings that are generated by this drug. So the drug pays for itself. .

And last question from me on the Triferic inventory, you mentioned 1.5 million of non-current inventory. Non-current, I just think about current assets and liabilities.

Does that mean that you’re not expecting to sell that inventory within one year, is that why you’re classifying it as non-current?.

That’s essentially correct Charles. It’s all active pharmaceutical ingredients that would go in to the finish product and our sales and operations planning team has developed a production plans based on our expected sales. We’ve determined that that inventory would be more than what we would use in the next 12 months for production purposes.

So essentially we’ve got based on our projections something in the order of 1.5 million inventories that we would use in the future. .

So it’s like raw materials or if it’s not finished inventory that’s --..

And it’s not exposed, none of that is exposed to any exploration or obsolescence in the next year. .

And we’ll go next to David Bouchey with IFS Securities. Please go ahead sir..

I’ve a lot of questions, but let me start with some basic housekeeping questions for Tom.

Tom what was the share count that you used to figure out your basic and diluted earnings per share for the quarter?.

Right around 51 million. .

So you were talking about higher concentrate sales and higher pass-through to Baxter, and that there might be a lower pricing as recorded by the renegotiated Baxter agreement.

So what kind of guidance can you give us, how should we think about gross margins going forward? Are they going to be what we see now or are they going to be back up in to double digits?.

On the concentrate business, it’s going to continue to run where it is now, but has a – we took a reserve for inventory that we thought was surplus requirements aggregating about 700,000 this quarter. So I would tend to look at it kind of along those lines, the increase in freight passed through the Baxter is just a pass-through.

So it doesn’t require margins per say, it’s just zero-some game, right. We invoice them for the amount of cost that we incur. That 600,000 that you saw is simply sales and cost with a net impact of zero to the gross profit (inaudible), and it will probably continue at that level.

It may also increase because they are putting on some additional business. \.

Let me move on to the subject everybody wants to talk about which is Triferic. I know you were very active Rob in the American Society of Nephrology’s Kidney week last week in their conference. And at that conference, I believe there were representative from the department of health and inland services.

You gave a little talk and you talked about the kidney innovation accelerator which will be a find, but it will also bring together key components and funding opportunities from the FDA, the Centers for Medicare and Medicaid services, NIH and HHS to ensure that the path to commercialization is straight and clear.

I can kind of sense in your voice that you have a lot of confident.

Given this announcement from HHS, how do you interpret that?.

I interpret it all in a very positive way. I think it certainly highlights the emphasis that has been put on the kidney space in improving the lives of these patients with new and innovative therapies. And it just further strengthens or supports what we’re doing with our pursuit of getting Triferic reimbursed separately.

So there’s a real focus right now that we see obviously with the work we’re doing, but also within the kidney space on strange innovations where patients will access to new therapies because it’s been a very stagnant area.

And what Bruce Greenstein said, was there is a set of money aside for innovation and they want to spur innovation, which is really just kind of piggy backing off at what we’re doing with CMS and CMMI. .

This kind of goes along with the recent retasking of CMMI to make it a little bit easier to get innovative therapies on the market?.

Back in September some people may have picked up on this. But there was an article out by Seema Verma, the Director of CMS and CMMI, the innovation center. And the direction it was going to go in to, which was innovation and they are looking for companies to bring them innovative therapies that they can work in to the market to help benefit patients..

And the timing of these things may come in to play to be a very fortunate then which will have (inaudible). .

Yeah, I mean it certainly doesn’t hurt us, it certainly helps us.

We felt like we made a lot of progress with the prior administration and we felt like we were going to be successful with administration, and then when the new administration came in with the new President elect, there was a turnover in personnel and there’s certainly a more focus on, I don’t to say on patient care and quality care of patients, that’s always been there in the government.

But there certainly seems to be more business like mentality. And maybe it’s because of that or maybe it’s just timing. I don’t know, but it’s all good. .

Let’s turn to the Chinese market, you mentioned that it’s growing much faster than we had thought. And in my estimate I had the Chinese market for dialysis patient surpassing the US in 2020.

Do you think that might happen one year earlier, two years earlier?.

It would be a complete guess on my part. We’ve been working with some companies in China and the data seems to confirm that the population is starting to approach the size of the US already.

And there’s certainly a couple of million patients out there that need treatment, that haven’t been getting it and so it’s just a function of how fast, the private sector and the government put clinics up. And I think there are at about 6,000 clinics which is close to what we got here in the US.

So it’s probably very close in terms of size, and at some point it could happen earlier where they surpass us. I really don’t’ know what the estimate was. .

What did you talk about licensing [dials] that concentrates in China, have you had any feedback, any buzz about that from any of the nephrologist, who visited your booth during the conference. .

Actually we have, we’ve had interest on our concentrate as well as our mixing systems, and I say there’s probably a fair change that we might do some business there on that end as well. .

Will that be through Wanbang or would you look for a separate partner?.

These would be most likely different partners. .

And you mentioned at the beginning of the call that rate is there. I would like to perhaps if you can give me a sign, kind of a level of explanation for the previous CMC filings for Calcitriol.

What were the problems that the FDA identified during the previous CMC filings?.

Which filings are you talking about, the one that we just did in September or the one prior to that?.

Prior to that. .

Well we had a different manufacturer I reckon. .

We had a different manufacturer and they were having some difficulties in controlling the oxygen headspace, and one of the issues with the Calcitriol it’s very sensitive to oxygen, and so there was an inconsistency in product quality that just didn’t meet our standards. .

So what is it about oxygen that affects Calcitriol?.

Calcitriol has some spaces that are very easily oxidized and once it’s oxidized it loses its potency, and all of the Vitamin D tend to have this although the Calcitriol is more sensitive to it than the other ones. .

And so that was fixed when you go to the new sub-contractor does the manufacturing?.

Yes..

And exactly what did the FDA ask for in terms of how many batches did they need data for the filing that was done in September and how many did you provide?.

Well we typically try to provide data on two to three batches of materials that are manufactured. But it varies, there’s no absolute requirement from FDA as to how many batches are there and we certainly did a total of three batches with the last submissions. .

And as you get longer term data you are continuing to submit that to the FDA?.

Of course, it’s a requirement. .

And they haven’t asked for anything additional?.

We haven’t heard of anything yet. I.

Thank you. And now we’ll conclude our question-and-answer session. I would now like to turn the call back to Rob Chioini for any additional or closing remarks. .

Thank you for your support and we hope to have some more news to update you with soon. .

And that does conclude today’s conference. We thank you for your participation and you may now disconnect..