Rockwell Medical: SFP is Key to Future Earnings Power Print E-mail
Wednesday, 29 July 2009 18:00

Rockwell Medical Technologies (NASDAQ:RMTI) is a small-cap bio-pharmaceutical company with a core, growing business which manufactures, sells, and distributes dialysate (which remove toxins and wastes from the blood while replacing nutrients) products to patients with chronic kidney disease (CKD) and end-stage renal disease (ESRD) receiving dialysis (which is typically conducted three times per week). The Company has a 27% share of the U.S. dialysate market with three manufacturing plants and over 16.6 million treatments provided last year. RMTI also provides ancillary products to hemodialysis (HD) providers such as blood tubing, fistula needles, dressings, cleansing agents, filtration salts, and other supplies.

The Company's current line-up of dialysate products are designed to be the delivery vehicle for Soluble Ferric Pyrophosphate (SFP), which provides an opportunity for RMTI to expand upon its current market share by offering a value-added, high margin dialysate iron replacement therapy option for its customers while improving the clinical outcomes for anemic dialysis patients. The Company's core business includes the following: RenalPure (Liquid Acid and Powder Bicarbonate Concentrates), Dri-Sate (Dry Acid Concentrate and Mixing System), SteriLyte (Liquid Bicarbonate Concentrate), blood tubing sets, and fistula needles.

RMTI supplies products and services for the kidney disease and dialysis market, which is dominated by DaVita (NYSE:DVA) and Fresenius Medical (NYSE:FMS). The Company's reach includes 37 states and foreign countries located in Latin America, Asia, and Europe. The three major dialysis markets include the U.S., E.U., and Japan, which account for about 55-60% of treatments on a global basis.

An estimated 19.2 million in the U.S. have CKD, which is a progressive loss of renal function that is divided into five stages with ESRD representing the irreversible loss of kidney function which requires patients to receive dialysis to survive - making it the ultimate recession-proof business. Stage 5 CKD affects an estimated 395,000 patients in the U.S. and 2 million worldwide while 8.1 million people in the U.S. are estimated to have Stages 3 or 4 CKD.

Upcoming milestones for RMTI include the following:

1.) Report Phase 2b FDA clinical trial results for SFP during 4Q09-1Q10

2.) Initiate pivotal Phase 3 clinical trial for SFP during 2Q10

3.) Report results from a NIH safety study (non-FDA) during 2010

4.) File NDA for SFP with the FDA during 2011 for 2012 U.S. market launch

In mid-April, RMTI announced that the independent Data Safety Monitoring Board (DSMB) providing oversight for the ongoing SFP Phase 2b dose-range study reviewed the interim study data and informed the Company of the following: (1) no safety concerns were identified, (2) there is no need to add the highest SFP dose group of 20 ug/dl, and (3) continuation of the study was recommended with the five existing dose groups.

The U.S. market for IV iron replacement therapy is estimated at $500 million per year while the global market is about $850 million. SFP is a unique, water soluble form of iron which bypasses the liver and results in higher absorption to maintain normal iron/hemoglobin levels and replace the iron that is lost through dialysis. SFP is distributed directly into the blood so that the iron uptake occurs naturally at the cellular level. Because SFP is designed to be administered with dialysis, it complements the Company's existing product line-up and is convenient to ESRD patients who must undergo dialysis on a regular basis.

Currently marketed IV iron replacement therapies are processed through the liver, which results in variable and delayed processing of the iron in order to deliver it in a useful form to the body. SFP (dialysate iron) is differentiated from IV iron therapies because it is delivered directly in a useable form through dialysis and can be used by the bone marrow to produce new red blood cells while maintaining a steady, normal level of hemoglobin and iron. By maintaining a constant iron balance, SFP maximizes the creation of red blood cells, the generation of hemoglobin, optimizes the treatment response of EPO. Also, oxidative stress on the liver is avoided since SFP bypasses this route of processing and about 2,000 human doses of SFP have been administered with no safety concerns arising to date.  

Shares of Rockwell have remained near the 52-week high of $8.79/share since surging in late June on news of inclusion in the Russell 2000, 2500, 3000, and Global Indexes (while remaining as a component in the Russell Microcap Index). The closing price of $8.68/share on 7/29/09 equates to a market cap of about $123 million with 14.2 million shares of common stock outstanding (40 million shares authorized) as of 6/30/09, according to a SEC Form S-3 filing on 7/25/09. The shelf filing authorizes the sale of common stock and warrants for aggregate proceeds up to $60 million.

RMTI operates in a steadily growing, niche market segment for dialysis concentrate solutions and related supplies with a key growth driver ahead in the form of SFP. SFP has demonstrated a low clinical risk profile due to the lack of any safety issues through 2,000 human doses and RMTI has guided for adequate liquidity and cash flow to fund operations through Phase 3 clinical trials. A licensing deal would be idea to fund the Phase 3 study and meet the goal of a market launch for SFP by 2012 as the Company ended 1Q09 with $3.35 million in cash and equivalents, which is insufficient to fund development of SFP through FDA approval and market launch.

RMTI is forecasting an increase in its U.S. dialysate market share from 27% in 2009 ($51.6 million in sales, 16.6 million treatments) to 35% in 2012 ($88 million in sales, 23 million treatments) at the time of expected FDA approval and market launch for SFP. The Company's estimated 35% dialysate market share in 2012 translates into a $210 million market opportunity for SFP since it represents an add-on to Rockwell's existing dialysate line-up in one convenient package (aside from the other benefits discussed earlier for SFP in terms of safety and efficacy).

Changes in Medicare/Medicaid (CMS) reimbursement to dialysis providers will involve fully bundled payments starting in 2011 with a full implementation in 2014. These changes are expected to benefit Rockwell's efforts to market an iron-supplemented dialysate versus providers of IV iron therapies on a stand-alone basis. Full details will be released next year, but the change is expected to involve a single composite rate per treatment rather than receiving reimbursement for individual drugs. This will also encourage dialysis providers to use Rockwell's all-in-one, economical solution for iron-supplemented dialysate.

Assuming revenue of $180 million ($100 million SFP + $80 million core dialysate business), 20 million shares of fully diluted common stock outstanding, operating expenses + taxes of $100 million; RMTI has potential earnings power of $4/share in 2012. The $100 million sales estimate for SFP represents a one-sixth share of the estimated U.S. market for iron replacement therapies in 2012, which is less than the Company's current 27% dialysate share and just one-half of their forecasted 35% share at the time of SFP launch. Additional upside is possible in the form of licensing deals and royalties in markets outside of the U.S.

Disclosure: No positions

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