Rockwell Medical, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited. Rockwell is a renal-focused pharmaceutical company and manufacturer of hemodialysis concentrates. The quarter included FDA approval of Triferic, its dialysis iron therapy.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Sales | $13.9 million | $13.0 million |
| Gross profit / margin | $2.3 million / 16.7% | $1.7 million / 13.0% |
| Operating loss | $3.8 million | $7.0 million |
| Net loss | $3.7 million | $7.8 million |
| Loss per share, basic and diluted | $0.07 | $0.20 |
| Cash used in operating activities | $3.3 million | $10.4 million |
- Sales rose 7.1% year over year. Domestic sales increased 6.6%; international sales increased 7.2% and were 14.8% of sales.
- SG&A increased to $5.3 million from $4.1 million, mainly reflecting higher noncash equity compensation ($3.3 million versus $2.2 million) and drug-launch preparation costs.
- Research and product development expense fell to $0.8 million from $4.6 million. The company attributed the prior-year expense in part to a $2.2 million Triferic application fee, later reversed in Q2 2014 after a fee waiver was granted.
- Net interest and investment income was $0.1 million; there was no interest expense, following repayment of long-term debt in Q4 2014.
- At March 31, cash and cash equivalents were $63.3 million and available-for-sale investments were $20.0 million, totaling $83.3 million. Current assets were $94.0 million, working capital was $83.7 million, and the company reported no debt. Cash declined $2.5 million during the quarter.
- Inventory increased $1.3 million from year-end. Total assets were $97.2 million and shareholders’ equity was $67.8 million at March 31.
Material changes, outlook, and risks
- Gross profit increased 37.6%, with margin up 3.7 percentage points. Management cited higher sales and the Baxter distribution arrangement, including $493,000 of deferred upfront-fee revenue recognized in the quarter.
- Under the 10-year Baxter agreement, Baxter is the exclusive distributor for specified concentrate and ancillary products in the U.S. and certain foreign markets; drug products are excluded. Management expected the transition to be completed in Q2 2015. Wholesale pricing will reduce reported concentrate revenue, with distribution and related costs also passed through or reduced.
- Management estimated the agreement would improve gross profit by approximately $1.2 million annually versus the pre-agreement domestic concentrate business, including deferred license revenue. It also expects longer-term sales growth from Baxter’s marketing channel and a planned Western U.S. facility.
- Baxter paid a $20 million upfront fee in 2014 and agreed to provide a $10 million facility fee for a new manufacturing facility. The upfront fee is deferred and recognized over expected shipments. Certain termination, regulatory, litigation, change-of-control, and other trigger events could require repayment of part of the fees; specified intellectual-property-related termination circumstances could entitle Baxter to a refund of up to $10 million, or $6.6 million in 2019.
- Triferic received FDA approval in January 2015; the company also received FDA approval to manufacture Calcitriol. Management planned to launch both products in 2015, expected positive operating cash flow following drug launches, and expected near-term launch-related cash needs primarily for working capital. These are expectations, not guaranteed results; the filing gives no quantified full-year earnings or revenue guidance.
- Key risks include successful commercialization and adoption of approved drugs, regulatory and clinical requirements, third-party drug supply, dependence on major concentrate customers, Baxter transition and termination/refund provisions, raw-material costs, and competition. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Progress, timing, market uptake, and economics of the Triferic and Calcitriol launches.
- Completion and operating performance of the Baxter transition, including minimum purchase levels, gross-margin effects, and any fee-refund triggers.
- Facility construction timing and the conditions affecting Baxter’s $10 million facility fee.
- Cash burn, inventory and receivables needs, and whether drug launches generate the positive operating cash flow management expects.
- Reconciliation of year-over-year R&D expense: the 2014 quarter included the Triferic application fee, which was reversed in Q2 2014 after the waiver was granted.