Rockwell Medical, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Rockwell is a renal-focused pharmaceutical company and manufacturer of hemodialysis concentrates and related products. FDA approved Triferic in January 2015; the company said it planned to launch Triferic and Calcitriol in 2015.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $13.0 million | $13.0 million | $26.8 million | $26.0 million |
| Gross profit | $2.1 million | $2.0 million | $4.4 million | $3.7 million |
| Gross margin | 15.9% | 15.4% | 16.3% | 14.2% |
| Operating loss | $2.7 million | $2.4 million | $6.5 million | $9.4 million |
| Net loss | $2.5 million | $3.2 million | $6.2 million | $11.0 million |
| Basic and diluted loss per share | $0.05 | $0.08 | $0.12 | $0.28 |
For the first six months, operating cash used was $9.7 million, versus $13.6 million a year earlier. Investing activities used $20.5 million, primarily for purchases of available-for-sale investments; financing provided $1.6 million. Cash declined to $37.1 million from $65.8 million at year-end, while investments rose to $40.1 million from $19.9 million. Cash and investments totaled $77.3 million, down from $85.7 million.
At June 30, current assets were $88.4 million, current liabilities $7.0 million, and working capital $81.4 million. The company reported no debt outstanding. Inventory increased $2.4 million to $6.3 million, mainly in preparation for drug launches. Shareholders’ equity was $66.0 million.
Material changes versus prior periods
- Q2 sales were essentially flat year over year. Six-month sales rose $0.8 million, substantially reflecting $1.0 million of deferred license revenue recognized under the Baxter Distribution Agreement.
- Higher gross profit and margins included Baxter-related deferred license revenue of $0.5 million in Q2 and $1.0 million for the six-month period. The company attributed the six-month margin improvement partly to this recognition.
- Q2 SG&A decreased to $3.8 million from $4.2 million, mainly due to lower non-cash equity compensation; six-month SG&A increased to $9.2 million from $8.3 million, including higher equity compensation and drug-launch preparation costs.
- Six-month research and product development expense fell to $1.7 million from $4.8 million. The 2014 comparison included a $2.2 million Triferic NDA fee that was reversed in Q2 2014 after the fee waiver was granted. Q2 2015 R&D was $0.9 million, versus $0.2 million in Q2 2014.
- Interest expense was nil in 2015 periods, compared with $0.9 million in Q2 2014 and $1.7 million in the first half of 2014, following repayment of long-term debt in Q4 2014.
Outlook, management commentary, and risks
- Management expected to launch Triferic and Calcitriol during 2015, become profitable following drug launches, and generate positive operating cash flow after launch. These are forward-looking expectations, not reported results.
- The 10-year Baxter agreement makes Baxter the exclusive sales, marketing, and distribution agent for specified concentrate and ancillary products and requires minimum annual purchase levels. Rockwell expected the arrangement to improve domestic concentrate gross profit by approximately $1.2 million annually versus pre-agreement results, including deferred license revenue. Domestic Baxter-invoiced sales began reflecting lower wholesale prices in June 2015.
- Management expected near-term launch-related cash investment to be primarily working capital for inventory and receivables, and described anticipated further Triferic research spending as modest relative to cash resources. It was also discussing potential partners to commercialize products outside the United States.
- Key risks include unsuccessful drug commercialization or regulatory expansion, dependence on third-party drug suppliers and manufacturers, possible Baxter agreement termination or loss of exclusivity and potential repayment of fees, customer concentration and competition in concentrates, raw-material cost increases, and healthcare reimbursement and regulatory changes. The company reported no material changes to the risk factors in its 2014 Form 10-K.
- Available-for-sale short-term bond funds were exposed to interest-rate-driven fair-value changes; management did not expect a hypothetical 100-basis-point rate move to materially affect portfolio value. International business was conducted in U.S. dollars, and management said a 10% currency move would not materially affect equity or net income.
- Disclosure controls were assessed as effective at a reasonable-assurance level; no material changes in internal control over financial reporting were reported. Restricted shares were tendered to satisfy tax liabilities, including 150,338 shares in May; this was not a publicly announced repurchase program.
Important facts for investors to verify
- Whether Triferic and Calcitriol launched as planned, and the resulting sales, margins, and cash flows.
- Actual Baxter purchase volumes and exclusivity status, deferred license revenue recognition, and whether the projected annual gross-profit benefit materialized.
- Cash burn, working-capital needs, inventory build, and remaining liquidity relative to commercialization costs.
- Drug supply and manufacturing readiness, regulatory and patent developments, and any changes in the risk disclosures.
- The six-month sales figure is presented as $26.8 million in management’s discussion; the financial statement text contains a formatting irregularity in the exact figure.