Rockwell Medical's (RMTI) soluble ferric pyrophosphate (SFP) or Triferic drug, currently under phase III development, is a game-changer. It is set to become the standard of care for iron replacement therapy in end-stage renal disease (ESRD) patients on dialysis treatment, a $600 mill. market in the U.S. alone, and over $1 bill. worldwide. Furthermore, the market demand has excellent growth characteristics, with the number of dialysis patients in the U.S. alone expected to rise to almost five-fold from 0.44 mill. to over 2 mill. patients by 2030, at a 8% to 9% CAGR, primarily due to an aging population and increased prevalence of type 2 diabetes. The long-term worldwide opportunity is also promising given that there are about 2.3 mill. dialysis patients worldwide, about five times that in the U.S.
While RMTI shares are up 50% year-to-date (YTD), the current $500 mill. market-cap severely undervalues the long-term opportunity. Simply put, in Triferic, you have an iron replacement therapy where the interests of patients, providers, insurance companies, and the government intersect, a not-so-common feat in the world of healthcare. Dialysis patients would get a drug that is easy to administer and has a safety profile similar to that of placebo. This is especially significant given that current treatments are black-boxed with severe side effects including anaphylactic reactions that can cause death, cardiovascular conditions including heart attack, stroke and congestive heart failure, among others.
The government and insurance companies would benefit as Triferic, due to its mode of administration, has been demonstrated to reduce the use of erythropoietin stimulating agents (ESAs), that is given to dialysis patients to restore their ability to produce red blood cells, by 37.1%. Given that the ESA market in the U.S. alone is about $2 bill., with the worldwide market estimated at $5.5 bill., the savings in the U.S. alone would be over $700 mill, with the strong growth characteristics discussed above. About 80% of these savings would accrue to the government under Medicare, and the remaining to private insurers. Dialysis providers would benefit as theirs margins are currently being squeezed under the new bundled Medicare reimbursement rules, so a drug that lowers overall dialysis cost will help them fortify margins.
In summary, Triferic is a safer and cost-effective alternative to the current iron replacement therapy, and RMTI has the operating infrastructure and relationships with major dialysis providers in the U.S. marketplace to make it the standard treatment of care. Furthermore, since the marketplace is concentrated with only nine major dialysis players that control 83% of the market, with the top two controlling 71% of the market, Triferic is positioned to quickly capture a major portion of the market in a quick time frame following FDA approval, as the company asserted in its most recent 3Q/2013 conference call. Also, there are strong economic incentives for providers, insurers and the government to force rapid adoption of Triferic once it is approved.
With successful Phase III results behind it, the company is preparing to submit its NDA next quarter (1Q/2014), with approval expected in the second half of 2014, and launch soon thereafter as the company already has the operating infrastructure and relationships in place. Based on our analysis, we believe that it has at least 100% upside from current prices for the baseline scenario, with multi-bagger potential if Triferic does become the dominant standard of care in the U.S. and captures significant market share overseas. We believe that the downside is limited due to the expected contribution to revenue and operating margins from the Calcitriol launch, with RMTI revenues expected to rise 150% over the next four years, even in the absence of Triferic.
While share prices could easily fall to the $6 to $8 range in the case of an absolute worst-case scenario where Triferic has to be abandoned based on a yet unforeseen problem that results in a negative FDA decision, the chances of that happening are extremely slim, we believe at less than 10% based on the clinical trial results and statements by company and analysts. We calculated that based on our baseline target of $36 in the case of Triferic approval, and a downside of $6 to $8 in case it is abandoned, current prices are factoring in a Triferic disapproval likelihood of 75%, which is clearly out of question based on the clinical data. In fact, assuming even a 25% disapproval likelihood, we still end up with a price target of above $28, more than twice current price levels.
Current Iron Replacement Therapy Is Problematic
Human kidneys and those of many vertebrate animals serve a vital function of filtering out waste products from the bloodstream, maintaining pH balance, regulating blood pressure and electrolytes, and endocrine functions such as producing hormones including calcitriol, erythropoietin, and renin. When normal kidney function is compromised, as in the case of renal failure, either due to risk factors including high blood pressure or diabetes, or due to a genetic history, dialysis or kidney transplantation is needed to sustain life. Else the accumulation of harmful toxins in the body can lead to death within weeks.
Dialysis is the removal of waste and excess water from the blood. Hemodialysis (see figure), in which the patient's blood is pumped through the blood compartment of a dialyzer, and the waste separated from the blood using hydrostatic pressure, is the most common type of dialysis performed. While dialysis filters out the waste, it does not address the compromised endocrine functions. For example, the kidneys of dialysis patients do not produce erythropoietin, that is needed for the production of red blood cells. This requires the administration of synthetic ESA in dialysis patients, which increases the demand for iron needed in the formation of red blood cells. Complicating things further, the dialysis process itself typically removes about 5 to 7 milligrams of iron during each treatment. This is the primary driver of anemia in patients with ESRD, and is currently treated by administering iron via IV to dialysis patients.
The administering of iron via IV however creates many complications. First, since ESA and iron work together, and iron must be present when ESA is administered, greater ESA doses are required. But Amgen's (AMGN) Epogen, the ESA most commonly administered to dialysis patients, is a black-boxed drug that has a myriad of side effects. These include allergic reactions leading to anaphylaxis and death, hypertension, seizures, crippling cluster migraine that is resistant to remedies, joint pain and clotting at the injection site, thrombotic events such as heart attacks, strokes and pulmonary embolism, and others. Second, it is believed that about 50% of the IV iron administered to anemia patients is not used to generate red blood cells, but is rather stored in the liver. The free iron is toxic and can cause inflammation, infection, oxidative stress, allergic reactions including anaphylaxis, and death.
Triferic is Vastly Superior to Current Therapy
RMTI's SFP or Triferic treatment, currently in Phase III trials, is a complete game-changer in this context (see video explaining it here). SFP is a small iron salt that lacks carbohydrates, unlike the larger IV iron carbohydrates. It is not treated as a foreign particulate in the body, and therefore is not expected to trigger anaphylactic reactions. As it is administered continuously via dialysate, it is slowly infused into the patient's bloodstream during the dialysis session. Upon entering the patient's blood, it binds rapidly to apo-transferrin, the body's natural protein for transporting iron, where it is taken directly to the bone marrow for incorporation into hemoglobin. This is physiologically similar to how a healthy person absorbs iron from their normal dietary intake, and it completely bypasses the liver and reticuloendothelial system, thereby preventing liver toxicity. It also enables ESA to be more effective in maintaining hemoglobin in the target range of 10-12 g/dL. Also, the reduced amount of ESA used helps avoid excessively high doses and potential risks associated with ESA as discussed in the prior section.
Overall, with Triferic, you get a drug that improves patient quality of life by eliminating the need for separate IV treatment, it has a safety profile similar to that of placebo vs. current black-boxed IV treatments that have myriad side effects as discussed in the prior section, and at the same time results in significant cost-savings of at least $700 mill. in the U.S. alone from reduced ESA use. This estimate does not include additional cost reductions from reduced hospital administration, and drug and supplies-related costs, due to the elimination of a separate IV treatment as the iron is administered with the dialysate.
Triferic's FDA Approval Seems All But Certain
RMTI share prices soared in both mid-July and early September, after it reported results from its two Phase III studies, CRUISE-1 and CRUISE-2, of Triferic in ESRD patients receiving hemodialysis. In both studies, Triferic met its pre-defined primary endpoint, demonstrating a statistically significant mean change in hemoglobin from baseline to End-of-Treatment between the SFP and placebo groups. In CRUISE-2, the mean difference between SFP and placebo was 3.6 g/L in favor of SFP, and was statistically significant (p=0.011). At baseline, both groups started at similar hemoglobin levels (109.6 g/L for SFP arm and 109.3 g/L for placebo arm), with the mean adjusted change from baseline hemoglobin to the end of the randomized treatment period in the SFP arm was -0.5 g/L, and in the placebo arm there was a statistically significant decline of -4.0 g/L. The results from CRUISE-1 were virtually identical with the mean difference still being 3.6 g/L (p=0.011) in favor of SFP, but with the mean adjusted change from baseline hemoglobin to the end of the randomized treatment period being 0.6 g/L for SFP arm and -3.0 g/L for the placebo arm.
Additionally, in both studies, Triferic also met key secondary endpoints, including maintenance of hemoglobin, maintenance of reticulocyte hemoglobin and increase in serum iron pre-to-post treatment without an increase in ferritin. Triferic also demonstrated excellent safety in both studies, with not a single anaphylactic event attributable to Triferic over the entire clinical program of over 100,000 drug doses, and there were also no differences in frequency or severity between Triferic and placebo group with respect to AEs or serious adverse events. Also, in October, RMTI announced positive safety results from its large Phase III short-term safety study that was being conducted in support of the company's new drug application (NDA) filings expected in 1Q/2014, concluding that the safety profile of Triferic was no different from placebo.
The CRUISE-1 and CRUISE-2 studies demonstrated that SFP administered via dialysate can maintain hemoglobin levels by providing iron to the bone marrow, replacing the iron loss patients experience during their dialysis treatment. The approvable end-point of a change in hemoglobin for thePhase III studies was confirmed during an end-of-Phase II meeting that the company had with the FDA in July of 2010, prior to the company finalizing the Phase III protocol. Thus, given Triferic's placebo-like excellent safety profile, especially when compared to the current black-boxed IV iron treatment, and its meeting its pre-defined primary end-point that it has confirmed with the FDA, as well as secondary endpoints, in both Phase III trials, its approval seems all but certain. The company expects to file the NDA for Triferic with the FDA next quarter, possible approval in the second half of 2014, and launch almost immediately thereafter.
In the company's own words, from the conference call following the announcement of the CRUISE-1 data:
"There is no question that SFP delivered strong data today and that this Phase III data is a resounding success. We believe the data presented today clearly suggests that SFP has the potential to become the market leader in the iron treatment space. The CRUISE-1 study met its primary endpoint and achieved statistical significance with a p-value of 0.011. This is exceptional Phase III efficacy data. For reference, 2 clinical trials with a p-value less than 0.05, along with strong safety data, is generally required by the FDA to approve new drugs. These successful Phase III results, coupled with the recent positive PRIME study data, demonstrating SFP's ability to significantly reduce ESA use by 35%, support our belief that SFP will set a new paradigm in iron therapy treatment for hemodialysis patients as it will deliver both significant clinical and pharmacoeconomic benefits. We believe SFP is positioned to become the new standard of care on iron therapy, and we expect it to severely disrupt the current IV iron market in dialysis."
Rockwell's Leadership And Concentrated Customer Base In The Dialysis Market Should Enable Triferic to Capture Market Share Quickly
Rockwell is an established manufacturer and leader in delivering high-quality hemodialysis concentrates and dialysates to dialysis providers and distributors in the U.S. and abroad. It currently supplies about 27% of the U.S. concentrate dialysis market, and has relationships with almost all of the nine major dialysis players that control 83% of the market. Furthermore, its products are sold in the two largest dialysis centers, DaVita (DVA) and Fresenius (FMS) that together control 71% of the market. While DVA dominates the U.S. dialysis market with over 1,954 treatment centers located in 44 states, FMS is a German provider of dialysis treatment at 3,160 clinics in over 40 countries.
So, basically the company needs to sell to just nine customers to capture 83% of the market, most of whom are already its customers, including the two largest ones that control 71% of the market. Furthermore, it already has the operating infrastructure in place in terms of a ready-made sales and distribution channel that will enable it to seamlessly integrate SFP sales into its commercial market. With patient advantages in terms of ease of administration and safety, and provider advantages in terms of lower costs, particularly important in the current healthcare environment, and its existing operating infrastructure, we believe that Triferic can easily capture majority market share in the U.S. within four years after approval.
Besides the U.S., Triferic has also received patent protection in several countries including the other two largest ESRD markets in the world, namely Japan and the European Union, and they also have pending patent applications in other foreign jurisdictions. Their existing relationship with FMS should also help them reach international markets, upon approval in those countries.
Rockwell is Much More Than Just Triferic
Rockwell Medical is a fully-integrated biopharmaceutical company providing innovative products and services initially targeting end-stage renal disease (ESRD) and chronic kidney disease (CKD), with innovative products and services for the treatment of iron deficiency anemia, secondary hyperparathyroidism and hemodialysis. Current drugs under development, besides Triferic, include those targeting women's health, oncology and parenteral nutrition based on its SFP technology, as well as new drugs for other targeted renal therapies and indications (see Figure).
Calcitriol is their FDA-approved low-cost generic vitamin D injection, for the treatment of secondary hyperparathyroidism in dialysis patients. The company is currently waiting on the FDA to complete their review of manufacturing data, that was submitted in July. FDA response was expected in October, so it should be coming anytime now, with launch soon thereafter. Like in the case of Triferic, RMTI will leverage its existing operating infrastructure to sell Calcitriol into the dialysis market.
Calcitriol is the only generic vitamin D and clinical data has shown it to be clinically equivalent in safety and efficacy to the two branded drug alternatives, namely Abbott Laboratories (ABT) Zemplar® and Sanofi-Aventis's (SNY) Genzyme subsidiary's Hectorol®. Calcitriol has cost-advantages over those two alternatives, and the company expects rapid uptake in this $350 mill. market, given the current emphasis on low-cost in the healthcare system and its commercial footprint in terms of having a 27% share in the dialysis concentrate market.
In the most recent 3Q/2013 reported last Tuesday, revenues came in at $13.1 mill., 3% higher than the year-ago prior quarter. The quarterly loss of 34c missed analyst estimates of 24c, but was well below year-ago loss of 86c, mostly on account of a significant drop-off in R&D spend that will go down even further as Triferic development costs drop-off. Going forward, analysts expect sales and earnings to improve from $52.4 mill. & $1.58 loss in FY 2013 to $82.9 mill. & 25c loss respectively in FY 2014. Also, the company's CitraPure® product line, launched in 2010, continues to grow rapidly amongst current and new customers, and RMTI expects it to become the new standard of care in dialysate. CitraPure® is currently the only acid concentrate completely free of acetate. Acetate promotes inflammation, and a dialysate free of acetate, containing citrate in its place, has been shown in studies to improve clinical outcomes.
Triferic Launch Will Hurt Amgen Sales
FMS and Daiichi Sankyo Co. (OTC:DSNKY) are among the largest suppliers of IV iron worldwide, with that being a relatively small part of their product portfolios. In term of impact, however, Amgen could be more seriously impacted by the Triferic launch as it is estimated to lead to a 37.1% reduction in the demand for ESA, which amounts to about $700 mill. In FY 2012, AMGN sold $2.72 bill. of ESAs in the U.S. and $1.26 bill. in the rest of the world, in total accounting for about 23% of its total revenue. Since a large portion of these sales are in the dialysis market, AMGN could suffer a huge loss in revenue and earnings from the Triferic launch. However, keeping it in perspective, assuming even a large $500 mill. loss in revenue, that may happen over the next 3-5 years, AMGN would be adding $6 bill. to $7 bill. in revenue over that period, based on analyst projections of 9.3% annual growth for the next five years.
RMTI Shares Have Huge Upside Based on Intrinsic Value
Intrinsic value, often used by value investors, refers to the actual value of the shares or units of a company as determined using fundamental analysis. This is in contrast to calculating the value based on a comparables analysis of various financial ratios, such as P/E and EV/EBITDA, for the company versus its closest peers in the industry. While there are many ways at arriving at an intrinsic value for a stock, qualitative and quantitative, we focus here on the discounted cash flow (DCF), the most popular method used by security analysts. Basically, it involves projecting a firm's operations into the future, and calculating the net present value (NPV) of all of its expected future net cash flows, including assigning a terminal value at the end of the forecast period (see table below).
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In building out the DCF model, we had to make a number of assumptions, many supported either based on company statements or filings, by independent research coverage of the stock, or based on our own experience. Some of the major assumptions used in the above model include:
- Dialysate market growth of 6.0% annually.
- Calcitriol captures 20.0% of the market share among RMTI's current customers in FY 2014, rising gradually to 50.0% by FY 2018, and it captures 5.0% of other customers by FY 2018.
- Triferic captures 10.0% of U.S. market in FY 2014, after launch in the second half of the year, rising to 50% of the market by FY 2018, and internationally it captures 20.0% of the market share by FY 2019.
- RMTI's net operating loss (NOL) carryforwards, that amounted to $33.0 million by FY 2012, were applied to future years.
- 35% tax rate was assumed for all years.
- A weighted average cost of capital (WACC) of 7.9% based on 2.0% risk-free rate of return, the stock's beta of 1.46, 6.0% market rate of return, and 12.5% cost of debt.
These assumptions were for the base case, with the pessimistic case assuming Triferic captures 33.3% U.S. market share and none internationally, and the optimistic case assuming 80.0% and 30.0% respectively. In the case of Calcitriol, the pessimistic case assumes 33.3% capture of current customers and none for others, with the corresponding numbers for the optimistic case being 80% and 10% respectively.
As you can see, based on the above assumptions, RMTI has at least 100% upside under the base case scenario, and even greater, at over 300%, for our optimistic scenario. The pessimistic scenario still assumes that Triferic would be approved, which based on the data, appears all but certain. While under those assumptions, we do not see any downside, if we back out the revenue numbers for Triferic, the company will continue to operate at a loss without those revenues, mostly due to the low gross margins on the dialysate product. It seems that the market may still be holding that out as a possibility based on the current share price.
Downside Risks
The most obvious downside risk is an unforeseen problem with the trials or protocol that could result in a negative or delayed FDA approval. In such an event, shares are sure to fall, and fall hard, given the recent rally that has taken shares up more than 50% YTD, including a more than 300% rally off its spring lows. In the case of a negative FDA decision, due to a critical problem that cannot be foreseen right now, shares are very likely to fall back at most to the $5 to $8 range. This is slightly higher than the $3-$4 lows earlier this year, as the Calcitriol launch later this year is expected to significantly add to revenues, estimated at $20 mill. next year and rising to $63 mill. by FY 2017, for the baseline case in our model. The corresponding numbers for the pessimistic and optimistic cases are $30 mill. and $116 mill. by FY 2017.
As a result, RMTI revenues even if Triferic development is aborted, the absolute worst-case scenario, are still expected to jump from the $52 mill. range in FY 2013 to $132 mill. by FY 2017 for the baseline case, with the corresponding numbers for the pessimistic and optimistic scenarios being $99 mill. and $185 mill. respectively by FY 2017. Furthermore, Calcitriol, as it would be using RMTI's existing sales and operating infrastructure, is expected to be highly accretive to operating margins, per the company. Under that scenario, it is likely that RMTI shares will fall severely, maybe to the $6 to $8 range, still higher than the $3 to $4 lows earlier this year. Those lows were reached given concerns over cash levels, that were alleviated given the recent re-financing. Also, the outlook with the Calcitriol approval has changed from a company with stagnant or falling revenues to one in which revenues are expected to go up 150% over the next four years, as outlined in our baseline scenario.
However, the chances of that happening are very low, we estimate at less than 10%, given that the company has met its pre-defined primary end-point that it had earlier confirmed with the FDA, along with all secondary endpoints, in both Phase III studies. Putting say a 10% probability on it falling to say $6, with the remaining 90% for the baseline target of $36, we would still end with a $33 baseline target based on those probabilities. In fact, even putting failure at 50%, we would end with a target of $21, still almost 50% above current trading level. Taking this even further, you would have to believe that approval likelihood was in the 25% range to arrive at a price target of $13.50, comparable to current price levels.
Another risk could be more resistance from established IV iron players. However, it is difficult to see a situation, given the current healthcare policy focus on cost-reduction, where any kind of competitive moves blocking the adoption of this drug would be effective.
Analysts and Institutional Investors
RMTI first came to our attention in mid-August when it ranked in the top 1% among all 5,300 U.S. traded stocks held by over 300 of our hand-picked top fund managers, and was included as one of our top 20 picks in our newsletter when it traded in late-August in the $5-$6 range. As can be seen in the Table below, our top funds accumulated RMTI during the first two quarters of this year, with the accumulation most intense in the latest available 2Q/2013, during which they added 4.3 mill. shares or 17% of the float of 25.1 mill. shares, also equal to 168% to their prior quarter holdings on 2.79 mill. shares. Based on the historical testing of our system, we have seen a strong correlation between this level of accumulation by top funds and the stock's performance over the following quarters, and RMTI's rally since late August seems to also validate that.
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Conclusion
RMTI is up strongly Wednesday, as we write this article, up 7% for the day. While it could consolidate along the way, as it is now up to more than four-fold from its lows this spring, the move is far from over. There are many news catalysts that are likely to provide further upside to the stock over the next year. First, the company should hear anytime soon on the FDA's review of their manufacturing data for Calcitriol, that was submitted in July. Second, the company should be filing its NDA for Triferic next quarter. And then, finally, the FDA decision on Triferic, which we believe will almost certainly be positive, is expected in the second half of 2014.
As we have seen in the case of many other drug stocks before, we believe that most of the appreciation in RMTI shares resulting from a potential Triferic launch are likely to happen before the FDA approval. Based on our calculation of the intrinsic value of RMTI shares, we would not be surprised if shares catapulted north of $25 by that time. A number of brokers have high price targets on the stock. Summer Street Research by far is the most bullish with a price target of $25, while Stifel Nicolaus and Craig Hallum have price targets of $18 and $16 respectively. The stock is generally under-covered by Wall St., with only four analysts that have price targets on it, so it wouldn't be surprising to see more coverage soon, possibly at higher prices.
In summary, you have in RMTI, a multi-bagger stock based on the potential for its paradigm-shifting Triferic iron replacement therapy. Although the company still has to file the NDA, approval seems all but certain based on the strong clinical data from both Phase III trials that demonstrated that Triferic is both safe and effective, especially significant when compared to the current black-boxed treatments that have a myriad of side effects. As one of the leading providers of dialysates, Rockwell has the operating infrastructure and relationships to quickly bring Triferic to market and capture significant market share. Furthermore, use of Triferic has been demonstrated to result in cost savings of at least $700 mill. in the U.S. alone, a significant factor that will ease adoption, given the current healthcare policy focus on reducing costs.
Rockwell has $31.2 mill. in cash and short-term investments, so there will be no need for any more dilution before Triferic and Calcitriol revenue turns it cash positive. We believe that the stock is particularly well-suited to long-term investors who have the patience to hold it as the company gradually claims its position as the standard of care for iron replacement therapy in dialysis patients. As such, any serious technical pullback in the stock, which is possible anytime given the strong rally, should be looked at as an opportunity to accumulate shares.
By Guru Fund Picks
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