Rockwell Medical, Inc (NASDAQ:RMTI) posted a loss in its latest fourth quarter and full year 2013 report, but there appears to be a light at the end of the tunnel for its dialysis treatment business. At its current price, the company is an attractive addition to a health care investor's portfolio.
The company provides products and services that treat renal disease, chronic kidney disease, iron deficiency, secondary hyperparathyroidism, and hemodialysis, or HD. Its products are used to clean the blood and replace nutrients lost during dialysis treatment. Its HD concentrates used during dialysis include CitraPure, Dri-Sate dry acid, and Renal Pure liquid acid concentrate.
Rockwell reduced net loss in the fourth quarter by 39% to $8.3 million, an improvement aided by a reduction in R&D expenses of 51%. The company's cash balance of just under $24 billion should be sufficient to permit the company to commercialize Triferic, an iron maintenance therapy for dialysis patients. The therapy has completed phase 3 trials and met its primary efficacy end point with acceptable safety results. Rockwell expects to file a new drug application in the next few weeks and anticipates an FDA approval within the next 12 months, given the data on the drug's efficacy and safety. Besides Triferic, another product under development is Calcitriol, an active vitamin D treatment for secondary hyperparathyroidism.
Rockwell's product line is selling well
During the fourth quarter of 2013, sales rose 7.4% from the prior period to $14 million and gross profit increased 21% to $2.1 million. The company's CitraPure sales continue to skyrocket, increasing 415% in the fourth quarter, while product unit shipments rose 560% since 2012. The CitraPure brand reflected 70% of the company's Dry Acid Sales and is expected to become the new standard of care in dialysis .
CitraPure's rising quarterly sales offset increasing raw material and operating costs, making gross profit for 2013 similar to that of 2012. The completion of the Phase 3 trial for iron drug Triferic resulted in a considerable reduction in R&D expense to $39.4 million from $48.3 million in 2012. In addition to its therapeutic benefits, the use of Triferic should reduce nursing staff hours and fit in well within a bundled reimbursement system. Rockwell's loss for fiscal 2013 narrowed to $48.8 million, or $1.48 per share, compared to $54.3 million, or $2.65 per share, in 2012.
Dialysis market has two major service providers
With the launch of Triferic, Rockwell expects to capture a lot of the U.S. dialysis market fairly quickly. Vitamin D injection Calcitriol has already been approved but an FDA review of the drug's chemistry data is still pending. The company expects the launch of Calcitriol to take place 60 days after an answer from the FDA. The launch of this new drug requires minimal additional selling expenses, and management expects sales to be brisk due to Calcitriol's status as the lowest cost vitamin D injection available .
Rockwell has developed a long-term supplier relationship with DaVita HealthCare Partners (NYSE:DVA), which should fare well for the company's current and future products. The dialysis treatment market is highly concentrated with two main providers -- Fresenius Medical Care (NYSE:FMS) and DaVita's dialysis centers -- controlling approximately 70% of the market.
Fresenius Medical Care is considered the leading provider of dialysis products and services due to its extensive product line and network of 3,250 dialysis centers located in 45 countries. Unlike Rockwell, the company made a profit during 2013 – for the fourth quarter, net income attributable to shareholders rose 36% to $349 million and basic EPS rose 38% to $1.16. Full year results showed a decline in net income of 6% for 2014. Fresenius also embarked on a "global efficiency program" that is expected to enhance the company's performance over several years and generate cost savings of up to $60 million.
Rival dialysis provider DaVita has a smaller operation, mostly U.S. based; its business expanded with the 2012 merger with HealthCare Partners that gave the company access to an additional 724,000 patients in four states. During 2013, DaVita had net income of $757 million, up 18% compared to 2012, and diluted EPS rose 8% to $2.95. During the last quarter of 2013, the company's dialysis treatment volume increased 6%. Warren Buffet is also a fan of DaVita HealthCare, and his company Berkshire Hathaway owns about 18% of total outstanding shares.
Reimbursement cuts pose a challenge
The persistent threat of reimbursement cuts is a big challenge for dialysis providers. Nearly 90% of dialysis patients rely on a portion of their treatment being covered by federal insurance. End stage renal disease is a chronic condition whose cost of treatment is automatically covered by the federal government. Fresenius and DaVita face the threat of cutbacks in federal government reimbursements, which in recent years have come under scrutiny due to claims that excessive payments are being made for dialysis services .
My Foolish conclusion
Rockwell Medical's shares have dropped about 8.7% since November 2013. Shares appear to be reasonably priced -- the stock trades at 24 times 2014 earnings and is estimated to grow annually over the next five years by 25%. I would consider investing in the stock now, but investors may need to hold it for the medium term -- at least until late 2015 when profits are expected to roll in.
Over the last four quarters, losses per share have improved even though the company missed market estimates in all except the latest fourth quarter. For the remainder of 2014, the market predicts the company will book a loss and going into the tail end of 2015, average EPS of $0.53 is expected.