Rockwell Medical Inc (RMTI): We Told You To Buy This At $4

Rockwell Medical Inc (NASDAQ:RMTIis trading near $8 a share and is up over 30% on the day. The near-entirety of this gain stems from a successful study regarding its iron replacement drug, soluble ferric pyrophosphate, more commonly known as SFP. You can read about the promising news by following that link, but the point is this: it’s clear investors are optimistic on the biopharmaceutical company’s prospects moving forward.

What if there was a way to know about Rockwell Medical Inc (NASDAQ:RMTI) when it was trading at just $4 a share?

This may sound like a rhetorical question, but it’s not. Insider Monkey’s first issue of its monthly mini-newsletter highlighted the potential of Rockwell, and for our subscribers who listened (and the public who read it; this was a free issue), they’ve seen a near-100% gain over the past three months.

Rockwell Medical Inc

Unless you’ve been living under a rock for the past few years, you likely know the benefits that tracking the world’s best hedge funds can have. Our quarterly newsletter’s small-cap strategy has beaten the market by more than 30 percentage points in less than a year, and longer-term data is equally as promising. You can learn about how to take advantage of these market inefficiencies here, but let’s focus on Rockwell Medical Inc (NASDAQ:RMTI) for a second.

Michael Castor of Sio Capital gave us a good look at why Rockwell was worth looking at. We’ve covered Castor a lot of late because, quite simply, he’s the next David Einhorn. Here’s what Mr. Castor said about Rockwell then:

Rockwell is focused on developing products for dialysis (kidney-failure) patients. Rockwell currently has a single product on the market: dialysate (the solution that ‘detoxifies’ the blood during the dialysis process). Dialysate is a relatively low gross-margin product, but Rockwell is a leading manufacturer with a market-leading product and growing share. Economies of scale should result in manufacturing efficiencies. More importantly, Rockwell has an existing commercial infrastructure and established relationships with customers. Accordingly, if Rockwell has any other products to sell to dialysis clinics, these will require very little incremental spending, and the resulting revenues should largely fall right to the bottom line. Indeed, this is exactly Rockwell’s story.

Rockwell has two products in late stage development. Both of these are geared towards sales to dialysis clinics. Both of these products are versions of already-existing drugs, thus making development risk extremely low.
The first of these products is calcitriol (vitamin D). Vitamin D is normally produced in the kidneys and is essential for healthy bone growth and for maintaining normal levels of calcium in the body. Rockwell submitted their application for FDA approval. We expect approval in the fall of 2013.

The second product is iron, which the body uses to produce red blood cells. Rockwell’s iron product, formally known as soluble ferric pyrophosphate (SFP), is in late stage clinical trials called CRUISE 1 and CRUISE 2. Data from these is due in July and September. Given solid early stage data coupled with the established benefit of IV iron, we think these are low-risk programs. Rockwell Medical Inc (NASDAQ:RMTI)’s SFP is arguably superior to other commercial iron products, but we believe that Rockwell’s real advantage is the ability to bundle several products while selling to dialysis clinics.

Dialysis is paid for by Medicare. The current paradigm is referred to as ‘bundled’ payments, in which clinics receive a fixed amount for caring for dialysis patients. If clinics are able to purchase lower-cost goods in caring for their patients, they keep the savings as incremental profits. RMTI has articulated that it’s plan is to sell its vitamin D and iron products at a modest discount in order to take some share.

From a financial perspective, Rockwell is winding down its R&D program as the SFP clinical trials are almost over. R&D spending, which is currently running at about $50m/year, should fall by half. The commercial infrastructure is in place with little incremental spending needed to support these two new products. We estimate that the combined R&D and SG&A spending will be approximately $50m at steady state. If Rockwell is able to capture 20% market share of its new products using modest discounting, we estimate that the company should generate incremental revenues in excess of $150m.

The main risk to investing in Rockwell Medical Inc (NASDAQ:RMTI) is commercial execution. Rockwell need to be successful at gaining market share and doing so with attention to controlling costs. There is also clinical trial risk, as no clinical trial is a sure thing, but the risk there is low given that IV iron products are already established to be important in caring for dialysis patients. If however, Rockwell is able to navigate these risks and perform as we expect, this should yield earnings power in excess of $1.50 per share by 2017. With the stock trading at $4.00, this is compelling in our opinion.

The other stock Michael Castor mentioned is up nearly 50% over the past three months. See what it was here.

Disclosure: none