The following is a guest post by a fellow investor (mobile guru) whose interest lie within the mobile space.

I have always found the largest gains in the Biotech arena are made once a company moves into Phase III testing on a potential blockbuster product or have just launched a potentially large revenue generating product. However with any Phase III testing, there is always the risk of failing to meet the required endpoints.  The risk can can be minimized when Phase II testing indicates a likelihood of passing Phase III, and that is where opportunity lie. Two biotech companies that I follow closely are Rockwell Medical (RMTI) and Bacterin International Holdings (BONE). Rockwell recently announced the start of Phase III trials while Bacterin just launched a new product and both have potential to be very large revenue and profit generators. Today’s article is going to focus on Rockwell Medical and I address Bacterin after they report at the end of this week.

Rockwell Medical is a fully-integrated biopharmaceutical company targeting end-stage renal disease, chronic kidney disease, and iron-deficiency anemia. The company has been serving this unique health care segment for over 16 years and is currently ranked # 2 with 40% market share. There’s an estimated 2.3 million patients in the world (431,144 US) with failed kidneys on dialysis.

What is dialysis?

Every other day over a 4-hour session, a machine which replicates the function of a normal kidney, filters the patient’s blood of excess water and impurities. This regimen must be maintained by the patient since their kidneys are no longer functioning, a chronic condition called end-stage renal disease (ESRD).

Since patients must stay on dialysis 3x per week for the rest of their life, Rockwell’s revenue is highly predictable and reoccurring. It is also not seasonal or cyclical, following the ups and downs of the economy. Leading causes of ESRD include diabetes and obesity affecting some 28 million Americans, growing a minimum 4% per year.

What makes Rockwell Medical unique in the Biotech world?

First they are generating revenues that are cash flow positive, if you remove the costs of the new drug trials. Secondly, they have a distribution network in place for their products through DaVista when/if their new water-soluble iron is approved.

On April 26th, Rockwell began enrolling patients for the final FDA Phase III clinical trial for SFP, which ignited a 32% stock price rally triggering a massive 7-year technical break out on the charts. Here is a quote from the Phase IIb findings.

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Data from the Company’s Phase IIb dose ranging clinical trial demonstrated a significant 13% dose reduction in ESA and 0.79 g/dL increase in hemoglobin compared to placebo in the intermediate therapeutic dose groups of 12 and 10 µg iron per dL respectively. Further data revealed the placebo group did not show a significant decline in Hgb despite iron withholding, suggesting that prior IV-iron therapy had resulted in excess iron stores. Ajay Gupta, Chief Scientific Officer of Rockwell, stated,

“This study data on ESA-sparing with concomitant increase in hemoglobin provides important information about SFP and it’s unique mode of action once it enters the bloodstream via the dialysate. By transferring iron rapidly and directly to apo-transferrin, SFP appears to overcome inflammatory reticuloendothelial block thereby delivering iron directly to the bone marrow for hemoglobin generation and enhancing ESA responsiveness.”

Rockwell owns the world-wide rights to water-soluble iron called SFP, which is simply added to their core dialysate product to treat iron deficiency anemia in kidney dialysis patients in a whole new way. Expectations are for trials to be completed late 2012 and expected FDA approval in 2013.

Iron Addressable Markets

? US: $600M (431,144 patients on dialysis)
? Rest of World: $3.29B (2,368,856)
? CAGR: 4-6% annually.

A majority of bio tech companies are focused on new drug development and perpetual fund raising to support these efforts. They typically have no sales, so Wall St. models future value based on the potential of successful FDA clinical trials and subsequent drug commercialization if approved.

A company with a new drug approval is considered a success if they obtain a 25% market share within 5-6 years, with a typical annual increase of 5% each subsequent year, due to their lack of experiencing in commercialization, including sales, marketing, distribution and customer service support.

Rockwell Medical is not your typical bio-tech company. They have been in the dialysis business for over 16 years with three US manufacturing facilities serving this health care segment. They are vertically integrated with an extensive transportation and distribution channel network serving 5,413 dialysis clinics scattered throughout the country. 2011 estimated annual sales run rate is $60 million ranking them #2 in the industry with 40% market share.

This existing distribution channel is already in place to sell higher margin drugs such as, SFP for extremely fast commercialization upon FDA approval anticipated in 2013. SFP, since it’s water-soluble is simply added to Rockwell current dialysate for a fast and seamless by the dialysis provider within days of ordering. Providers can also simply mix dialysate on site for daily use consistent with current practice. Rockwell is positioned to take iron market share extremely fast upon FDA approval and that’s the undervalued opportunity for investors.

DaVita (DVA) is Rockwell’s largest customer. They have 30% market share with 1,642 dialysis clinics across 42 US states, 128,000 patients and provides over 20 million dialysis treatments every year. US iron addressable market is estimated at $600 million, so DaVita spends $180 Mn on iron every year. Rockwell is positioned to get all of DaVita’s iron sales in the 1st quarter of launch targeted for late 2013. DaVita is participating in Rockwell’s FDA Phase III clinical trial and their PRIME study, with preliminary results expected mid next year.

A May 4, 2011 research report released by LifeSci Advisors evaluated the significant impact of SFP if this drug achieves positive Phase III data and assuming commercial success would contribute ~ $65-85 per share to Rockwell’s share price. Rockwell Medical (RMTI) closed at $11.74 last Friday.

See this link to read their full report written by Andrew I. McDonald, Ph.D. who as an analyst for Think Equity, covered AMAG Pharmaceuticals (AMAG) in 2006, when this company also started their Phase III FDA clinical trial for a competing iron drug.

Rockwell Medical and Bacterin to be Added Again to Russell Index?

Russell Investments re-calibrates its family of indices in an annual process known as reconstitution. On May 31st, they rank 4,000 stocks by market cap, from highest to lowest, to determine new company additions and deletions. Today, $3.9 trillion in assets is bench-marked to Russell indices with $636.5 billion replicating the Russell 2000 and 3000 growth indexes.

Last year, new companies with market caps greater than $112Mn were added to the Russell indexes. Rockwell Medical didn’t make the cut and was deleted. As a result, large index funds such as, BlackRock Fund Advisors (iShares ETF’s) sold 542,785 shares or State Street Global Advisor sold 259,017 shares. A total of 1,433,145 shares of Rockwell were sold on June 25, 2010 reconstitution day @ $4.54/share.

What will be the minimum company market cap to be added to the Russell indexes this year?

Credit Suisse’s Portfolio & Derivatives Strategy team, in a just released May 5, 2011 24-page research report entitled, “2011 Russell Reconstitution” concluded that new companies with a minimum market cap of $81Mn will be added to the Russell 2000 Growth Indexes.

As of last Friday’s $11.74/share close, Rockwell’s market cap is $208Mn and Bacterin International Holdings at $4.00 are significantly above this minimum $81Mn projected market cap threshold to be potentially added to the Russell indexes. Both stocks prices will see an increase if added. Russell announces the preliminary list of new company additions and deletions on June 10th.

I’m a long time investor with investment experience in high tech, biotechs and precious metals. I blog on topics that are of interest to me and my goal is to generate intelligent discussion. I don’t consider myself an expert in any one area, but know a little about a lot of things. I believe as soon as we stop learning, we stop living. You can connect with me at SeekingAlpha.

Related Posts:

Acquisitions To Increase in Pharma Sector in ’11

Synergy Pharmaceuticals Advances Phase III

Update On Investment Themes for 2011

6 Responses to “Phase III Trials Could Be Explosive for RMTI”

  1. Jose Says:

    Hi

    Intersting analyse.

    But, you know when this kind of products can be approved? Or there are a time predefined when are in phase III and approved?

    Thanks
    Jose

  2. Mobile Guru Says:

    They are about a year away from having data on their studies. Two of the studies are pretty straightforward and should hit end points fairly easily. The Prime study has a different end point and if this one is reached the value is much higher.

    Go to this site and read the valuation report from early May if you want more details.

    http://www.lifesciadvisors.com/clients/rockwell/

  3. christopher brecher Says:

    I just called investors relations at Bone…They said they are “not taking any calls…try again in a month”…Any idea what that means?…thanks,,,…

  4. Mobile Guru Says:

    Which of these two did you call?

    Investor Relations Contact
    Yvonne Zappulla
    Managing Director
    Grannus Financial Advisors, Inc.
    Phone: 212-681-4108
    E-mail: yvonne@grannusfinancial.com

    Media Relations Contact
    Molly M. Mason
    Director of Marketing and National GPO Account Manager
    Bacterin International, Inc.
    Phone: 406.388.0480
    Fax: 406.388.1354
    E-mail: mmason@bacterin.com

  5. jeff pierce Says:

    Thx for following up with this Joe.

  6. christopher brecherf Says:

    I called investors relations at Bacterium directly..Which one of the ones mentioned above should I call for Bacterium?…thanks

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