Hello, everyone, and welcome to this latest in the series of Fireside Chats in the context of H.C. Wainwright's Kidney Conference. I am joined here today by Rockwell Medical's President and Chief Executive Officer, Mark Strobeck. Rockwell Medical is traded on the Nasdaq under the ticker symbol RMTI, and we cover Rockwell with a buy rating and 12-month price target of $9 a share. My name is Ram Selvaraju. I'm a Managing Director and Senior Healthcare Equity Research Analyst with H.C. Wainwright. Mark, it's a pleasure to have you with us today.
Hi, Ram. Good afternoon, and thank you for having us today, joining you at the third annual Kidney Conference. Looking forward to our discussion and telling you a little bit more about what's going on at Rockwell.
So I think what would be a great place to start is if you could give our audience a brief overview of Rockwell Medical's core commercial stage business, which is in the dialysate space. For those of you who are not aware, dialysates represent a key component of the long-term management of patients with end-stage renal disease, advanced renal disease, patients who need dialysis. But I'll stop there and let Mark tell you a little bit more.
Yeah, happy to do so. So Rockwell Medical has been around for over 20 years, and our core expertise is really in the manufacturing, commercialization, and distribution of dialysis concentrates, which are the materials, as Ram mentioned, are used within dialysis machines to help patients effectively clean their blood when they are suffering from issues with their kidneys. We are the second-largest provider of concentrates in the United States. We service the larger part of the United States, and we do that through our three manufacturing facilities, you know, which work tirelessly to make products, you know, in the highest quality way for our patients, and then distribute them through our own trucking division, which is set to deliver products directly to clinics to allow patients and those facilities access to our products.
We are, you know, in a process of continuing to grow our business. We've made some significant strategic changes over the last couple of years, really focusing on this business, because of our expertise and our belief that there is an opportunity there for us to grow within that market, and really deliver a very profitable organization, to allow us to grow into higher margin opportunities.
So I think that represents an interesting jumping-off point to discuss several topics related to the commercial aspects of Rockwell. So Mark, maybe you could walk us through how large the target market is, particularly in the United States, and what level of market share Rockwell has attained so far. You mentioned earlier that Rockwell is the second-largest provider of dialysis concentrates in the US. Just give us a sense of, you know, what percentage of the overall market Rockwell currently holds and where you think that could evolve from a market share standpoint in the coming years, as well as maybe give us some background on where gross margins currently stand and where you expect them to evolve going forward.
Sure, sure. There's just under 500,000 patients annually that need dialysis treatment. Each of those patients undergoes treatments, you know, roughly three times a week, and each of those patients roughly uses about three and a half gallons of concentrates per treatment. When you look at the overall market size, we estimate it today to be, in the United States alone, to be about $450 million, with an annual growth rate that we are seeing of about 4%-6%, that gets us to north of $500 million in 2028. This market is unique in the sense that there are really only two players that exist today.
It is us and Fresenius that have the manufacturing capacity and the distribution to be able to make product and distribute it to the over 12,000 dialysis, in-center dialysis facilities in the United States. Today, we roughly have about 20% of that market, but as this market continues to change, we are continuing to grow within that. And we see that there is an opportunity for a large, independent concentrates provider to continue to gain market share. So that's the, that's the landscape by which we, we play in. We're an indispensable player in that. That is confirmed by the fact that some of our largest customers, we provide materials to DaVita. Our second-largest customer, interestingly, is Fresenius. And we, we are a, an indispensable player in this space, and this space is not changing.
This is how dialysis is administered to patients. It requires the use of concentrates, and, you know, we're, as the second-largest supplier, a critical component of that.
On gross margins, you know, where would you say those stand currently, and how would you expect them to evolve? How high could they conceivably go?
Yep. So, you know, as I mentioned earlier, we, about two years ago, undertook a strategic shift to focus on our concentrates business, not only driving top-line revenue, but to drive also the cost down to make our products, in an effort to enhance our gross margin. Just a couple of years ago, this business actually operated at a gross loss. We have now turned that around. We are now generating a gross profit. We have given guidance this year that our gross margins will be in the 13%-15% range. I can say very confidently that we will be within that. We've also given guidance that in 2025, we expect our gross margins to go up to 20%, and that in 2026, we expect our gross margins to go above 25%.
We see a path where we can get our gross margins higher than 30% over the course of the next couple of years. We already see that with a number of our customers today, and we think a lot of that is gonna come from our ability to continue to make our products in a much more efficient manner.
So you mentioned earlier that there is certainly room for Rockwell to grow its business within the current dialysis concentrates market in the United States, especially given your current status as the second largest provider. But maybe talk a little bit about some customer acquisition strategies that you are currently implementing, and also give us some background on two additional aspects, which I think are really important. One is your relationship with DaVita, which, you know, you mentioned earlier, but DaVita has obviously had a long-standing relationship with Rockwell that doesn't simply end with being a Rockwell customer. So I think our audience would appreciate learning a little bit more about DaVita's involvement with Rockwell. And also, if you could give us some context around the Evoqua transaction, which took place last year, and the extent to which that broadened Rockwell's overall customer footprint.
Sure. Yeah, so, you know, we are a very transactionally focused organization. You know, just within the last 2 years, we completed 2 acquisitions, one of which you just mentioned, which was our acquisition of the Evoqua concentrates business. This was a business that was, you know, doing just around $17 million in revenue, had high gross margins, high gross profits. And we were able to acquire that business for less than 1x revenue. And we've been able to transition that business into the Rockwell platform, and took on 700 additional new customers as a result of that. It effectively took out the number 3 player in the space, really now making this a market opportunity of which there's 2 players that support it. We continue to look for opportunities and ways in which to add more.
Transactionally, we're very active in the business development marketplace today. We're looking at a number of different opportunities of all different sizes, some of which are smaller and can give us access to markets that we don't currently access, others of which are the size that are about 1x the size of our current business, which today stands at about $90-$94 million in revenue. So we're looking at all different opportunities, and I suspect that over the next 6-12 months, that there will be announcements associated with new acquisitions for our business. As it relates to our relationship with DaVita, as you know, we have a long-standing, very strong relationship with DaVita. They're our largest customer.
DaVita's incredibly supportive of the work that Rockwell does, in part because we've continued to supply them on an uninterrupted basis through the course of the last number of years, particularly as others have suffered from interruptions. In addition, we continue to add new business from DaVita, which again, I think is a strong support signal that they are, you know, very happy with the work that Rockwell does. In addition, DaVita is a shareholder of Rockwell. They participated in our last financing, and so again, as another indication of partnership and another indication of support, you know, DaVita's ownership, a part ownership of the company, I think is an important element of that.
So, you know, we see it as, you know, when Rockwell succeeds, DaVita succeeds, and, you know, it gives us an opportunity to grow even further.
Can you give us an update on the percentage of Rockwell that DaVita currently owns?
So they participated in the last financing in the form of preferred shares. Those preferred shares convert at $11 a share, so obviously they saw that there was an opportunity for the value of the company to increase. They today do not own a meaningful or controlling, you know, ownership percentage of the company. So it sits below the 10% threshold. But they obviously saw the opportunity, and, you know, as a shareholder, they're similarly interested in seeing a return on their investment, so I think their conversion price is an indication of where they see that this company can go.
Can you tell us a little bit about the ex-US opportunity in the dialysis concentrates arena, and in particular, maybe talk a little bit about some of your ex-US relationships, distribution arrangements, partnerships, that have been put in place over the last few years, that effectively allow Rockwell to optimize the value of its business beyond the US?
Yeah. So about 12% of our business today is ex-US, and that comes through a number of partnerships that we've put in place with international countries that are interested in accessing our products. Those have been great relationships for us. Not only has it allowed us to price our products appropriately, but the distribution is largely handled by those companies, and so therefore, it's not an expense that we take on. We think there's an opportunity to continue to grow that, and, you know, we continue to work with different countries that are looking to access our products. I think to make a meaningful you know, to create a meaningful presence internationally, it still is expensive to transport, you know, liquid-based products.
So we're gonna need to look for organizations that have, you know, a firm foundation in some of those territories for us to build a much more robust international business. We are currently looking at those today, particularly in Europe, where we think there's a, there's an opportunity there to continue to apply our expertise more internationally and allow a, a larger concentrates business to, to grow.
Let's talk a little bit about some of the underlying metrics to Rockwell's operations. You mentioned earlier the gross margins continue to evolve 13%-15% this year, significant increase planned for next year. Potentially, the ceiling is north of 30% achievable within the next couple of years. You also talked a little bit about where Rockwell's revenues are slated to be for this year. Maybe walk us through a little bit how your top-line revenue guidance has evolved recently.
I understand that you recently increased it, and also what you anticipate to be able to achieve in the course of next year, along with, you know, any kind of frame of reference you could provide to us with respect to what the quarter-over-quarter sequential growth has been on the top line, and also what you expect to be the timeframe within which Rockwell could ultimately achieve sustainable profitability.
Sure. So, you know, since I joined the organization, we have grown our top-line revenue, you know, almost every quarter that we've been here. A lot of that is driven both by adding additional customers, being able to support businesses that go beyond the geographic space that we currently or had previously supported, in addition to, you know, finding ourselves in a marketplace where we can, again, more appropriately price our products. At the beginning of the year, we took a, you know, what I would say a more forward-looking approach to just customer segmentation within our business.
And as a result of that, you know, we applied different economic measures for different customers, and what we're beginning to start to see is the fruits of some of that, and that has allowed us to increase our revenue guidance for this year. In addition, we've been quite heavily focused, and it's really a company-wide, you know, objective for this year, which is to optimize our business. You know, through the course of the first 18 months that I was here, you know, we got rid of a lot of the, you know, the easier elements to fix, some of the low-hanging fruit.
We reduced our expenses, but now we're in a position where we really need to turn to optimization, and that's primarily gonna come through manufacturing and being able to more fully automate our manufacturing process away from the more manual approach that we've used previously. We've taken a number of steps to do that. The Evoqua acquisition gave us the opportunity to access a fully automated set of manufacturing lines. We're also, within our own existing facilities today, beginning for the first time to make investments in new equipment and new machinery that are gonna allow us to more fully automate those manufacturing processes. Where we're gonna see the biggest step in, you know, in the improvement in our gross margin, I believe, is gonna come from making our products in a much more efficient manner, and we've already demonstrated that we're able to do that.
I think as we'll see through the course of 2024, a continual improvement in that gross margin that'll allow us to reach some of the numbers that you spoke about earlier.
What would you say is potentially the timeframe within which Rockwell could exceed that, you know, visually important $100 million annualized revenue threshold?
So I would say, you know, in a very short period of time. You know, as I've mentioned, you know, from a top-line perspective, we've already increased guidance to $90-$94 million for 2024. I think as you'll see performance of this business through the rest of 2024, you'll see a very clear path to revenue that's north of $100 million. Similarly, for the fourth quarter of last year was the first quarter that we were profitable on an Adjusted EBITDA basis. I think you'll also see this year, the first opportunity for this company to begin to start to generate positive cash flow, which will be the truest sign that we've turned the corner and are now in a business that is going to, on a steady and consistent basis, be profitable, cash-generating, you know, for Rockwell.
With respect to, you know, how you expect to report and provide financial guidance going forward, what would you say is likely to be the most appropriate metric for investors to focus on? Would that be how you're growing the top line, how gross margins are evolving, or would you advise folks to pay particular attention to Adjusted EBITDA, for example?
Yeah. So our metric and our goal of success is true profitability, is the ability for this business to begin to start to throw off meaningful amounts of cash. That is 100%, I think, the right objective for folks to be looking at. And I think once you see that we are able to turn that corner, I think we'll give you a sense of what this business is able to do. Underneath that is obviously gross margins. We continue to want to see gross margins continue to tick upwards. That will be the sure sign that the plans that we're putting into place to not only price our products appropriately, but to also make the meaningful changes that we need to within our manufacturing process are starting to take shape.
And then, you know, if we look, again, at, you know, some of the ex-US developments, I understand that historically, before Rockwell refocused itself on the dialysis concentrates business, you know, the company was actively engaged in doing some clinical development, or at least exploring the viability of that. Can you maybe talk a little bit about Rockwell's long-term strategic plans for ferric pyrophosphate citrate, FPC, formerly known as Triferic, and if you see any potential value to be unlocked there, whether that's within the context of the United States, with activities that Rockwell might itself decide to focus on in the future, or whether that's in the context of what your ex-US partners might be able to do?
Yep. So when we set out our strategy two years ago, the focus has always been to grow the company's revenue to north of $100 million, to get this business to throw off a meaningful amount of cash, so that we could take that cash and make investments in what we'll call more innovative, longer-term opportunities. FPC certainly is one of those opportunities that we continue to evaluate, given our access to that technology, as a potential investment opportunity for us to grow beyond, you know, where we are today. We, as you know, we've moved away from Triferic in the U.S. We do have some international partnerships that are continuing to pursue Triferic
I don't think from our perspective, you know, a continued investment in Triferic itself is going to generate a significant amount of return to shareholders, and improve the position of our organization. I think we really need to take a broader, more systematic and aggressive approach to where we place the capital that we're generating from our business to ensure that we are, you know, going to add value to this company, both from a revenue, from a profit, from a cash perspective, and not a, you know, longer-term, you know, investment exercise that may not yield much in the form of a return. So we've done this before. This is certainly my background.
It's our team's background in being able to do this, and so we feel very confident that we'll be highly selective in where we make those investments, but it will be all with the intent to add value quickly to this organization.
And, you know, now looking ahead towards how you intend to deploy capital, you know, maybe some questions around how that might be done from a financial perspective. You know, what are your thoughts on, for example, you know, stock buybacks, as well as how you expect to treat debt as a component of the cap structure? I know that historically, Rockwell has been pretty public on its intent regarding the management of its debt, the steady pay-down of principal, but maybe give us a sense of where you think the company stands right now on those two fronts.
Yep. So philosophically, you know, when we inherited this business, the sort of debt-to-equity ratio was upside down. The equity value of the company was significantly less than the debt that the company had on the business. So one of the goals and focuses of our activities has been to reverse that, and we've done that successfully and have paid down a significant portion of our debt. I think we had just north of $20 million of debt when I started, and we are now at around $8 million in debt, and obviously, the equity value has gone up. You know, it's still philosophically a goal to have a business that doesn't have a significant amount of leverage on it, and I don't think that's a good long-term business strategy.
However, I think if the right opportunity came, we're not looking to, you know, add any, you know, significant dilution to shareholders either. And so we'll be, you know, very thoughtful, as we've been so far, about, you know, our approaches around the use of debt, in an effort to stave off any additional dilution, but allow us to find opportunities to grow our business. You know, I mean, we've had opportunities along the way here to raise capital at what I would call very unattractive valuations, and we've stayed very clear away from that, and true to the mission of we are going to do everything we can to continue to build shareholder value in this company without taking any unnecessary dilution. As far as stock buybacks go, you know, it's something that we've contemplated.
I'd like to see us be in a much stronger cash position, if we're going to contemplate that. We're really right at the point now where we're turning the corner. We're starting to now finally add cash to the balance sheet. I'd like to see us be in a much safer position before we would contemplate anything like that.
Very helpful. And then one last question, which I think is top of people's minds, particularly given the ongoing commentary from the Fed and the will they, won't they question around when they expect to potentially modify interest rates and shift to a less inflationary environment. But I think the real question here, as far as Rockwell's operations are concerned, is, would the direction of interest rates, assuming they trend downwards in the medium to long term, have any impact on Rockwell's own pricing flexibility? You mentioned earlier, you know, the discussion of ongoing positive evolution of gross margins. It doesn't sound like whatever direction interest rates take is likely going to have a meaningful impact on your pricing strategy, but maybe you could talk through that for a little bit.
... Sure. Yeah, I mean, from our perspective, you know, we don't see that necessarily an impact on interest rates is gonna change our ability to appropriately price our products in this market. Unfortunately, we still have the same number and the growing number of patients who suffer from end-stage renal disease. Those patients need treatments, right? And those treatments are being purchased from those providers. It sits sort of to the side of where, you know, inflation rates are. What I would say about inflation rates, you know, that does have an impact on Rockwell, is as it relates to the outstanding, you know, debt obligation that we do have. We were successful in renegotiating our loan agreement at the beginning of the year, lowering our interest rate.
Obviously, the interest rate that we have is set and tied to the current interest rate today. So to the extent that the Fed continues to lower or look at lowering, that interest rate obviously will reduce the overall burden of servicing our debt. But we were quite successful in lowering that interest rate when we renegotiated that at the beginning of the year. So we're in a pretty good position as it stands today.
Great, and I would just, you know, reiterate to our investor audience, you know, Rockwell is still a company that trades well below 2x revenue. At the end of the day, looking at its growth rates and looking at comparable metrics, it seems if Rockwell continues to sustain its growth trajectory, both on the top line as well as from the perspective of being able to generate positive cash flow from operations, this continues to look undervalued. But, before we leave it there, Mark, is there anything else that you would like to highlight about Rockwell to our investor audience?
Yeah, and I would, you know, sort of piggyback off of some of the comments that you just made. We've had 8 successive quarters of revenue growth, expense reduction, gross margin growth, and now we're at the point of turning to profitability. This team that exists here today has a tremendous amount of experience and expertise, not only in running and managing public companies, growing those companies, but also in the manufacturing of concentrates. I believe today we carry the world's leading experts within this space, and, you know, we've done nothing but be successful, and I believe we will continue to be. So we're an opportunity that I think is exciting. We don't carry a lot of clinical risk, we don't carry a lot of regulatory risk. This is purely an execution play, and we've done, you know, and this team has successfully executed.
Thank you very much, Mark, for walking through salient aspects of the Rockwell story for us with our institutional investor audience. I'd like to thank our audience for their attention. Mark, very much wanna wish you all the best with future progress at Rockwell, and look forward to more exciting things to come.
Yeah, and I'd like to thank everybody today for listening as well, and Ram, thank you for the great questions. Great to see you.
Thank you very much.