Overview
Rockwell Medical, Inc., together with its subsidiaries, (collectively, “we,” “our,” “us,” the “Company” or "Rockwell") is a biopharmaceutical company dedicated to transforming anemia and improving outcomes for patients across the globe. We are initially targeting end-stage renal disease (“ESRD”) and chronic kidney disease with innovative therapies and products for the treatment of iron deficiency and hemodialysis (also referred to as “dialysis”). Our business strategy is to bring our pharmaceutical products to market ourselves in the United States and to utilize partners to develop and commercialize such products in international markets.
Triferic® (ferric pyrophosphate citrate) is the Company’s proprietary iron therapy that replaces iron and maintains hemoglobin in dialysis patients without increasing iron stores. We believe Triferic is applicable to a wide variety of disease states in which iron deficiency is an issue, and we are initially targeting patients with ESRD. The Company has developed two formulations of Triferic: Dialysate Triferic, which adds Triferic to the dialysate, and I.V. Triferic, which delivers Triferic intravenously. Dialysate Triferic is the first and only FDA approved product indicated to replace iron and maintain hemoglobin concentration in adult hemodialysis patients. The Company has developed two presentations of Dialysate Triferic for ESRD patients. The first presentation is a liquid, single-patient presentation of Dialysate Triferic, which was approved by the FDA in 2015. The second presentation is a powder packet, multiple-use formulation of Dialysate Triferic, which was approved by the FDA in 2016. During 2019, we built a commercial organization for our Triferic products and launched Dialysate Triferic in the United States in May 2019. We have also developed an intravenous formulation of Triferic, hereinafter referred to as I.V. Triferic, which is a novel formulation of Triferic that would be used for the same indication as Dialysate Triferic, if approved. We submitted a new drug application (“NDA”) for I.V. Triferic in May 2019, with a Prescription Drug User Fee Act ("PDUFA") action date of March 28, 2020. We plan to leverage the medical and commercial capabilities we established in 2019 to support the potential launch of I.V. Triferic.
We are also an established manufacturer and leader in delivering high-quality hemodialysis concentrates and dialysates to dialysis providers and distributors in the United States and abroad. We manufacture, sell and distribute hemodialysis concentrates and other medical products and supplies used in the treatment of patients with ESRD. As one of the two major suppliers in the United States, our dialysis concentrate products are used to maintain human life by removing toxins and replacing critical nutrients in the dialysis patient’s bloodstream. In 2019, we estimate that we supplied approximately 25% of the United States domestic market with dialysis concentrates, with the majority of our sales being made in the United States. We also supply dialysis concentrates to distributors serving a number of foreign countries, primarily in the Americas and the Pacific Rim.
We believe that Triferic is an innovative treatment for iron replacement and has the potential to be developed in other disease states where iron replacement is required. We are actively evaluating additional indications for potential development. If we determine that a new indication demonstrates the potential for a sufficient return on investment, we will evaluate initiating clinical development of Triferic for such indication(s), provided we have the funding to do so.
We are regulated by the FDA under the Federal Food, Drug and Cosmetics Act, as well as by other federal, state and local agencies. We hold several FDA product approvals including for both drugs and medical devices.
As of December 31, 2019, we had approximate balances of $11.8 million of cash and cash equivalents, $14.3 million of investments available-for-sale, working capital of $24.5 million and an accumulated deficit of $306.5 million. Net cash used in operating activities for the twelve months ended December 31, 2019 was approximately $27.3 million. We will require significant additional capital to sustain our operations and make the investments needed to execute our longer-term business plan.
On February 4, 2020, we entered into an underwriting agreement (the “Underwriting Agreement”) with Cantor Fitzgerald & Co., as underwriter (the “Underwriter”), pursuant to which we (i) agreed to issue and sell an aggregate of 3,191,489 shares of our common stock (the “Shares”) to the Underwriter and (ii) granted the Underwriter an over-allotment option for 30 days to purchase up to an additional 478,723 shares that may be sold upon the exercise of such option by the Underwriter (the “Offering”). The Shares were purchased by the Underwriter from us at a price of $2.22 per share. The Offering was made pursuant to our effective Registration Statement on Form S-3 (File No. 333-227363), which was previously filed with the SEC under the Securities Act. The Offering closed on February 6, 2020. On February 19, 2020, the Underwriter exercised its over-allotment option in full and an additional 478,723 shares were sold to the Underwriter on February 21, 2020. We raised a total of $8.0 million, net of estimated issuance costs of $0.2 million, relating to the Offering.
On March 16, 2020, Rockwell Medical, Inc. and Rockwell Transportation, Inc., as Borrowers, entered into a Loan and Security Agreement (the "Loan Agreement") with Innovatus Life Sciences Lending Fund I, LP, as collateral agent, and the lenders party thereto to obtain term loans in an amount up to $35.0 million. $22.5 million was drawn under the Loan Agreement on the date of closing and the remaining $12.5 million will be available for subsequent draws based on our achievement of certain milestones. Net proceeds at closing were approximately $21 million after deducting estimated fees and expenses of $1.5 million. Interest on the loans will accrue either in cash or a combination of cash and in kind interest, at our election. Cash interest will accrue at a rate equal to the greater of (i) Prime Rate (as defined in the Loan Agreement) and (ii) 4.75% plus 4.00%, for an initial interest rate of 8.75% per annum. We have the option, under certain circumstances, to add 1.00% of such interest rate amount to the then outstanding principal balance in lieu of paying such amount in cash. We are entitled to make interest-only payments for thirty months, or up to thirty-six months if certain conditions are met. The Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that are customary for credit facilities of this type. The term loans will mature on March 16, 2025.
Based on the capital raise and debt financing noted above, management believes the Company currently has sufficient funds to meet its operating requirements for at least the next twelve months from the date of the filing of this report.
The Company will require additional capital to sustain its operations and make the investments it needs to execute upon its longer-term business plan, including the commercialization of Dialysate Triferic and I.V. Triferic, if approved, and executing plans for enhancing its medical capabilities and generating additional data for Triferic. If the Company is unable to generate sufficient revenue from its existing long-term business plan, the Company will need to obtain additional equity or debt financing. If the Company attempts to obtain additional debt or equity financing, the Company cannot assume that such financing will be available on favorable terms, if at all.
Our Initial Market Opportunity – Hemodialysis
Hemodialysis is the primary treatment modality for ESRD employed in the United States with approximately 90% of all dialysis patients receiving in-center hemodialysis. We do not currently compete in the peritoneal or home dialysis segments. Hemodialysis treatments are primarily performed in freestanding clinics, as well as in some hospitals. The majority of dialysis services are performed by national and regional for-profit dialysis chains. Based on data published by the United States Renal Data Systems (“USRDS”) we estimate that there are approximately 7,300 Medicare-certified hemodialysis treatment clinics in the United States. The two largest national for-profit dialysis chains service approximately 73% of the domestic in-center hemodialysis market. According to the most recent statistics published by USRDS, there were approximately 523,000 dialysis patients in the United States as of the end of 2017, of which approximately 468,000 were receiving hemodialysis.
Based on a global market study published by a major dialysis products manufacturer, the global ESRD population receiving some form of treatment was estimated to be over 3.2 million patients at the end of 2017 with the overall global patient population growing approximately 6% annually. Data from USRDS and the European Renal Association indicates that there are more than two million patients undergoing hemodialysis globally. According to the National Kidney Foundation, 10% of the worldwide population is affected by chronic kidney disease and millions die each year because they do not have access to affordable treatments. We have observed that the ESRD patient population in the United States has grown steadily over the past several decades and we expect the United States dialysis population to grow approximately 3% annually over the next several years. The Asia-Pacific market is projected to experience rapid growth in both the incidence of kidney disease and total treatment in the ESRD population over the next decade. One common side-effect of dialysis treatments is iron deficiency anemia.
The great majority of hemodialysis patients receive dialysis treatment three times per week, or approximately 150 times per year. Most patients have their dialysis treatment performed at a free-standing clinic for permanent loss of kidney function; these are called “chronic” patients. Some have their treatment performed at hospitals for temporary loss of kidney function; these are called “acute” patients. A small percentage of chronic patients receives their treatment at home; these are called “home” dialysis patients. In each setting, a dialysis machine dilutes concentrated solution, such as Rockwell’s concentrate products, with purified water. The resulting solution is called dialysate. Dialysate is pumped through an artificial kidney or filter (called a dialyzer) while the patient’s blood is pumped through a semi-permeable membrane inside the dialyzer in the opposite direction the dialysate is flowing. The dialysate can exchange bicarbonate, sodium, calcium, magnesium and potassium into the patient’s blood while removing fluid and waste. Dialysate generally contains dextrose, sodium chloride, calcium, potassium, magnesium, sodium bicarbonate and citric acid or acetic acid. The patient’s physician chooses the proper concentrations required for each patient based on each particular patient’s needs.
In addition to using concentrate products during every in-center treatment, a dialysis provider also uses other products such as blood tubing, fistula needles, dialyzers, drugs, specialized component kits, dressings, cleaning agents, filtration salts and other supplies, some of which we sell.
Triferic (Ferric Pyrophosphate Citrate)
Triferic is the first and only FDA-approved iron replacement product indicated for the replacement of iron to maintain hemoglobin in adult patients with hemodialysis-dependent chronic kidney disease ("HDD-CKD"). Each hemodialysis treatment results in a small amount of blood loss due to trapping of red blood cells in the extracorporeal blood circuit and blood loss from vascular access. This blood loss, when combined with repeated blood draws, increased blood losses from the gastrointestinal (“GI”) tract and stimulation of erythropoiesis by use of erythropoiesis stimulating agents (“ESAs”), frequently results in iron deficiency and anemia in hemodialysis patients. In total, hemodialysis-related and GI iron losses amount to about 1 g - 1.5 g of elemental iron annually, not taking into consideration possible blood losses from dialyzer clotting or bleeding from surgical procedures related to vascular access.
We believe Triferic addresses an important unmet need in the treatment of ongoing iron losses and anemia in ESRD patients. Triferic’s unique mode-of-action distinguishes it from conventional I.V. iron products because Triferic donates iron to transferrin, immediately, and completely, as soon as it enters the blood, providing bioavailable iron to the body. The iron bound to transferrin is transported to the bone marrow to make hemoglobin. Triferic delivers approximately 5 – 7 mg of iron with every hemodialysis treatment to the bone marrow and maintains hemoglobin without increasing iron stores (ferritin). In addition to the unique mechanism of action of Triferic, our first formulation of the drug is delivered via the dialysate, which is an innovative mode of delivery that we believe adds a convenience factor for the dialysis units.
We developed Dialysate Triferic as the first and only FDA-approved product indicated to replace iron and maintain hemoglobin concentration in adult hemodialysis patients. We developed I.V. Triferic, a novel intravenous (“IV”) formulation of Triferic that would be used for the same indication, if approved, and we have a PDUFA date of March 28, 2020. Descriptions of Dialysate Triferic and I.V. Triferic are set forth below.
Dialysate Triferic
Dialysate Triferic received FDA approval in January 2015 and remains the only FDA-approved therapy indicated to replace iron and maintain hemoglobin in adult hemodialysis patients. In May 2019, we commenced commercial sales of Dialysate Triferic in the United States.
In 2013, we successfully completed two pivotal Phase 3 efficacy trials, called CRUISE-1 and CRUISE-2, for Dialysate Triferic. The CRUISE studies were identical single-blind, placebo controlled, parallel group, multi-center studies comparing Triferic delivered via hemodialysis bicarbonate concentrate to placebo group receiving standard hemodialysis solution, with approximately 600 subjects split evenly between the two studies and treatment arms. Oral or IV iron supplementation was prohibited, and ESA doses were held constant. Both CRUISE studies successfully met their primary endpoint, demonstrating a statistically significant mean change in hemoglobin from baseline to end-of-treatment. 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.
A supportive clinical trial, called the PRIME study, demonstrated that Dialysate Triferic significantly reduced the need for ESA and IV iron during dialysis compared to the placebo arm dialyzed using conventional dialysate. The PRIME study was a nine-month, prospective, randomized, placebo-controlled, double-blinded, multi-center study in the United States that randomized patients equally to dialysate containing Triferic versus conventional dialysate. A total of 103 patients received the blinded study drug (52 Triferic and 51 placebo). A blinded central anemia management group facilitated ESA dose adjustments, and IV iron was administered according to the approved indication and product labeling when ferritin levels fell below 200 µg/L. Both groups successfully kept their hemoglobin concentrations within the target range. At the end of treatment, there was a significant 35% reduction in prescribed ESA dose in patients treated with Triferic compared with the placebo patients. In a subgroup of ESA hypo-responsive patients—those on more than 13,000 units of epoetin per week—patients needed 74% less ESA in the Triferic group compared to the placebo group at the end of treatment. According to data from Dialysis Outcomes and Practice Patterns Study, a study of hemodialysis practices in the United States, hypo-responsive patients, as defined in the PRIME study, represent more than 20% of the dialysis population. Finally, patients treated with Triferic in this study used 51% less IV iron than the placebo.
In January 2014, we completed our long-term safety study for Triferic which was a prospective, randomized, double-blinded, placebo-controlled, crossover, multicenter, multinational, Phase 3 study with an enrollment of 718 hemodialysis patients in the United States and Canada. This large-scale long-term safety study, coupled with the successful Phase 3 CRUISE studies, dosed over 100,000 Triferic administrations and demonstrated a safety profile similar to placebo.
Dialysate Triferic received a reimbursement J-code on January 1, 2016 from the Centers for Medicare & Medicaid Services (“CMS”), providing that Dialysate Triferic would be reimbursed for administration to dialysis patients within the existing fixed-
price “bundle” of payments that CMS provides to dialysis providers. On April 26, 2019, pursuant to a request we submitted earlier in 2019, we were notified of a preliminary recommendation by CMS to grant our powder packet formulation of Dialysate Triferic a separate J-Code, which became effective on July 1, 2019.
In June 2018, the Company determined, based on feedback provided from CMS’s Innovation Center (“CMMI”), that Dialysate Triferic was unlikely to obtain add-on reimbursement in the near term. As a result, the Company changed its commercialization strategy to plan for the commercial launch of Dialysate Triferic with reimbursement within the bundle of payments to dialysis providers, while continuing to develop I.V. Triferic (discussed below). We commercially launched Dialysate Triferic in May 2019.
I.V. Triferic
We are also developing I.V. Triferic, an intravenous formulation of Triferic, for use by hemodialysis patients in the United States as well as international markets. I.V. Triferic was developed pursuant to a Special Protocol Assessment (“SPA”) with the FDA. As part of the SPA, the FDA agreed that an equivalence approach would be acceptable for I.V. Triferic. In other words, rather than conducting additional safety and efficacy trials, the FDA agreed that our NDA would be acceptable if we are able to show equivalence between I.V. Triferic and Dialysate Triferic by comparing pharmacokinetic (“PK”) parameters of total iron and transferrin-bound iron of I.V. Triferic to Dialysate Triferic. The formal equivalence study was completed during 2018, and I.V. Triferic met bioequivalence criteria compared with Dialysate Triferic. Because I.V. Triferic is a new formulation and new method of administration, the FDA advised us that it requires a new 505(b)1 NDA. We held a pre-NDA meeting with the FDA during which the FDA agreed that the equivalence study was adequate for submission of an NDA. No other material issues were raised regarding our studies and a potential NDA filing. Based on the data from the equivalence study and feedback received during the pre-NDA meeting, on May 28, 2019, we submitted a NDA seeking FDA approval to market I.V. Triferic in the United States for the clinical indication of replacing iron and maintain hemoglobin in adult dialysis patients. We have a PDUFA date of March 28, 2020.
On November 1, 2018, CMS issued interpretive guidance on the availability of Medicare reimbursement for certain products indicated to treat renal disease (the “CMS Guidance”). As set forth in the CMS Guidance, Dialysate Triferic would not be eligible for add-on reimbursement under the CMS Transitional Drug Add On Pricing Adjustment (“TDAPA”) program. However, based on the CMS Guidance, we believed that, if approved by the FDA on or after January 1, 2020, I.V. Triferic would be eligible for separate sole source payment with a separate J-Code for a two-year timeframe. However, on October 31, 2019, CMS finalized revised guidance regarding the TDAPA program that significantly limited the eligibility of new products for TDAPA to only certain NDA types, as classified by the FDA. Pursuant to the revised guidance, I.V. Triferic will not be eligible for TDAPA.
Limitations of Existing Therapies for Anemia in Hemodialysis Patients
The current standard of care for treating anemia in HDD-CKD patients includes injectable ESAs and IV iron products. ESAs and IV iron products are often used together to address the two primary causes of anemia in dialysis patients: low erythropoietin (“EPO”) levels and iron deficiency. EPO is a hormone that is produced by the kidneys and stimulates red blood cell production in the bone marrow. In patients with CKD, the kidneys do not make enough EPO and as a result the bone marrow makes fewer red blood cells, causing anemia. ESAs are synthetic recombinant versions of human EPO that are administered to CKD patients to stimulate EPO production. Administration of ESAs creates a significant demand for iron in the bone marrow, since iron is a critical building block for hemoglobin that is contained in red blood cells. CKD patients often have deficient serum iron levels, which can be caused by a number of factors including, but not limited to, blood lost during hemodialysis treatments and related lab testing, the limited diets of CKD patients, and iron sequestration and reduced absorption of dietary iron which are caused by elevated levels of hepcidin, a hormone that regulates iron metabolism. Since iron is a critical component of hemoglobin production, reduced levels of iron can cause iron deficiency anemia. IV iron is used to support anemia management in dialysis patients to achieve or maintain an iron replete state prior to, during and following initiation of ESA therapy. IV iron products are macromolecular complexes which are taken up by macrophages where iron gets stored. Iron complexes are metabolized within the macrophages to release iron so that it can bind to transferrin in plasma - the iron carrier in the circulation. Transferrin carries the iron to the bone marrow for hemoglobin generation during red cell production. Due to the inflammation present in hemodialysis patients, hepcidin, the master molecule responsible for regulation of iron absorption from the GI tract and export of recycled iron from the macrophages is released, thereby blocking the release of iron from macrophages, which is referred to as iron sequestration. This reduces the efficiency of iron delivery to the bone marrow for erythropoiesis, leading to a state of functional iron deficiency. Since IV iron finds a depot in macrophages it can be administered in large doses and is therefore ideally suited as a replacement therapy in iron depleted patients. Consistent with this mechanism of action, IV iron products were approved as large dose injection/infusion to replenish and restore iron stores in iron-depleted patients (serum ferritin level < 200 ng/mL) with iron deficiency anemia. However, since IV iron has been the only therapy available for hemodialysis patients for over 30 years it has been commonly used off-label
in hemodialysis patients in a proactive manner for maintaining iron balance and preventing the development of iron deficient state. When iron-carbohydrate complexes are administered IV to hemodialysis patients, a significant portion of the iron is sequestered and the dose needed to deliver sufficient iron to the bone marrow far exceeds the amount of iron lost, hence causing progressive and cumulative tissue iron overload with concomitant elevation of serum ferritin levels. In summary, we believe that cumulative tissue iron overload caused by IV iron over time is potentially hazardous to patients. The long term safety of IV iron remains to be established. Furthermore, the carbohydrate moiety in IV iron complexes is thought to be responsible for anaphylactic reactions seen in all IV iron complexes although rarely.
Our Triferic Portfolio
Triferic is structurally and functionally different from IV iron and is specifically FDA-approved to treat the small amounts of iron losses that all dialysis patients experience. Triferic is unique in molecular structure, mode-of-action (bypassing the hepcidin induced block to iron release from the macrophages) and the FDA-approved clinical indication (to replace iron and maintain hemoglobin in adult hemodialysis patients). All components of Triferic are physiologic and present in all mammals. Triferic is used proactively in hemodialysis patients to maintain iron homeostasis such that the amount delivered to the patient and to the bone marrow for erythropoiesis closely approximates the amount lost. Consequently, tissue iron overload is avoided, unlike when iron-carbohydrate complexes are administered proactively. Triferic delivers iron and maintains hemoglobin without increasing iron stores (ferritin) and thus addresses an unmet need. Finally, Triferic has demonstrated an excellent safety profile in clinical trials and in the Company’s sample demonstration program. No reported instances of anaphylaxis have been received during more than 1,000,000 doses administered and Triferic can be administered even to patients with history of allergic reactions to IV iron.
The First and Only FDA-Approved Therapy to Replace Iron and Maintain Hemoglobin. As of now, Triferic is the only FDA-approved therapy indicated to replace iron and maintain hemoglobin in adult hemodialysis patients. We believe that Triferic, due to its unique mechanism of action, facilitates potential clinical and cost-saving benefits. Triferic is an innovative iron therapy that replaces the ongoing iron losses that routinely occur in the vast majority of hemodialysis patients. Effective January 1, 2016, Triferic received a CMS reimbursement code, commonly referred to as a J-Code, for the liquid presentation of Dialysate Triferic. An additional J-code for the Triferic powder packet presentation of Dialysate Triferic was received effective July 1, 2019.
Dialysate and I.V. Formulations. We have two primary formulations of Triferic for commercialization: Dialysate Triferic and I.V. Triferic. We launched Dialysate Triferic, a formulation that is delivered through dialysate, including a liquid form and a powder form, in May 2019. We received FDA approval to market Dialysate Triferic in liquid form in 2015 and in powder form in 2016. Dialysate Triferic is reimbursed within the CMS bundled rate for dialysis providers. We have also developed I.V. Triferic, an I.V. formulation of Triferic, for which we submitted an NDA in May 2019. Importantly, I.V. Triferic can be delivered to patients who receive their treatment with dialysis machines using bicarbonate cartridges, which we believe is the predominant form of bicarbonate delivery in Europe and certain other non-U.S. countries.
International Opportunities. Our strategy for Triferic outside the United States is to license it to key partners for development and/or commercialization. To date, we have established partnerships in China, India, Canada, Peru and Chile. We are actively pursuing international licensing opportunities in other countries and regions, with a focus on Europe, Japan and Latin America. Based on our discussions with market participants, we believe that many international markets disproportionately utilize dialysis machines that operate using dry bicarbonate cartridges or bags, whereas the majority of the United States market utilizes machines that operate using a liquid bicarbonate solution. As a result, we believe the international market opportunity for I.V. Triferic is greater than that of Dialysate Triferic due to the fact that Dialysate Triferic must be mixed with a liquid bicarbonate solution prior to administration. I.V. Triferic, on the other hand, can be infused regardless of the type of dialysis machines or hemodialysis solutions that are being utilized. We have received regulatory approval for Dialysate Triferic in Peru, and we expect to receive regulatory approval for Dialysate Triferic in Chile in 2020. We also have a license agreement (the "Wanbang Agreement") with Wanbang Biopharmaceutical, Co., Ltd. (“Wanbang”), for the development and commercialization of Triferic in China, which grants to Wanbang rights to both Dialysate Triferic and I.V. Triferic in China.
Develop Additional Product Presentations and Clinical Programs for Triferic in ESRD. We are also continuing to evaluate, research, and explore other presentations of Triferic for potential application in ESRD patients. In addition, we believe that Triferic represents an innovative development within ESRD and we will be initiating preclinical studies that will evaluate the compatibility of Triferic with the new prolyl hydroxylase inhibitors versus IV iron.
Dialysis Concentrate Products
We manufacture, sell, deliver and distribute hemodialysis concentrates, along with certain ancillary products. As one of the two major suppliers in the United States, our dialysis concentrate products, as more fully described below, are used to maintain human life by removing toxins and replacing critical nutrients in the dialysis patient’s bloodstream. We use Baxter Healthcare
Corporation (“Baxter”) as our exclusive marketer and distributor in the United States and in select foreign markets pursuant to an Exclusive Distribution Agreement, as amended (collectively, the “Distribution Agreement”). In June 2017, we entered into the First Amendment to Exclusive Distribution Agreement with Baxter which, among other things, enabled us to negotiate directly with DaVita, Inc. ("DaVita") on a long-term contract for the supply of our concentrate products. In August 2019, we signed a new Products Purchase Agreement with DaVita (the "Products Purchase Agreement"). The Products Purchase Agreement provides for an increase in the product sale prices relative to the prices charged for products under the previous agreement with DaVita. We also supply dialysis concentrates to distributors serving a number of foreign countries, primarily in the Americas and the Pacific Rim. Nipro Medical Corporation distributes our dialysis concentrates in certain countries in Latin America that are not covered under the Baxter Distribution Agreement.
Dialysate concentrates accounted for approximately 96% of our 2019 revenue. Approximately 89% of our 2019 sales were to distributors and customers for use in the United States. All of our concentrate products are manufactured according to Association for the Advancement of Medical Instrumentation guidelines and current good manufacturing practices (“cGMP”) established pursuant to Title 21 of the Code of Federal Regulations, Part 820 (“21 CFR 820”). Our concentrate products are diluted with purified water on-site at the clinic in the dialysis machine, creating dialysate, which works to clean the patient’s blood.
CitraPure Citric Acid Concentrate
Our CitraPure Concentrate is citric acid-based, and 100% acetate-free, in contrast to the acetate-based products used for many years. CitraPure does not promote inflammation associated with acetate-based products and the reduction in inflammation is beneficial to improving patient outcomes. Citrate acts as an anticoagulant and has been shown in clinical studies to reduce the need for heparin during dialysis treatment (CitraPure is not indicated for heparin sparing). CitraPure is packaged as a liquid and as a dry powder acid concentrate for use with our Dry Acid Concentrate Mixer. CitraPure is packaged as dry acid concentrate in 25 gallon cases and liquid acid concentrate in 55 gallon drums and four one gallon jugs to a case.
Dri-Sate Dry Acid Concentrate
Our Dri-Sate Concentrate is our original acetic acid-based product. Dri-Sate is packaged as a dry powder acid concentrate for use with our Dry Acid Concentrate Mixer. Dri-Sate is packaged as dry acid concentrate in 25 gallon cases.
RenalPure Liquid Acid Concentrate
Our RenalPure Liquid Concentrate is our original acetic acid-based product and is packaged in 55 gallon drums and four one gallon jugs to a case.
Dry Acid Concentrate Mixer
Our Dry Acid Concentrate Mixer is designed for our CitraPure and Dri-Sate Dry Acid products and enables the clinic to mix acid concentrate on-site. Clinics using our Dry Acid Concentrate products realize numerous advantages, including lower cost per treatment, reduced storage space requirements, reduced number of deliveries and more flexibility in scheduling deliveries, while enabling us to reduce distribution and warehousing costs.
RenalPure and SteriLyte Bicarbonate Concentrate
RenalPure bicarbonate is a dry powder mixed on-site at the clinic and is packaged for bulk and individual treatment and SteriLyte bicarbonate is a liquid packaged in four one gallon jugs to a case and is used mainly in acute care settings.
Ancillary Products
We offer certain ancillary products to selected customers including cleaning agents, filtration salts and other supplies used by hemodialysis providers.
Our Growth Strategies
U.S. Commercialization of Triferic. The United States hemodialysis market is currently the largest market in the world for dialysis products. There are an estimated 468,000 hemodialysis patients in the United States, or approximately 73 million treatments annually, approximately 98% of which are conducted in hemodialysis centers.
Dialysate Triferic. During 2019, we built a sales, marketing, and medical infrastructure to support the launch of Dialysate Triferic. The launch is being supported by a combination of sales representatives, nurse educators and medical science liaisons. Our initial target customers include selected medium and small sized dialysis chains and independent dialysis centers. The launch of Dialysate Triferic has enabled us to engage with key customers in the dialysis industry regarding the potential clinical and pharmacoeconomic benefits of Triferic and is providing us with valuable experience to support our future commercial and medical initiatives, as well as the potential launch of I.V. Triferic.
I.V. Triferic. We submitted an NDA for I.V. Triferic in May 2019, with a PDUFA date of March 28, 2020. We expect to launch I.V. Triferic in the U.S. market in the fourth quarter of 2020, subject to FDA approval.
Research to Support Triferic Value Proposition. To support the launch of our Triferic products in the United States and globally, we are evaluating potential clinical studies and real-world data initiatives that we believe have the potential to support the value proposition for both Dialysate Triferic and I.V. Triferic. Such initiatives, if successful, have the potential to provide valuable clinical and pharmacoeconomic data that can be used by our medical teams to educate dialysis providers of the benefits of Triferic. As an example, we have reached an agreement with EMA on a Phase 3 clinical study design for I.V. Triferic in the European Union that would include a primary endpoint related to ESA dosing. If successful, this trial will provide the data necessary to support a filing for regulatory approval in the E.U. and potentially provide additional data for our U.S. label. We are also collecting data from sites that are purchasing Dialysate Triferic in the United States so that we can assess the impact of Dialysate Triferic on various clinical and pharmacoeconomic measures.
International Commercialization of Triferic. We are working to commercialize Triferic and our Triferic products in various markets across the globe. We are actively engaged in licensing negotiations for Triferic in a number of regions and countries. We believe that I.V. Triferic is a more relevant method of delivery in a number of countries and will support our out-licensing efforts for those territories. We intend to leverage the development, regulatory, commercial presence and expertise of potential business partners to accelerate sales of our products throughout the world. To date, our international licensing agreements for Triferic have been focused primarily on Dialysate Triferic due to the fact that Dialysate Triferic is approved in the United States, thereby simplifying the approval process in certain international countries. We expect that our international licensing activities in the future will be more focused on I.V. Triferic given the larger market opportunity for the product in certain major markets, including Europe, Japan and China.
In 2016, we licensed the commercialization rights for Dialysate Triferic for the Chinese market to Wanbang, a subsidiary of Shanghai Fosun Pharmaceutical (Group) Co., Ltd. ("Fosun Pharma"). The People’s Republic of China is expected to become the largest ESRD market in the world over the next several years. Commercial sales activity in this market will commence following regulatory or registration approval. Under the terms of the Wanbang Agreement, we received an upfront payment of $4 million, which we are recognizing as revenue over the term of the agreement. Rockwell may also receive milestone payments of up to an additional $35 million over the life of the agreement in regulatory and revenue milestone payments, beginning with regulatory approval. We are also entitled to a transfer price on product sold to Wanbang that includes a double digit royalty, and Wanbang is responsible for the cost of the clinical trials and regulatory approval program in China. We retain manufacturing responsibilities for Dialysate Triferic for China. In March 2019, we entered into an amendment to the Wanbang Agreement that provided Wanbang with rights to I.V. Triferic in China.
On January 14, 2020, we entered into license and supply agreements with a wholly-owned subsidiary of Sun Pharmaceutical Industries Ltd. (together, “Sun Pharma”), for the rights to commercialize Dialysate Triferic (ferric pyrophosphate citrate) in India. Under the terms of the agreements, Sun Pharma will be the exclusive development and commercialization partner for Dialysate Triferic in India and we will supply the product to Sun Pharma. In consideration for the license, we received an upfront fee of $100,000, and will be eligible for milestone payments and royalties on net sales. A Joint Alliance Committee, comprised of members from the Company and Sun Pharma, will guide the development and execution for Dialysate Triferic in India. Sun Pharma will be responsible for all clinical, regulatory and commercialization activities.
We have also executed a distribution agreement to market our Triferic products in Canada with RMC Health Care Inc. We expect to file for regulatory approval of I.V. Triferic in 2020, and if approved, we are entitled to receive a transfer price based on our partner’s sales price in Canada. Further, in 2017, we licensed the liquid formulation of Dialysate Triferic to Commercializadora Biorenal SpA in Chile and Quimica Europea in Peru. These distributors are responsible for obtaining regulatory approvals, and we are entitled to receive a fixed transfer price for sales of Dialysate Triferic in those markets. In January 2019, we received regulatory approval for Dialysate Triferic in Peru, representing the first approval of a Triferic product outside the United States, and we expect our partner to commercialize the product beginning in 2020.
Additional Potential Indications for Triferic. We are currently evaluating development of other clinical indications for Triferic. These clinical applications include other indications where iron deficiency is prevalent, including cardiovascular disease, peritoneal dialysis, total parenteral nutrition (“TPN”) and possibly treating cancer patients with functional iron deficiency.
Enhance Dialysis Concentrates Business: During 2019, we identified certain potential enhancements to our dialysis concentrates business in an effort to improve its profitability. Specifically, we: (i) implemented price increases on selected products with certain customers, including DaVita; (ii) evaluated our ability to be more efficient in our manufacturing or transportation operations, and established a plan to implement certain measures during 2020 to improve our efficiency in these areas; and (iii) evaluated the expansion of our business to include additional products for sale to customers in the United States and other jurisdictions such as Latin America.
Clinical Development
Dialysate Triferic is approved for commercial sale in the United States and Peru, and is not approved for sale in other major markets globally. We have received regulatory guidance from the European Medicines Agency (“EMA”) regarding the clinical studies that are needed to file for approval of I.V. Triferic in Europe. At the present time, we do not intend to commence these clinical studies, absent finding a development partner in Europe or raising additional capital. In conjunction with our licensee in the People’s Republic of China, Wanbang, we completed two clinical pharmacology studies in 2019, which demonstrated no ethnic difference in Triferic PK in Chinese subjects compared to U.S. subjects. In December 2019, we and Wanbang met with the National Medical Products Administration ("NMPA"), China’s equivalent of the FDA, to discuss the results of the PK studies and whether they would be sufficient to support a regulatory submission for Dialysate Triferic in China. During the meeting, we and Wanbang received guidance from NMPA that an additional clinical study would be required to support a regulatory submission, and accordingly we are working with Wanbang to determine the scope and timing of such clinical study. Under our agreement with Wanbang, Wanbang is responsible for all clinical development costs required to support the approval of Triferic in China.
As a post-approval requirement under the Pediatric Research Equity Act, we are required to conduct a further clinical study of the effectiveness of Dialysate Triferic in a pediatric patient population. We have reached agreement with the FDA on the design of this study, and in 2019 we entered into a contract with a Contract Research Organization (CRO) and initiated start-up work for the conduct of the study. We expect to begin enrollment in the study during 2020. The study design has also been agreed with the EMA under a Pediatric Investigation Plan (PIP). The results of the pediatric study will support an EU marketing application if and when we are able to complete the other clinical trials that are required.
We believe that Triferic has the potential to be developed for use in other indications in which iron replacement is required. We have engaged a third-party consultant to assist in evaluating the medical and commercial viability of Triferic in potential new indications. If this research demonstrates that a new indication has the potential for a sufficient return on investment, and if funding is available, we would look to potentially initiate clinical programs in such new indications. In addition, we are assessing potential investment in clinical programs to evaluate additional product presentations of Triferic within ESRD.
Distribution Agreement with Baxter
Pursuant to the Distribution Agreement, Baxter is our exclusive agent for commercializing our hemodialysis concentrate and ancillary products in the United States and various foreign countries for an initial term of 10 years ending October 2, 2024. We retain sales, marketing and distribution rights for our hemodialysis concentrate products for our international customers and in those countries in which we have an established commercial presence. During the term of the Distribution Agreement, Baxter has agreed not to manufacture or sell any competitive concentrate products in the United States hemodialysis market, other than specified products. The Distribution Agreement does not include any of the Company’s drug products. In June 2017, we entered into the First Amendment to Exclusive Distribution Agreement with Baxter (the “Amendment”) (See “Item 3 – Legal Proceedings”). The terms of the Amendment included, among other things, reduced pricing on certain accounts. While reducing pricing, the Amendment provided incentives to Baxter to pursue new customers and increase future sales.
Under the Distribution Agreement, Baxter purchases concentrate-related products from us at pre-determined gross margin-based prices per unit adjusted each year during the term and subject to an annual true up. The Distribution Agreement also requires Baxter to meet minimum annual purchase levels, subject to a cure period and certain other relief, in order to maintain its exclusive distribution rights. The minimum purchase levels increase each year over the term of the Distribution Agreement. Purchases in any calendar year that exceed the minimum may be carried forward and applied to future years’ minimum requirements. The Distribution Agreement also contains provisions governing the operating relationship between the parties, our obligations to maintain specified manufacturing capacity and quality levels, remedies, as well as representations, warranties and indemnification obligations of the parties. We continue to manage customer service, transportation and certain other functions for our current customers. Baxter pays us an amount equal to our related costs plus a slight mark-up for these services.
Upon the mutual determination of us and Baxter, the Distribution Agreement also provides that Baxter will pay us up to $10 million to build a new manufacturing facility in the Pacific time-zone that will serve customers in the western United States. The fee payable in connection with building the facility will be reduced to the extent that the facility is not operational within 12 months after the start of construction. Except for any leased components, we will own and operate the facility when completed.
Either party may terminate the Distribution Agreement upon the insolvency or material breach of the other party or in the event of a force majeure. In addition, Baxter may also terminate the Distribution Agreement at any time upon 270 days’ prior written notice to us or if (i) prices increase beyond certain thresholds and notice is provided within 45 days after the true up payment is due for the year in which the price threshold is exceeded, (ii) a change of control of the Company occurs and 270 days’ notice is provided, or (iii) upon written notice that Baxter has been enjoined by a court of competent jurisdiction from selling in the United States any product covered by the Distribution Agreement due to a claim of intellectual property infringement or misappropriation relating to such product. If Baxter terminates the Distribution Agreement under the discretionary termination or the price increase provisions, it would be subject to a limited non-compete obligation in the United States with respect to certain products for a period of two years.
Pursuant to the Distribution Agreement, we received an upfront fee of $20 million. If a “Refund Trigger Event” occurs, we would be obligated to repay a portion of the upfront fee and any paid portion of the facility fee. A “Refund Trigger Event” means any of the following: (i) a change of control of the Company involving any of certain specified companies; (ii) a termination by Baxter due to the Company’s bankruptcy or breach, or due to price increases that exceed the stated thresholds; (iii) a termination by either party due to a force majeure; (iv) settlement or adjudication of any claim, action or litigation relating to a covered product that materially and adversely affects Baxter’s commercialization of the product; and (v) any regulatory action or ruling relating to a covered product that materially and adversely affects Baxter’s commercialization of the product. In the event of a Refund Trigger Event occurring from January 1, 2019 to December 31, 2021, Baxter would be eligible for a 25% refund of the Distribution Agreement’s upfront fee.
The Distribution Agreement may be extended an additional five years by Baxter if Baxter achieves a specified sales target and pays an extension fee of $7.5 million. If the first extension occurs, the Distribution Agreement term may later be extended an additional five years at Baxter’s option at no additional cost.
Distribution and Delivery Operations
The majority of our domestic dialysis concentrate products are delivered through our subsidiary, Rockwell Transportation, Inc., which operates a fleet of trucks used to deliver products to our customers. Rockwell distribution and delivery will continue to operate under the Distribution Agreement on behalf of Baxter for domestic business. We perform delivery services that are generally not available from common carriers or our competitors, such as stock rotation, non-loading-dock delivery and drum pump-off service. As a result, we believe we offer a higher level of service than other providers. Dialysate Triferic is generally delivered to our customers by our third-party logistics provider in the United States.
Sales and Marketing
The top ten dialysis providers treat approximately 426,000 hemodialysis patients in their centers according to an article published by Nephrology News in 2019. We believe this constitutes approximately 91% of the in-center hemodialysis patients in the United States as of 2019. We market and sell Dialysate Triferic, and intend to market and sell I.V. Triferic, directly to these customers and independent clinics in the United States. Our global strategy is to partner with and license these products to established companies in other regions of the world to assist in the further development (primarily clinical trials and regulatory activities), if necessary, and commercialize in those regions. We continue to pursue international licensing opportunities in a number of countries and specific regions.
During the fourth quarter of 2018 and throughout 2019, we assembled sales and marketing leadership and a field-based sales team to support the commercialization of Dialysate Triferic in the United States. The team consists of sales and marketing leaders who have extensive experience selling and marketing products within the ESRD marketplace. This leadership is supported by experienced sales representatives responsible for effectively promoting the product within the United States and clinical nurse educators responsible for supporting the integration of Triferic into United States dialysis clinics. We believe this sales force is appropriately sized for marketing Triferic to the nephrology community within the United States This infrastructure will be leveraged for the launch of I.V. Triferic, if approved.
Our dialysis concentrate products are sold to customers in the United States through Baxter and DaVita in accordance with the Distribution Agreement and the Product Purchase Agreement, respectively. Our dialysis concentrate products are sold to international customers through independent sales agents, distributors and direct.
Medical Affairs
We believe that Triferic represents innovation for iron replacement within ESRD. We believe that medical education will play an integral role in helping to further the awareness and understanding of how Triferic can address the replacement of ongoing iron losses and maintenance of hemoglobin in ESRD patients. Accordingly, we have invested in our Medical Affairs capabilities by hiring a Chief Medical Officer in November 2019, who will also lead any clinical investigations of Triferic in such new indications for the product that we identify as feasible and commercially attractive, and hiring a team of Medical Science Liaisons. In addition, we have enhanced our Medical Advisory Board with preeminent key opinion leaders in the anemia management space. We anticipate applying this medical expertise in ESRD to educate dialysis clinicians through disease state presentations, publications, journals, product literature, medical industry trade conferences and congresses, and other channels including digital, social and healthcare related mediums and web-based applications. We anticipate targeting our medical education efforts to senior and operating management of dialysis companies, dialysis service providers, nephrologists, clinic administrators, nurses, medical directors and technical and purchasing personnel.
Competition
Dialysis Concentrate Solutions and Dialysis Products Market Competition
In the United States, the principal competitor for our concentrate products is Fresenius Medical Care NA (“Fresenius”), a vertically integrated manufacturer and marketer of dialysis devices, drugs and supplies and dialysis clinic operator, which has substantially greater financial, technical, manufacturing, marketing, and research and development resources than us. Fresenius, through its Fresenius Kidney Care division, operates approximately 2,600 clinics and treats approximately 37% of the in-center hemodialysis patients in the United States. Fresenius also manufactures and sells a full range of renal products, including dialysis machines, dialyzers, concentrates and other supplies used in hemodialysis. Fresenius also services clinics owned by others with its products where it commands a market leading position in its key product lines. Fresenius manufactures its concentrate in its own regional manufacturing facilities. Fresenius and Rockwell are the two major dialysis concentrate suppliers in the United States.
Iron Delivery Market Competition
We expect to differentiate Triferic for iron maintenance therapy for hemodialysis patients based on its unique mode of action, clinical benefits, ability to lower treatment cost for providers, ease of administration and excellent safety profile.
Historically, IV iron has been used to treat iron deficiency anemia, and currently, the drug Venofer® is generally regarded as having dominant market share over other IV iron drug products, such as Sanofi’s Ferrlecit®. Venofer® is owned by Switzerland-based Vifor Pharma Management Ltd. (“Vifor”). Vifor also markets Ferinject® which is primarily used to treat anemia in a non-dialysis setting. Fresenius has a sublicense agreement that allows Fresenius to distribute Venofer® to the dialysis market in the United States and Canada. Other IV iron competitors include Watson's generic IV iron drug, Nulecit®. IV iron is a repletion therapy and not an iron maintenance therapy, and therefore, technically, Triferic and IV iron are not competing products as their molecular structure, mode-of-action and FDA-approved clinical indication to treat anemia are different. Both therapies are needed to treat dialysis patients, where Triferic is administered during every dialysis treatment and IV iron is administered when there is excessive blood loss in a patient. Accordingly, as Triferic gains market share, we expect IV iron use will decline.
We are also aware of a class of drugs, known as hypoxia-inducible factor ("HIF") prolyl hydroxylases inhibitors ("PHIs"), or HIF-PHIs, that are in development for a variety of indications, including the treatment of anemia for patients with chronic kidney disease. HIF-PHIs are designed to stimulate erythropoiesis and manage iron utilization and can be administered orally. Certain HIF-PHI compounds, including roxadustat and vadadustat, have reached or completed Phase 3 development in the United States, and a NDA for roxadustat was submitted in the United States in December 2019. If successfully developed and approved, HIF-PHIs could potentially offer a more convenient, more effective and/or safer alternative to injectable ESAs for treatment of anemia in CKD patients while potentially increasing iron availability for hemoglobin synthesis. However, we believe iron replacement therapies, such as Triferic, will continue to be required to address ongoing iron losses in hemodialysis patients as disclosed in the recent roxadustat phase III dialysis study results, where approximately half of the patients on roxadustat were administered IV iron.
The markets for drug products are highly competitive. Competition in drug delivery systems is generally based on marketing strength, product performance characteristics (i.e., reliability, safety, patient convenience) and product price. Acceptance by dialysis providers and nephrologists is also critical to the success of a product. The first product on the market in a particular therapeutic area typically is able to obtain and maintain a significant market share. In a highly competitive marketplace and with
evolving technology, additional product introductions or developments by others could render our products or technologies noncompetitive or obsolete. In addition, pharmaceutical and medical device companies are largely dependent upon health care providers being reimbursed by private insurers and government payers. Drugs approved by the FDA might not receive reimbursement from private insurers or government payers.
Prior to 2011, CMS had paid providers for dialysis treatments under the Medicare program in two parts: the composite rate and separately reimbursed drugs and services. The composite rate was a payment for the complete dialysis treatment except for physicians’ professional services, separately billed laboratory services and separately billed drugs. CMS implemented a bundled reimbursement rate in 2011. The bundled rate is a single payment per treatment, thereby eliminating reimbursement for individual drugs and services to providers. Regulations provide that the rate is recalculated each year. As a result, dialysis drugs are now viewed by providers as an additional cost rather than as a source of revenue.
Quality Assurance and Control
We have established a Quality Management System ("QMS") which defines systems and procedures used to assure quality in the design, manufacture, and delivery of our finished device and pharmaceutical products. Our quality system activities are planned and executed to ensure compliance to the requirements of 21 CFR Parts 820, 210, and 211.
Dialysis Concentrate Solutions Business
We operate under FDA guidelines and place significant emphasis on providing quality products and services to our customers. We have established an organizational structure and quality system procedures to ensure our device products are designed and produced to meet product quality requirements and FDA guidelines. Dialysis products are manufactured and tested using validated equipment and defined process controls to ensure rigid conformance to specifications. To assure quality and consistency of our dialysis concentrates, analytical testing is performed using validated instrument methods to verify that the chemical and microbial properties of each product lot complies with the specifications required by industry standards. Our concentrates are labeled per FDA Unique Device Identifier ("UDI") code requirements to ensure traceability of distributed products. Our quality program activities also include assessments of suppliers of raw materials, packaging components and finished goods, and quality management reviews designed to inform management of key issues that may affect the quality of products, assess the effectiveness of our quality systems and identify areas for improvement.
Drug Manufacturing
We utilize Contract Manufacturing Organizations (“CMOs”) to manufacture and package our drug products for sale. These contract manufacturers are FDA registered drug manufacturing establishments. We follow defined procedures to qualify manufacturers of our products and to review and approve all manufactured products to ensure compliance with FDA cGMP regulations. We ensure our contract manufactures have established robust quality systems and employ validated processes to ensure the quality and compliance of our drug products to their specifications prior to distribution.
Government Regulation
The testing, manufacture and sale of our hemodialysis concentrates and the ancillary products we distribute are subject to regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign agencies. Under the Federal Food, Drug, and Cosmetic Act, as amended (the "FD&C Act"), and FDA regulations, the FDA regulates the pre-clinical and clinical testing, manufacture, labeling, distribution and marketing of medical devices and drugs. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of marketing clearances or approvals and criminal prosecution.
We are developing and commercializing selected drug candidates, such as Triferic. The development and regulatory approval process for new drugs and additional indications for approved drugs includes preclinical testing and human clinical trials and is lengthy and uncertain. Before marketing any pharmaceutical or therapeutic product in the United States, the product must undergo rigorous preclinical testing and clinical trials and an extensive regulatory approval process implemented by the FDA under the FD&C Act.
Moreover, the FDA imposes substantial requirements on new product research and the clinical development, manufacture and marketing of pharmaceutical products, including testing and clinical trials to establish the safety and effectiveness of these products.
Medical Device Approval and Regulation
A medical device may be marketed in the United States only with prior authorization from the FDA, unless it is subject to a specific exemption. Most Class I devices (general controls) and some Class II devices (general and special controls) are exempt from the premarket notification (i.e., 510(k) clearance) requirements. Class III devices generally require "premarket approval" (“PMA”) from the FDA as described in further detail below. FDA grants 510(k) clearance when the submitted information establishes that a proposed device is "substantially equivalent" in terms of safety and effectiveness to a legally marketed device that is not subject to premarket approval. A legally marketed device is a “pre-amendment” device that was legally marketed prior to May 28, 1976 (for which a PMA is not required), a device that has been reclassified from Class III to Class I or II, or a device which has been found substantially equivalent through the 510(k) process. The FDA in recent years has been requiring a more rigorous demonstration of substantial equivalence than in the past, including requiring clinical trial data in some cases. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a new or major change in the intended use of the device, will require new 510(k) submissions. It usually takes from three to six months from the date of submission to obtain 510(k) clearance, and may take substantially longer. Our hemodialysis concentrates (acid and bicarbonate) and other ancillary products are categorized as Class II devices.
Class III devices typically are devices that sustain or support life, prevent impairment of human health or present a potential unreasonable risk of illness or injury. A Class III device generally must receive approval through a PMA application, which requires proving the safety and effectiveness of the device to the FDA. The process of obtaining PMA approval is expensive and uncertain. It usually takes approximately one year to obtain approval after filing the request, and may take substantially longer.
Our hemodialysis concentrate products and other ancillary devices are subject the FDA 510(k) requirements. 510(k) clearance generally is granted when the submitted information establishes that a proposed device is “substantially equivalent” in terms of safety and effectiveness to a legally marketed device that is not subject to premarket approval. A legally marketed device is a “pre‑amendment” device that was legally marketed prior to May 28, 1976 (for which a PMA is not required), a device that has been reclassified from Class III to Class I or II, or a device which has been found substantially equivalent through the 510(k) process. The FDA in recent years has been requiring a more rigorous demonstration of substantial equivalence than in the past, including requiring clinical trial data in some cases. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness, or constitute a new or major change in the intended use of the device, will require new 510(k) submissions. It usually takes from three to six months from the date of submission to obtain 510(k) clearance, and may take substantially longer.
If human clinical trials of a device are required, whether for a 510(k) submission or a PMA application, and the device presents a “significant risk,” the sponsor of the trial (usually the manufacturer or the distributor of the device) will have to file an investigational device exemption (“IDE”) application prior to commencing human clinical trials. The IDE application must be supported by data, typically including the results of animal and laboratory testing. If the IDE application is approved by the FDA and one or more appropriate Institutional Review Boards (“IRBs”), the device may be shipped for the purpose of conducting the investigations without compliance with all of the requirements of the FD&C Act and human clinical trials may begin. The FDA will specify the number of investigational sites and the number of patients that may be included in the investigation. If the device does not present a “significant risk” to the patient, a sponsor may begin the clinical trial after obtaining approval for the study by one or more appropriate IRBs without the need for FDA approval.
Any devices manufactured or distributed by us pursuant to FDA clearances or approvals are subject to continuing regulation by the FDA and certain state agencies. As a manufacturer of medical devices for marketing in the United States, we are required to adhere to regulations, including 21 CFR 820, which is commonly referred to as the Quality System Regulation, setting forth detailed cGMP requirements, which include testing, control and documentation requirements. We must also comply with medical device reporting regulations which require that we report to the FDA any incident in which our products may have caused or contributed to a death or serious injury, or in which our products malfunctioned and, if the malfunction were to recur, it would be likely to cause or contribute to a death or serious injury. Under such a scenario, our products may be subject to voluntary recall by us or required recall by the FDA. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. The FD&C Act prohibits the marketing of approved medical devices for unapproved uses.
We are subject to routine inspection by the FDA and certain state agencies for compliance with cGMP requirements and other applicable quality system regulations. We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, transportation and disposal of hazardous or potentially hazardous substances.
We have 510(k) clearance from the FDA to market hemodialysis concentrates in both liquid and powder form. In addition, we have received 510(k) clearance for our Dry Acid Concentrate Mixer.
We must comply with the FD&C Act and related laws and regulations, including cGMP, to retain 510(k) clearances. We cannot assure you that we will be able to maintain our 510(k) clearances from the FDA to manufacture and distribute our products. If we fail to maintain our 510(k) clearances, we may be required to cease manufacturing and/or distributing our products, which would have a material adverse effect on our business, financial condition and results of operations. If any of our FDA clearances are denied or rescinded, sales of our products in the United States would be prohibited during the period we do not have such clearances.
Drug Approval and Regulation
The marketing of pharmaceutical products in the United States, such as Triferic, requires the approval of the FDA. The FDA has established regulations, guidelines and safety standards which apply to the pre‑clinical evaluation, clinical testing, manufacturing and marketing of our new iron maintenance therapy product and other pharmaceutical products. The steps required before a pharmaceutical product can be produced and marketed for human use include: (i) pre‑clinical studies; (ii) submission to the FDA of an Investigational New Drug Application (“IND”), which must become effective before human clinical trials may commence in the United States; (iii) adequate and well controlled human clinical trials; (iv) submission to the FDA of an NDA; and (v) review and approval of the NDA by the FDA. An NDA generally is required for products with new active ingredients, new indications, new routes of administration, new dosage forms or new strengths. An NDA requires that complete clinical studies of a product’s safety and efficacy be submitted to the FDA, the cost of which is substantial. The costs are often less, however, for new delivery systems, which utilize already approved drugs than for drugs with new active ingredients.
Pre‑clinical studies are conducted to obtain preliminary information on a pharmaceutical product’s efficacy and safety in animal or in vitro models. The results of these studies are submitted to the FDA as part of the IND and are reviewed by the FDA before human clinical trials begin. Human clinical trials may begin 30 days after receipt of the IND by the FDA unless the FDA objects to the commencement of clinical trials.
Human clinical trials are typically conducted in three sequential phases, but the phases may overlap. Phase 1 trials consist of testing the product primarily for safety, metabolism and pharmacologic action in a small number of patients or healthy volunteers at one or more doses. In Phase 2 trials, the safety and efficacy of the product are evaluated in a patient population somewhat larger than the Phase 1 trials with the primary intent of determining the effective dose range. Phase 3 trials typically involve additional testing for safety and clinical efficacy in an expanded population at a large number of test sites. A clinical plan, or protocol, accompanied by documentation from the institutions participating in the trials, must be received by the FDA prior to commencement of each of the clinical trials. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time.
The results of product development and pre‑clinical and clinical studies are submitted to the FDA as an NDA for approval. If an application is submitted, there can be no assurance that the FDA will review and approve the NDA in a timely manner. The FDA may refuse to file an NDA if it is not sufficiently complete to permit substantive review. The FDA may deny an NDA by way of a complete response letter if applicable regulatory criteria are not satisfied or it may require additional testing, including pre‑clinical, clinical and or product manufacturing tests. Even if such data are submitted, the FDA may ultimately deny approval of the product. Further, if there are any modifications to the drug, including changes in indication, manufacturing process, labeling, or a change in a manufacturing facility, an NDA supplement may be required to be submitted to the FDA. Product approvals may be withdrawn after the product reaches the market if compliance with regulatory standards is not maintained or if problems occur regarding the safety or efficacy of the product. The FDA may require testing and surveillance programs to monitor the effect of products which have been commercialized and has the power to prevent or limit further marketing of these products based on the results of these post‑marketing programs.
Manufacturing facilities are subject to periodic inspections for compliance with regulations, such as cGMP requirements, and each domestic drug manufacturing facility must be registered with the FDA. Foreign regulatory authorities may also have similar regulations. We expend significant time, money and effort in the area of quality assurance to comply with all applicable requirements. FDA approval to manufacture a drug is site specific. In the event an approved manufacturing facility for a particular drug becomes inoperable, obtaining the required FDA approval to manufacture such drug at a different manufacturing site could result in production delays, which could adversely affect our business and results of operations. Manufacturers and distributors must comply with various post‑market requirements, including adverse event reporting, re‑evaluation of approval decisions and notices of changes in the product or in the process or procedures used to manufacture a product.
Once an NDA is approved, a product is subject to certain post-approval requirements. As an NDA applicant, we are required to submit to FDA information about any adverse event associated with the use of our approved drug, whether or not the adverse event is considered drug related. If our marketed drug is found to be potentially harmful or does not comply with applicable requirements, we also may recall the product. The FDA regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational
activities and promotional activities involving the internet. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Major changes and some moderate changes to an approved drug, or to the conditions established in the approved NDA, may require the submission and approval of a new NDA or NDA supplement before the change can be implemented. Other changes may be made at the time of FDA’s receipt of the NDA supplement or may be described in our next annual report for the approved NDA.
Pediatric Requirements
Under the Pediatric Research Equity Act ("PREA"), NDAs or supplements to NDAs must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant full or partial waivers, or deferrals, for submission of data. Unless otherwise required by regulation, PREA does not apply to any drug for an indication where orphan designation has been granted.
The Best Pharmaceuticals for Children Act (“BPCA”) provides NDA holders a six-month extension of the marketing exclusivity or patent protection for a drug if certain conditions are met. Conditions for exclusivity include the FDA’s determination that information relating to the use of a new drug in the pediatric population may produce health benefits in that population, the FDA making a written request for pediatric clinical trials, and the applicant agreeing to perform, and reporting on, the requested clinical trials within the statutory timeframe. Applications under the BPCA are treated as priority applications, with all of the benefits that designation confers.
Other Government Regulations
The federal and state governments in the United States, as well as many foreign governments, from time to time explore ways to reduce medical care costs through health care reform. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, we cannot predict what impact any reform proposal ultimately adopted may have on the pharmaceutical and medical device industry or on our business or operating results. Our activities are subject to various federal, state and local laws and regulations regarding occupational safety, laboratory practices, and environmental protection and may be subject to other present and possible future local, state, federal and foreign regulations. We do not expect that compliance with these regulations, including environmental laws, will have a material adverse impact on our financial condition.
The approval procedures for the marketing of our products in foreign countries vary from country to country, and the time required for approval may be longer or shorter than that required for FDA approval. We generally depend on our foreign distributors or marketing partners to obtain the appropriate regulatory approvals to market our products in those countries, which generally do not require additional testing for products that have received FDA approval.
However, since medical practice and governmental regulations differ across regions, further testing may be needed to support market introduction in some foreign countries. Some foreign regulatory agencies may require additional studies involving patients located in their countries. Even after foreign approvals are obtained, further delays may be encountered before products may be marketed. Issues related to import and export can delay product introduction. Many countries require additional governmental approval for price reimbursement under national health insurance systems.
Product License Agreements
We are party to a Licensing Agreement between the Company and Charak, LLC (“Charak”) dated January 7, 2002 (the “2002 Agreement”) that grants the Company exclusive worldwide rights to certain patents and information related to our Triferic products. On October 7, 2018, we entered into a Master Services and IP Agreement (the “Charak MSA”) with Charak and Dr. Ajay Gupta, who serves as Executive Vice President and Chief Scientific Officer of the Company. Pursuant to the Charak MSA, the parties entered into three additional agreements described below related to the license of certain soluble ferric pyrophosphate (“SFP”) intellectual property owned by Charak, as well as the Employment Agreement (defined below). The Charak MSA provided for a payment of $1,000,000 to Dr. Gupta, payable in four quarterly installments of $250,000 each on October 15, 2018, January 15, 2019, April 15, 2019 and July 15, 2019, and reimbursement for certain legal fees incurred in connection with the Charak MSA. As of December 31, 2019, all payments under the Charak MSA were paid.
Pursuant to the Charak MSA, the aforementioned parties entered into an Amendment, dated as of October 7, 2018 (the “Charak Amendment”), to the 2002 Agreement, under which Charak granted the Company an exclusive, worldwide, non-transferable license to commercialize SFP for the treatment of patients with renal failure. The Charak Amendment amends the royalty payments due to Charak under the 2002 Agreement such that the Company is liable to pay Charak royalties on net sales by the Company of products developed under the license, which includes the Company’s Triferic product, at a specified rate until
December 31, 2021 and thereafter at a reduced rate from January 1, 2022 until February 1, 2034. Additionally, the Company shall pay Charak a percentage of any sublicense income during the term of the agreement, which amount shall not be less than a minimum specified percentage of net sales of the licensed products by the sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and no be less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.
Also pursuant to the Charak MSA, the Company and Charak entered into a Commercialization and Technology License Agreement I.V. Triferic, dated as of October 7, 2018 (the “IV Agreement”), under which Charak granted the Company an exclusive, sublicensable, royalty-bearing license to SFP for the purpose of commercializing certain intravenous-delivered products incorporating SFP for the treatment of iron disorders worldwide for a term that expires on the later of February 1, 2034 or upon the expiration or termination of a valid claim of a licensed patent. The Company is liable to pay Charak royalties on net sales by the Company of products developed under the license at a specified rate until December 31, 2021. From January 1, 2022 until February 1, 2034, the Company is liable to pay Charak a base royalty at a reduced rate on net sales and an additional royalty on net sales while there exists a valid claim of a licensed patent, on a country-by-country basis. The Company shall also pay to Charak a percentage of any sublicense income received during the term of the IV Agreement, which amount shall not be less than a minimum specified percentage of net sales of the licensed products by the sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and no be less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.
Also pursuant to the Charak MSA, the Company and Charak entered into a Technology License Agreement TPN Triferic, dated as of October 7, 2018 (the “TPN Agreement”), pursuant to which Charak granted the Company an exclusive, sublicensable, royalty-bearing license to SFP for the purpose of commercializing worldwide certain TPN products incorporating SFP. The license grant under the TPN Agreement continues for a term that expires on the later of February 1, 2034 or upon the expiration or termination of a valid claim of a licensed patent. During the term of the TPN Agreement, the Company is liable to pay Charak a base royalty on net sales and an additional royalty on net sales while there exists a valid claim of a licensed patent, on a country-by-country basis. The Company shall also pay to Charak a percentage of any sublicense income received during the term of the TPN Agreement, which amount shall not be less than a minimum royalty on net sales of the licensed products by the sublicensee in jurisdictions where there exists a valid claim, on a country-by-country basis, and no be less than a lower rate of the net sales of the licensed products by the sublicensee in jurisdictions where there exists no valid claim, on a country-by-country basis.
The foregoing summary does not purport to be a complete description of the terms of the MSA, the Amendment, the IV Agreement and the TPN Agreement and each is qualified in their entirety by reference to the full text of such documents, which are filed as exhibits to this Annual Report on Form 10-K.
Trademarks and Patents
We have several trademarks and service marks used on our products and in our advertising and promotion of our products, and we have applied for registration of such marks in the United States and several foreign countries. Most such applications have resulted in registration of such trademarks and service marks.
As of December 31, 2019, we owned or had the rights to 25 issued patents (5 U.S. and 20 foreign) and 64 pending applications (5 U.S. and 59 foreign). Patents and patent applications owned or licensed by us include claims to I.V. and Dialysate Triferic compositions, formulations and methods of making, as well as other patent claims, including Erythropoietin Stimulation Agent ("ESA") sparing methods using Triferic, and parenteral nutritional compositions including Triferic.
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United States
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Foreign
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Description
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Issued
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Expiration
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Pending
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Issued
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Expiration
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Pending
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Triferic (I.V. and Dialysate)
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2
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2029
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(1)
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1
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3
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(2)
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2028
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(1)
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30
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Triferic (ESA Sparing)
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—
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2034
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2
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7
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(3)
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2034
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28
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Triferic (TPN)
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1
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2026
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—
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9
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(4)
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2026
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1
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Other
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2
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—
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2
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1
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—
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0
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Total
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5
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5
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20
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59
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(1)
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Expiration date in U.S. and foreign (Europe, Japan and Canada) for the synthesis and formulation of our pharmaceutical grade formulation of our Triferic product. In the United States, this patent is listed in Orange Book.
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(2)
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European patent validated in 32 European states (not included in total).
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(3)
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European patent validated in 3 European states (not included in total).
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(4)
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European patent validated in 12 European states (not included in total).
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See Item 1A “Risk Factors” for a discussion of certain risks related to our intellectual property.
Suppliers
The raw materials and packaging materials for our hemodialysis concentrates, the components for our hemodialysis kits and the ancillary hemodialysis products distributed by us are generally available from several potential suppliers. The raw materials for our concentrate products consist primarily of chemical ingredients and packaging components, all of which meet or exceed the requirements of United States Pharmacopeia (“USP”). Key raw materials for our hemodialysis concentrates include citric acid USP, calcium chloride USP, dextrose USP, glacial acetic acid USP, magnesium chloride USP, potassium chloride USP, sodium bicarbonate hemodialysis grade USP and sodium chloride USP, as well as key packaging components such as bottles, caps, bags, boxes and labels. There are multiple potential suppliers for each of these raw materials. We generally negotiate pricing and approximate material quantities for our chemicals on an annual basis and utilize blanket purchase orders with monthly release schedules to meet our needs for production.
We have engaged CMOs for the manufacture and packaging of Triferic. We have two suppliers for the active pharmaceutical ingredient (“API”) utilized in Triferic, two packagers for the powder formulation of Dialysate Triferic and one fill and finish vendor for the liquid formulation of Dialysate Triferic and I.V. Triferic. New production is generally initiated via purchase orders, though we will evaluate the need for supply agreements based on our forecasted product needs. The lead time to qualify and obtain regulatory approval for an additional CMO could be lengthy. Any material dispute, lack of quality of the product, or loss of any significant drug product supplier could have a material adverse effect on our business, financial condition and results of operations.
See Item 1A “Risk Factors” for a discussion of certain risks related to our key suppliers.
Customers
We operate in one market segment, the hemodialysis market, which involves the manufacture, sale and distribution of hemodialysis products to hemodialysis clinics, including pharmaceutical, dialysis concentrates, dialysis kits and other ancillary products used in the dialysis process.
One customer, DaVita, accounted for 49% of our sales in 2019 and 46% of our sales in 2018. Our accounts receivable from this customer were $1.2 million and $2.5 million as of December 31, 2019 and 2018, respectively. In August 2019, we signed a new Products Purchase Agreement with DaVita, with an initial term expiring on December 31, 2023.
In October 2014, we entered into the Distribution Agreement with Baxter, which was amended in June 2017, pursuant to which Baxter received exclusive distribution rights for our concentrate products in the United States. Our domestic customer contracts for the supply of dialysis concentrate products that permitted assignment to Baxter without consent have been assigned to Baxter. As a result, for 2019 and 2018, our direct sales to Baxter aggregated approximately 27% and 26% of sales, respectively, and we had a receivable from Baxter of $2.0 million and $2.8 million as of December 31, 2019 and 2018, respectively.
Another customer, Nipro Medical Corporation, accounted for 9% and 10% of our sales in 2019 and 2018, respectively.
DaVita, Baxter, the accounts administered by Baxter, and Nipro Medical Corporation are important to our business, financial condition and results of operations. The loss of any significant accounts could have a material adverse effect on our business, financial condition and results of operations.
No other customers accounted for more than 10% of our sales in any of the last three years.
See Item 1A “Risk Factors” for a discussion of certain risks related to our key customers.
The majority of our international sales in each of the last two years were sales to domestic distributors that were resold to end users outside the United States. Our total international sales, including sales made through domestic distributors for resale outside the United States, aggregated 11% and 14%, of our overall sales in 2019 and 2018, respectively.
See Item 1A “Risk Factors” for a discussion of certain risks related to our foreign sales.
Employees
As of December 31, 2019, we had 299 employees, substantially all of whom are full time employees. Our arrangements with our employees are not governed by any collective bargaining agreement. Our employees are employed on an “at‑will” basis.
Research & Development
We have invested heavily in the testing and development of Triferic and our Triferic products. We have engaged outside service providers, contract research organizations, consultants and legal counsel to assist us with clinical trials, product development and obtaining regulatory approval. We completed human clinical trials and other testing in 2013 and submitted our NDA for Dialysate Triferic to the FDA in 2014. We received FDA approval for Dialysate Triferic in January 2015.
Since the approval of Dialysate Triferic, we have conducted additional clinical studies of Triferic for other indications and presentations, including the IV formulation, a proof of concept clinical study in peritoneal dialysis patients, and a pediatric study of Triferic. We have incurred product development and research costs aggregating approximately $6.9 million and $5.6 million in 2019 and 2018, respectively, with such costs primarily related to Triferic. Such costs also included efforts to address manufacturing issues in an effort to achieve FDA approval of Calcitriol, which we have since discontinued.
We expect that research and product development spending in 2020 will focus on the Triferic platform, with projects that may include the pediatric study to satisfy FDA and EMA requirements, a Phase 3 study in Europe to support registration for approval, post-marketing studies to further demonstrate the pharmacoeconomics and patient outcomes of Triferic and additional studies of Triferic in new indications.
Corporate Information
We were originally incorporated in the state of Michigan in 1996, and re-domesticated to the state of Delaware in 2019. Our executive offices are located at 411 Hackensack Avenue, Suite 501, Hackensack, New Jersey 07601. Our telephone number is (248) 960-9009 and our website is http://www.rockwellmed.com.
Our website is included as an inactive textual reference only and nothing on the website is incorporated by reference into this Annual Report on Form 10‑K.
You are advised to read this Annual Report on Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our definitive proxy statement, which will be filed with the SEC in connection with our 2020 annual meeting of stockholders, our quarterly reports on Form 10-Q and any current reports on Form 8-K that we may file from time to time. You can access free of charge on our website copies of these reports as soon as practicable after they are electronically filed with the SEC.
The SEC also maintains a website on the internet that contains reports, proxy and information statements and other information regarding issuers, such as us, that file electronically with the SEC. The address of the SEC’s website is http://www.sec.gov.
Investing in our common stock involves a high degree of risk and there can be no assurance that future results will meet expectations. You should carefully consider the risks and uncertainties described below before purchasing our common stock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties may also impair our business operations. If any of these risks actually occur, our business, financial condition or results of operations would likely suffer. In that case, the trading price of our common stock could fall, and you may lose all or part of the money you paid to buy our common stock.
RISKS RELATED TO OUR DRUG BUSINESS
We may not be successful in commercializing Dialysate Triferic, which will impede our development and growth and may limit our long-term prospects.
In June 2018, we announced plans to commence initial steps to prepare for the commercial launch of Dialysate Triferic without waiting to receive separate reimbursement status. While we have commenced commercialization of Dialysate Triferic as of the date of the report, we will need to add to our sales and marketing infrastructure in order to successfully commercialize Dialysate Triferic. We do not know whether we will be able to successfully implement our commercialization strategy for Dialysate Triferic or whether our new business strategy will ultimately be successful. We may not be able to convince potential customers
that the safety, efficacy, clinical utility of Dialysate Triferic are compelling enough to effectuate a change in their clinical practice, including potential operational changes required to adopt Dialysate Triferic. Additionally, the initial demand for the product will impact our ability to utilize existing product inventory prior to expiration. If we commercialize Dialysate Triferic slower than currently anticipated, we may need to write off additional inventory reserves, which could result in material accounting charges in future periods. Additionally, the expiration of existing product inventory could limit the total inventory available for commercial sales while we ramp-up commercial production and attempt to manage production in light of anticipated demand.
In assessing our ability to meet these challenges, a potential investor should take into account our recent management turnover, limited cash position, limited sales and marketing personnel and their limited commercialization experience, the competitive conditions existing in our industry and general economic conditions. Our future success is largely dependent on our ability to successfully implement our Dialysate Triferic commercialization business strategy. Our revenues may be adversely affected if we fail to implement our Dialysate Triferic commercialization business strategy.
Our near-term success depends substantially on the commercialization of Dialysate Triferic and, if approved, I.V. Triferic. Although Dialysate Triferic has been approved by the FDA, and the FDA may approve I.V. Triferic, we may not be able to commercialize either product successfully.
Dialysate Triferic launched commercially in the United States in May 2019 and I.V. Triferic has a PDUFA date of March 28, 2020; however, it is possible that either version of Triferic will not gain market acceptance and that we will not be successful in the commercialization of these products. We do not know whether we will be able to successfully implement our commercialization strategy for Dialysate Triferic and I.V. Triferic, if approved, or whether our new business strategy will ultimately be successful.
Both formulations of Triferic will be reimbursed “within the bundle,” which means that dialysis providers will not receive any additional amount of reimbursement from Medicare or Medicaid to compensate them for the cost of purchasing and administering Triferic. This reimbursement status may result in a slower rate of commercial adoption, as we must work to show dialysis providers that improved patient outcomes, the reduction of utilization in other therapies and the resulting savings offset the costs associated with Triferic. Additionally, Triferic competes against current anemia therapies (including intravenous iron and the ESA class of drugs) and possibly other future products. Additionally, it may be difficult to gain market acceptance from dialysis chains, anemia managers and nephrologists and such acceptance may be slower than expected, if at all.
Market acceptance will depend on a number of factors, such as demonstration of Dialysate Triferic’s safety and efficacy, cost-effectiveness, and advantages over existing products. Other factors that may impact the commercial success and ultimate profitability of Triferic include:
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the rate of adoption of Dialysate Triferic and I.V. Triferic relative to the shelf life of the existing inventory that we have on hand and whether we can sell our existing inventory before it expires;
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our ability to manage inventory available for commercial sale;
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the effectiveness of our marketing, sales and distribution strategies and operations for development and commercialization;
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the impact of Dialysate Triferic and I.V. Triferic on established customer protocols, formularies and operational practices;
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reimbursement of either formulation of Triferic by government and commercial payors;
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our ability to execute our marketing strategy without significant additional expenditures;
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our competitors’ activities, including aggressive marketing and pricing practices and other tactics to retain their market share;
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our ability to successfully assert our patents against potential competitors who may seek to introduce generic versions of either formulation of Triferic;
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our ability to comply with ongoing regulatory requirements applicable to either formulation of Triferic and the manufacturing processes, labeling, packaging, distribution, adverse event reporting, storage, advertising, promotion and recordkeeping applicable to Triferic;
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the impact of certain royalties related to our sale of either formulation of Triferic paid by us based on the profitability of either formulation of Triferic;
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our ability to avoid third party patent interference or patent infringement claims;
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our ability to maintain a continued acceptable safety profile of either formulation of Triferic;
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the discovery of previously unknown problems with either formulation of Triferic or with any third-party manufacturers or manufacturing processes, or failure to comply with regulatory requirements;
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the ability to successfully manufacture commercial product to enable a launch of I.V. Triferic in 2020; and
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the ability to successfully complete our I.V. Triferic commercialization planning thereby enabling a launch of Triferic I.V. in 2020.
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An adverse development with respect to any of the foregoing may have a material adverse effect on our ability to manufacture and market either formulation of Triferic. We cannot assure you that we will be able to generate meaningful and sustained revenues through the sale of either formulation of Triferic. If we are not successful in commercializing either formulation of Triferic, or are significantly delayed in doing so, our entire investment in Triferic may be of no value, our inventory of finished product may expire or become obsolete (resulting in write-offs of such inventory), our licensing rights could be materially adversely affected and the price of our common stock could substantially decline. Even if we are successful in commercializing either formulation of Triferic, since the market is highly concentrated with two significant suppliers, our continued success may depend on adoption of Dialysate Triferic by the limited number of existing dialysis providers.
If we are unable to develop and maintain sales, marketing and distribution capabilities to sell and market Dialysate Triferic or any other products we may develop, our product sales may be hindered.
We are still in the process of establishing an internal sales organization for the sale, marketing and distribution of Dialysate Triferic, as well as I.V. Triferic (if approved). In order to successfully commercialize Dialysate Triferic, I.V. Triferic and future product candidates, we must establish and/or increase our sales, marketing, distribution and other non-technical capabilities. The development of a sales organization to market Dialysate Triferic, I.V. Triferic, or any future product candidate, is expensive and time-consuming, and we cannot be certain that we will be able to successfully develop this capacity or that this function will execute as expected. If we are unable to establish adequate sales, marketing and distribution capabilities, we may not be able to generate product revenue and our business and results of operations will suffer.
If we are unable to use our Dialysate Triferic inventory before its shelf life expires, we will likely have to write-off such inventory, which will likely have a material adverse effect on our business, results of operations, financial position and cash flows.
Given that we have recently commenced commercialization of Dialysate Triferic, we cannot predict the rate of future sales and usage of the drug. As of December 31, 2019, we had a gross inventory balance for Dialysate Triferic of $3.5 million, including approximately $2.9 million in Dialysate Triferic’s active pharmaceutical ingredient and $0.6 million in finished goods inventory. Of this amount, we had reserved $2.8 million related to our Dialysate Triferic finished goods and active pharmaceutical ingredient inventory. As a result of this reserve, our total Dialysate Triferic inventory had a net book value of $0.7 million as of December 31, 2019. The Dialysate Triferic inventory has an initial shelf life ranging from one to three years. If we are unable to utilize some or all of our Dialysate Triferic inventory before its shelf life expires, some or all of our investment in Dialysate Triferic inventory may not be salable. This would reduce the inventory we have available for sale and require us to reserve for the reduction in value, which would likely require us to write-off the value of such inventory. We may also need to reserve for inventory that we estimate will not be sold before such inventory expires. Any such inventory reserve could have a material adverse effect on our business, results of operations, financial position and cash flows.
In order to realize the full potential value for our Triferic franchise, we will need to obtain regulatory approval of I.V. Triferic. Although we believe that we currently have sufficient data to support the approval of I.V. Triferic in the United States, there is no guarantee of success.
In order to expand and realize the full potential value of our Triferic franchise, we will need to obtain approval of I.V. Triferic by the FDA, as well as foreign regulators, such as the EMA. We believe that the market opportunity for I.V. Triferic is greater than for Dialysate Triferic. Although we believe that we have sufficient data to support the approval of I.V. Triferic, it is possible that the FDA could request additional data regarding the product or the manufacturing process. Accordingly, there is no guarantee the FDA or any other foreign regulator will approve I.V. Triferic. In reviewing our planned NDA submission for I.V.
Triferic, the FDA may find deficiencies that raise safety or efficacy concerns or may otherwise require additional clinical testing or impose other requirements, which could significantly delay approval or result in us not receiving approval at all. In addition, varying interpretations of the data obtained from testing could delay, limit or prevent regulatory approval. Furthermore, at the time of FDA approval of our NDA for Dialysate Triferic, we agreed to perform a post-approval clinical study of Dialysate Triferic in a pediatric population. If we do not timely satisfy our post-approval study requirements, it is possible that the FDA could decline to act on future Dialysate Triferic or I.V. Triferic filings. If approval is not granted for I.V. Triferic on the timeframe we expect, or if it is not approved at all, the value of our Triferic franchise would be severely limited.
I.V. Triferic, if approved, is ineligible for add-on reimbursement status, the commercial opportunity for the drug product in the United States could be limited.
On October 31, 2019, CMS issued a final rule to update payment policies and rates under the ESRD Prospective Payment System for renal dialysis services to beneficiaries on or after January 1, 2020. ("2020 Final Rule"). The 2020 Final Rule included certain revisions to the eligibility requirements for the CMS TDAPA program. Under the revised TDAPA rules, ESRD drugs approved by the FDA under NDA Type 3 (or certain combination types) are ineligible for TDAPA effective as of January 1, 2020. As previously disclosed, we have filed an NDA for I.V. Triferic. The FDA has informed us that the NDA for I.V. Triferic will be classified as a Type 3 NDA. As a result, the Company believes that I.V Triferic will not be eligible for TDAPA. This could significantly limit the overall commercial opportunity in the United States for I.V. Triferic should the FDA approve the drug.
Our ability to market Dialysate Triferic is limited by the FDA to those specific indications and conditions for which clinical safety and efficacy have been demonstrated.
The FDA must approve any new indication for an approved product. Dialysate Triferic is approved by the FDA for use in adult patients receiving hemodialysis treatments and has not yet been approved for other indications or for other claims for which we may seek approval, such as ESA-sparing. We are not able to promote Dialysate Triferic or encourage our customers to use Dialysate Triferic for purposes other than the indications of use that have been specifically approved by the FDA as safe and effective. If we are not able to obtain FDA approval for additional indications for Dialysate Triferic or secure an expanded product label, our ability to fully market Dialysate Triferic on the basis of cost savings or improved patient outcomes may be limited, which would limit our ability to take full advantage of Dialysate Triferic’s market opportunity.
Because we may be unable to complete our development, manufacturing and commercialization of our products, we could face significant harm to our business plans, prospects, results of operations, financial condition and liquidity.
Commercializing Dialysate Triferic depends on a number of factors, including but not limited to:
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further product and manufacturing process development;
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completion, refinement and management of our supply chain and distribution channels;
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meeting regulatory requirements for clinical information;
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differentiation of our products from competitive products, including those in development by other companies;
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demonstration of efficiencies that will make our products attractively priced; and
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development of an adequate sales force and sales channels necessary to distribute our products and achieve our desired revenue goals.
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We cannot commercialize I.V. Triferic unless and until we receive FDA approval of our NDA for this product candidate, which was submitted in May 2019. Even if the FDA approves I.V. Triferic for commercialization, under the 2020 Final Rule published by CMS in October 2019, it appears that I.V. Triferic is not be eligible for add-on reimbursement, meaning I.V. Triferic would be required to be sold within the bundled payment for dialysis treatment. This could significantly limit the overall commercial opportunity in the United States for I.V. Triferic.
We cannot assure investors that the strategies we intend to employ will enable us to support the manufacture, distribution and selling of Dialysate Triferic or I.V. Triferic (if approved). If we are unable to implement the necessary steps of our business plan, our prospects, results of operations and financial condition will suffer.
If we are unable to obtain and maintain adequate protection for our data, intellectual property and other proprietary rights, our business may be harmed.
Our success depends in part on our ability to obtain and defend patent and other intellectual property rights that are important to the commercialization of our drug products and product candidates. The degree of patent protection that will be afforded to our drug products and processes in the United States and in other important markets remains uncertain and is dependent upon the scope of protection afforded to us by the patent offices, courts, administrative bodies and lawmakers in the relevant jurisdictions. We can provide no assurance that we will successfully obtain or preserve patent protection for the technologies incorporated into our drug products and processes, or that the protection obtained will be of sufficient breadth and degree to protect our commercial interests in all countries where we conduct business. If we cannot prevent others from exploiting our inventions, we will not derive the benefit from them that we currently expect.
While we have an issued patent in the United States and certain other major markets, including Europe and Japan, that covers the I.V. and Dialysate formulations of Triferic, these patents expire in 2029. The previously issued foundational composition-of-matters patents for Triferic expired in 2016. In light of the current patent protection that we have for Triferic, it is possible that a competitor could seek to manufacture a generic version of Triferic using product specifications and manufacturing methods that do not infringe our issued patent. Further, it is possible that a competitor could seek to invalidate our issued Triferic patent.
We also rely on regulatory exclusivity for protection of our drug products, which includes regulatory data protection and market protection. Implementation and enforcement of regulatory exclusivity varies widely from country to country. Failure to qualify for regulatory exclusivity, or failure to obtain or maintain the necessary extent or duration of such protections for our drug products could affect our revenues, our decision on whether to market our drug products in a particular country and could otherwise have an adverse impact on our results of operations. In the United States, our regulatory exclusivity for Dialysate Triferic as a new chemical entity started with FDA approval of the product. Because of the delay between approval and the commercial launch of Triferic, our regulatory exclusivity has expired and we must rely on patent protection for the long-term protection of our Triferic franchise.
Litigation, interferences, oppositions, inter partes reviews, administrative challenges or other similar types of proceedings are, have been and may in the future be necessary to determine the validity and scope of certain of our proprietary rights. Such proceedings may also be necessary to determine the validity, scope or non-infringement of certain patent rights claimed by third parties to be pertinent to the manufacture, use or sale of our drug products. We may also face challenges to our patent and regulatory protections covering our drug products by third parties, including manufacturers of generics that may choose to launch their products before the expiration of our patent or regulatory exclusivity.
Litigation, interference, oppositions, inter partes reviews, administrative challenges or other similar types of proceedings are unpredictable and may be protracted, expensive and distracting to management. The outcome of such proceedings could adversely affect the validity and scope of our patent or other proprietary rights, hinder our ability to manufacture and market our drug products, require us to seek a license for the infringed product or technology or result in the assessment of significant monetary damages against us that may exceed amounts, if any, accrued in our financial statements. An adverse determination in a judicial or administrative proceeding or a failure to obtain necessary licenses could prevent us from manufacturing or selling our drug products. Furthermore, payments under any licenses that we are able to obtain would reduce our profits derived from the covered products and services.
We depend on third parties to manufacture Triferic. If these organizations are unable or unwilling to manufacture our drug products, or if these organizations fail to comply with FDA or other applicable regulations or otherwise fail to meet our requirements, our business will be harmed.
We rely on CMOs to manufacture Triferic. If a CMO is unable to manufacture Triferic in sufficient quantities and on a consistent basis, or if it becomes unwilling to produce Triferic for us, we may not be able to supply our customers in a timely manner. For I.V. Triferic and our liquid formulation of Dialysate Triferic, we have a single-source finished goods supplier and do not have a long-term supply contract. If we were to experience a supply disruption, it could take an extended period of time to find and qualify an alternate supplier. The manufacturing facilities and processes used by our CMOs must be approved by the FDA and foreign regulators, where applicable, before the drug products manufactured by such CMOs can be sold. After approval, CMOs must meet certain ongoing regulatory requirements for product testing and stability of our commercially marketed products. We do not control the manufacturing processes of our CMOs and depend on them to comply with current good manufacturing practices (“cGMP”), and obtain and maintain regulatory approval. If approval for a CMO is not received or ongoing testing does not continue to meet approved standards and approval is withdrawn, the CMO’s production would be delayed or suspended, which could adversely affect our Triferic commercialization efforts. If that was to happen, we may be forced to find another capable CMO or shift production to another CMO that is already approved and under contract with us. Any such circumstance could
significantly hamper our ability to supply our customers with our drug products in a timely manner, which may have a material adverse effect on our business, results of operations, financial position and cash flows.
We rely on third party suppliers for raw materials and packaging components of our drug products. We may not be able to obtain the raw materials and proper components we need, or the cost of the materials or components may be higher than expected, any of which could impair our production or commercialization of drug products and have a material adverse effect on our business, results of operations and financial position.
We may not be able to obtain the raw materials or packaging components we need, or the price of such materials or components may rise significantly, for a variety of reasons, including but not limited to:
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a business interruption, including a force majeure, cyber-attack or labor strike at a supplier;
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regulatory requirements or action by regulatory agencies or others against a supplier, including delays in receiving necessary approvals;
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failure of a supplier to comply with cGMP standards, which could result in quality or product failures, adulteration, contamination and/or recall;
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adverse financial or other strategic developments at or affecting a supplier;
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termination or disagreement over the terms and conditions of the supply contract by a supplier;
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unexpected demand for or shortage of raw materials or packaging components; and
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unexpected increases in our product demand.
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Some of the suppliers for our raw materials or packaging components are single-source suppliers. Finding an alternative source can be expensive and take a substantial amount of time, especially when regulatory approval is required to qualify the supplier. If we are unable to obtain our raw materials and packaging components and are not able to establish alternative supply sources, or if the prices for such items increase substantially, our CMOs may not be able to produce the desired quantities of our drug products and our expected gross profit margins may be materially adversely affected.
An epidemic of the coronavirus disease is ongoing in China and other parts of the world and may result in significant disruptions to our and our partners’ clinical trials, supply chain and product demand, any of which could have a material adverse effect on our business.
An epidemic of the coronavirus disease is ongoing in China and other parts of the world. As the outbreak is still evolving, much of its impact remains unknown. As of this filing, it is impossible to predict the effect and potential spread of the coronavirus disease in China and globally.
Wanbang is our commercialization partner for both Dialysate Triferic and I.V. Triferic in China. We currently expect Wanbang to initiate additional clinical studies during 2020 that are necessary to support a submission for regulatory approval in China. We also expect to begin enrollment in a pediatric clinical study in 2020. However, the coronavirus disease may result in significant delays or disruptions for such clinical trials, which could affect the regulatory approval process. If the patients involved with these clinical trials become infected with the coronavirus disease, we may have more adverse events and deaths in our clinical trials as a result. We may also face difficulties enrolling patients in our clinical trials if the patient populations that are eligible for our clinical trials are impacted by the coronavirus disease.
Additionally, if our clinical trial patients are unable to travel to our clinical trial sites as a result of quarantines or other restrictions resulting from the coronavirus disease, we may experience higher drop-out rates or delays in our clinical trials. We may also face decreased demand if our dialysis patients are unable to travel to dialysis clinics.
The severity of the coronavirus disease could also make access to our existing supply chain difficult or impossible and could materially impact our business. Any one or a combination of these events could have an adverse effect on our business.
We may not be successful in obtaining foreign regulatory approvals or in arranging out-licensing partners capable of obtaining the approvals needed to effectively commercialize Dialysate Triferic, I.V. Triferic or any other drug product candidates outside
of the United States. Even if we, or our partners, are successful in obtaining the required regulatory approvals, we may not be effective at marketing our drug products in certain markets or at all.
The regulatory procedures for obtaining marketing approval of drug products and product candidates, including Dialysate Triferic and I.V. Triferic, outside the United States vary from country to country and such approvals can be difficult to obtain. Regulatory approval in foreign countries may require additional clinical testing, such is the case with Triferic and our ability to file for regulatory approval in Europe. These tests may be expensive and time consuming and there can be no assurance as to our ability to achieve a positive result, even if we have had positive clinical trial results in the past. Even after foreign approvals are obtained, further delays may be encountered before products may be marketed. Many countries require additional government approval for price reimbursement under national health insurance systems.
Even if we obtain the necessary foreign approval in a particular market, we do not have expertise selling and marketing on an international level and, therefore, may not be successful in realizing commercial value from our drug products. Thus, our strategy is to out-license the rights to our drug products in markets outside the United States to partners who we believe will have the necessary resources and expertise to obtain regulatory approval and ultimately commercialize our out-licensed drug products. However, we may not be successful in finding new partners who will be willing to invest in our drug products outside the United States and even if we are able to find new partners, they may not be able to obtain the necessary foreign regulatory approvals. If we are not successful in out-licensing our drug products outside of the United States or entering into other arrangements with partners capable of obtaining the necessary regulatory approvals to commercialize our drug products, we may be forced to seek regulatory approval and market these products ourselves. If we elect to seek regulatory approval ourselves, it may take longer than expected to obtain such approval and to market and manufacture our products. As a result, we may decide to delay or abandon development efforts in certain markets. Any such delay or abandonment, or any failure to receive one or more foreign approvals, may have an adverse effect on the benefits otherwise expected from marketing in foreign countries.
If we are successful in obtaining partners to develop and commercialize our drug products in foreign markets, we will be dependent upon their effectiveness in selling and marketing our drug products in those foreign markets. These partners may face stiff competition, government price regulations, generic versions of our drug products, violations of our intellectual property rights and other negative events or may otherwise be ineffective in commercializing our drug products, any of which could reduce the market potential for our drug products and our success in those markets.
If Dialysate Triferic, I.V. Triferic or any other drug product candidates are approved and marketed outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.
We may be subject to additional risks if Dialysate Triferic, I.V. Triferic or any other drug product candidates are approved and marketed outside of the United States, including:
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reduced protection for intellectual property rights;
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unexpected changes in tariffs, trade barriers and regulatory requirements;
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economic weakness, including inflation, or political instability in particular foreign economies and markets;
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anti-corruption laws, including the Foreign Corrupt Practices Act (the "FCPA");
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foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country; and
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business interruptions resulting from disease outbreaks, including the recent coronavirus disease epidemic, geopolitical actions, including war and terrorism, or natural disasters, including earthquakes, typhoons, floods and fires.
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We may not be successful in expanding our drug product portfolio or in our business development efforts related to in-licensing, acquisitions or other business collaborations. Even if we are able to enter into business development arrangements, they could have a negative impact on our business and our profitability.
As part of our business strategy to expand our drug product portfolio, we are seeking to acquire or in-license other drug products or product candidates that we believe are a complementary fit with our current product portfolio, as well as other product or product candidates that we believe have substantial development potential. We may not be able to identify such products or product candidates. If we do, the negotiation of such arrangements can be a lengthy and complex process and there can be no
assurance that any such negotiations will be completed on a timely basis or at all, or result in an arrangement that will enable us to effectively integrate, develop and launch such products or product candidates effectively.
In addition, the market potential for new drug products or product candidates is highly uncertain and evaluation of such potential requires significant judgment and assumptions. There is a significant risk that any new drug product may not be able to be brought to market as profitably as expected or at all. If the results of any new drug product initiative are materially worse than expected, it could have a material adverse effect on our business, results of operations, financial position and cash flows.
Our drug business depends on government funding of health care, and changes could impact our ability to be paid in full for our drug products, increase prices or cause consolidation in the dialysis provider market.
Medicare and Medicaid fund the majority of dialysis costs in the United States. Many dialysis providers receive the majority of their funding from the government and are supplemented by payments from private health care insurers. These providers depend on Medicare and Medicaid funding to be viable businesses. Changes to health insurance and reimbursement by Congress may have a negative impact on Medicare and Medicaid funding and on reimbursement protocols. If Medicare and Medicaid funding were to be materially decreased, dialysis providers would be severely impacted, increasing our risk of not being paid in full. An increase in our exposure to uncollectible accounts could have a material adverse effect on our business, results of operations, financial position and cash flows.
Since 2011, CMS has continued to modify reimbursement policies for dialysis under the ESRD prospective payment system generally resulting in lower payment to dialysis providers. We anticipate that dialysis providers will continue to seek ways to reduce their costs per treatment due to this change in reimbursement practice, which could reduce our sales and profitability and have a material adverse effect on our business, results of operations, financial position and cash flows.
The Trump administration and members of Congress have introduced legislation in both the House of Representatives and Senate to repeal and/or replace all or part of the Patient Protection and Affordable Care Act ("PPACA"). Such legislation includes potential changes to or the repeal of Medicaid expansion, coverage for pre-existing conditions and insurance coverage minimum benefits. The likelihood of passage and the impact of this legislation is uncertain. However, it could potentially impact reimbursement by Medicare and Medicaid programs for our drug products and dialysis and could negatively affect the ability of certain individuals to obtain coverage. Other federal and state healthcare reform measures could be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, or change the methods used by Medicare and Medicaid to reimburse providers, including the “bundled” payment model and the availability of transitional separate reimbursement.
As a result of these changes to Medicare and Medicaid reimbursement, the dialysis provider industry may continue to consolidate. This may result in increased purchasing leverage for providers across all dialysis product categories and increased pricing pressure on all suppliers to the industry.
We have in-licensed rights to certain patents that cover our products. If we fail to remain in compliance with these license agreements, we could forfeit the rights to these patents, which could negatively impact our ability to commercialize our products.
We have acquired rights to certain patents under license agreements, including with an affiliate of Dr. Ajay Gupta, our Chief Scientific Officer. These in-licensed patent rights cover I.V. Triferic and have other claims that could cover Triferic and other products. If we fail to remain in compliance with the terms of these license agreements, including due diligence obligations relating to our efforts to develop and commercialize licensed products in certain markets, we could be found to be in breach of these license agreements. If this was to happen, the licensor could terminate the license agreement in certain circumstances, causing us to forfeit our rights to the licensed patents. This could cause us to lose the ability to sell certain products, including I.V. Triferic, and could potentially subject us to expensive and protracted litigation. Any of these occurrences could significantly harm our results of operations and future prospects.
The dialysis market is highly concentrated in the United States, with two organizations (DaVita and Fresenius) accounting for approximately 73% of the total number of hemodialysis patients. Given this concentrated market power, our success in commercializing Triferic will depend in part on the willingness of DaVita and Fresenius to adopt Triferic.
The dialysis market is highly concentrated in the United States. DaVita and Fresenius own or manage a large number of the outpatient dialysis facilities located in the United States, which account for 73% of the total number of hemodialysis patients in the United States. This represents a substantial majority of Triferic’s addressable market opportunity in the free-standing dialysis clinic setting. Due to this concentration, these entities have substantial purchasing leverage, which may put pressure on our pricing by their potential ability to extract price discounts on our products, correspondingly negatively impacting our bargaining position
and profit margins. Additionally, if one or both of these entities elect to not adopt Triferic, that decision would have a significant impact on our ability to successfully penetrate a large portion of the total addressable market in the United States.
New classes of drugs, such as HIF-PHIs, may limit the need for iron to be administered to ESRD patients.
A new class of drugs, known as HIF-PHIs, is currently in development for a variety of indications, including the treatment of anemia for patients with chronic kidney disease. HIF-PHIs are designed to stimulate erythropoiesis and manage iron utilization and can be administered orally. Certain HIF-PHI compounds, including roxadustat and vadadustat, have reached or completed Phase 3 development in the United States, and an NDA for roxadustat was submitted in the United States in December 2019. If successfully developed and approved, HIF-PHIs could potentially offer a more convenient, more effective and/or safer alternative to injectable ESAs for treatment of anemia in CKD patients while potentially increasing iron availability for hemoglobin synthesis. It is possible that HIF-PHIs may significant limit or potentially eliminate the need for parenteral iron to be administered to patients on dialysis.
Historically, iron has been provided to patients within the dialysis setting via an intravenous push as this has been viewed as a more effective way to provide iron than oral iron products. However, it is possible that clinicians may start to provide patients with oral iron agents, instead of IV iron or Triferic. Significant utilization of oral agents would diminish the commercial opportunity of Triferic within ESRD dialysis patients receiving hemodialysis.
Part of the growth strategy of the Triferic portfolio is to evaluate and potentially initiate clinical programs for new indications. We are currently conducting research as to the medical and economic viability of Triferic in new indications and it is possible that the research may determine that Triferic is not either medically or economically viable in new indications.
A potential growth driver for the Triferic portfolio is the potential utility of Triferic in disease states outside of ESRD where iron replacement is required. We are currently performing an evaluation of the potential utility of Triferic in certain other disease states. It is possible that the results of this project may show that Triferic and/or its potential presentations may not be medically viable within these new disease states. It is also possible that the results of this project may demonstrate that even if Triferic were medically viable in new disease states, it would not be economically viable or we may not have the funds to conduct required clinical trials. To launch a product in a new disease state, we would likely need to substantially conclude that Triferic could supplement and/or compete with the current standard of care, and raise the funds needed for the development of such new indications.
Even if we were to determine that Triferic is medically and economically viable in new indications, and even if we were able to obtain additional funding to conduct the necessary clinical trials, clinical trials for our products are expensive, may take several years to complete, and their outcomes are uncertain.
Assuming that our research identifies new clinical indications for Triferic that would be both economically and medically feasible, and assuming that we were able to obtain the necessary funding to conduct clinical trials, conducting clinical trials is a lengthy, time-consuming and expensive process. We would incur substantial expense for both pre-clinical testing and clinical trials with no guarantee that these efforts would either be completed in a timely manner or that they would result in a positive outcome. Completion of clinical trials may take several years or more. The length of time can vary substantially with the type, complexity, novelty and intended use of the product. Factors that can influence and affect the rate of completion of clinical trials include: the potential delay by a partner in beginning a clinical trial; the failure of third-party contract research organizations (“CROs”) and other third-party service providers and independent clinical investigators to manage and conduct the trials, to perform their oversight of the trials or to meet expected deadlines; the inability to recruit clinical trial participants at the expected rate; the inability to follow patients adequately after treatment; unforeseen safety issues; and unforeseen governmental or regulatory issues or concerns, including those of the FDA, DEA and other regulatory agencies.
RISKS RELATED TO OUR CONCENTRATE BUSINESS
We may be required to repay a portion of the upfront fees received from Baxter, which could materially and adversely affect our financial position and cash reserves.
Upon the occurrence of a “Refund Trigger Event” under the Distribution Agreement with Baxter, we may be required to repay to Baxter $5.0 million of the $20.0 million upfront fee and a portion of the facility fee. A Refund Trigger Event includes, among other things, termination due to an uncured material breach by us. If we are required to make any such payment to Baxter, we may need to reallocate funds from other parts of our business, which could force us to change or delay plans for use of that
capital. In any such event, our financial condition, results of operations, and cash reserves could be materially and adversely affected.
A few customers account for a substantial portion of the end user sales of our concentrate products. The loss of any of these customers could have a material adverse effect on our business, results of operations, financial position and cash flows.
Sales of our medical device products are highly concentrated in a few customers. One customer accounted for nearly half of our sales in each of the last three years and for a substantial number of the clinics we serve. The loss of any of these significant customers could have a material adverse effect on our business, results of operations, financial position and cash flows.
We provided Baxter with certain pricing concessions as an incentive to increase its domestic concentrate business. Baxter may not be successful in increasing its domestic concentrate business. If Baxter is not successful in increasing its concentrate business, we may realize lower operating profit from concentrates as a result.
We face competition in the concentrate market and have a large competitor with substantial resources.
The primary competitor in the market for our concentrate products is Fresenius, a large diversified company which has financial, technical, manufacturing, marketing, research and management resources substantially greater than ours. We and our distributor, Baxter, may not be able to successfully compete with Fresenius. Fresenius has historically used product bundling and low pricing as a competitive strategy to capture market share of concentrate products. We and Baxter may be at a disadvantage in competing against these strategies to sell concentrate products. Furthermore, Fresenius is vertically integrated and is the largest provider of dialysis services in the United States, treating approximately 37% of all U.S. in-center hemodialysis patients through its clinics. Fresenius has routinely acquired our customers, and it may acquire more of our customers in the future.
We may be affected materially and adversely by increases in raw material and transportation costs.
A significant portion of our costs relates to chemicals and other raw materials, which are subject to price volatility based on demand and are highly influenced by the overall level of economic activity in the United States and abroad. These costs have tended to rise from year to year and are likely to continue to rise in the future. Under the Distribution Agreement with Baxter, such cost inflation may result in increases in the prices we charge Baxter. If these increases exceed levels specified in the Distribution Agreement, Baxter has the option to terminate the Distribution Agreement and obtain a refund of a portion of the fees (as a Refund Trigger Event) we received from Baxter. Any such termination or refund could have a material adverse effect on our business, results of operations, financial position and cash flows. Additionally, we have been adversely affected by a general shortage in commercial truckers in the United States. This has negatively impacted our profit margins as we pay higher costs to ship products to our customers. Continued increases in shipping costs, or the costs of raw materials, could negatively impact our profit margins, as we may be limited in our ability to pass these costs along to our customers.
RISKS RELATED TO OUR FINANCIAL POSITION
We have limited capital resources and will likely need additional funding before we are able to achieve profitability. If we are unable to raise additional capital on attractive terms, or at all, we may be unable to sustain our operations.
We have limited capital resources, a cumulative deficit of approximately $306.5 million since inception and we expect to incur further losses for the foreseeable future. As of December 31, 2019, we had approximately $26.0 million of cash, cash equivalents and investments available-for-sale, and working capital of $24.5 million. Net cash used in operating activities for the year ended December 31, 2019 was approximately $27.3 million.
On March 22, 2019, we entered into a sales agreement with Cantor Fitzgerald & Co. (the “Agent”), pursuant to which we may offer and sell from time to time up to $40,000,000 of shares of common stock through the Agent. We are not required to sell any shares at any time during the term of the sales agreement. Our ability to sell common stock under the sales agreement may be limited by several factors, including, among other things, the trading volume of our common stock and certain black-out periods that we may impose upon the sales agreement, among other things.
On June 20, 2019, we closed a public offering of 5,833,334 shares of common stock at a price of $3.00 per share. On July 9, 2019, the underwriters of the public offering partially exercised their over-allotment option to purchase an additional 425,800 shares of common stock at a price of $3.00 per share, which closed on July 11, 2019.
On February 6, 2020, we closed a public offering of 3,191,489 shares of common stock at a price of $2.22 per share. On February 19, 2020, the underwriter of the public offering exercised its over-allotment option to purchase an additional 478,723 shares of common stock at a price of $2.22 per share in full, which closed on February 21, 2020.
On March 16, 2020, Rockwell Medical, Inc. and Rockwell Transportation, Inc., as Borrowers, entered into a Loan and Security Agreement (the "Loan Agreement") with Innovatus Life Sciences Lending Fund I, LP, as collateral agent and the lenders party thereto to obtain term loans in an amount up to $35.0 million. $22.5 million was drawn under the Loan Agreement on the date of closing, and the remaining $12.5 million will be available for subsequent draws based on our achievement of certain milestones. Net proceeds at closing were approximately $21 million after deducting estimated fees and expenses of $1.5 million. Interest on the loans will accrue either in cash or a combination of cash and in kind interest, at our election. Cash interest will accrue at a rate equal to the greater of (i) Prime Rate (as defined in the Loan Agreement) and (ii) 4.75% plus 4.00%, for an initial interest rate of 8.75% per annum. We have the option, under certain circumstances, to add 1.00% of such interest rate amount to the then outstanding principal balance in lieu of paying such amount in cash. We are entitled to make interest-only payments for thirty months, or up to thirty-six months if certain conditions are met. The Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that are customary for credit facilities of this type. The term loans will mature on March 16, 2025.
Based on the capital raise and debt financing noted above, management believes the Company currently has sufficient funds to meet its operating requirements for at least the next twelve months from the date of the filing of this report.
The Company will require additional capital to sustain its operations and make the investments it needs to execute upon its longer-term business plan, including the commercialization of Dialysate Triferic and I.V. Triferic, if approved, and executing plans for enhancing its medical capabilities and generating additional data for Triferic. If the Company is unable to generate sufficient revenue from its existing long-term business plan, the Company will need to obtain additional equity or debt financing. If the Company attempts to obtain additional debt or equity financing, the Company cannot assume that such financing will be available on favorable terms, if at all.
Our existing capital resources may not be adequate to finance our operating cash requirements for the length of time that we have estimated and additional capital that we may need to operate or expand our business may not be available.
Our forecast of the period of time through which our existing capital resources will be adequate to support our current operations is a forward-looking statement that involves risks and uncertainties. The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include, but are not limited to:
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the timing and expenditures associated with the commercialization of Dialysate Triferic and the timing and magnitude of cash received from product sales;
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the timing and expenditures associated with the build-up of inventory;
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the timing, design and conduct of, and results from, clinical trials that we may conduct; and
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the timing of the licensing, partnering and acquisition of new product and product candidate opportunities.
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If our cash is insufficient to meet our future operating requirements, we will have to raise additional funds. Our capital raising activities may include, but may not be limited to, the issuance of common stock or other securities via private placement or public offerings or the issuance of debt. While we may seek capital through a number of means, there can be no assurance that additional financing will be available on acceptable terms, if at all. Furthermore, additional equity financings may be dilutive to our stockholders and newly issued securities may have rights, preferences or privileges senior to those of holders of our common stock.
Debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate as a business. Additionally, we may have difficulty borrowing money through a term loan or debt facility given the covenants in our distribution agreement with Baxter which prohibit us from entering into a contract encumbering the assets used in our concentrate business. These assets currently constitute a substantial portion of the tangible assets we own. If our development activities require substantial cash resources in the future in excess of our liquid resources on hand and if our cash flows are not sufficient to support financing through unsecured indebtedness, we may not be able to obtain debt financing and our capital financing options may become limited.
Regardless of whether we seek to raise additional working capital through the sale of equity securities or the incurrence of indebtedness, if we do not have sufficient funds available to successfully commercialize Dialysate Triferic, conduct planned clinical studies and pursue business opportunities, our business, results of operations, financial position and cash flows could be materially adversely affected.
Our drug and concentrate businesses are highly regulated, resulting in additional expense and risk of noncompliance that can materially and adversely affect our business, results of operations, financial position and cash flows.
Our businesses are highly regulated. The testing, manufacture and sale of the products we manufacture directly or through third party CMOs are subject to extensive regulation by the FDA and by other federal, state and foreign authorities. Before drug product candidates or medical devices, such as our concentrate products, can be commercially marketed in the United States, the FDA must give either premarket approval or 510(k) clearance. After a product is approved, regulatory authorities may impose significant restrictions on a product’s indicated uses or marketing or requirements for potentially costly post-marketing studies. Our drug products are subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, sampling, record- keeping and reporting of safety and other post-market information. In addition, manufacturers and their facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to current cGMP and applicable state laws. As such, we and our CMOs are subject to continual review and periodic inspections to assess compliance with cGMP and state laws. Accordingly, we and our partners must continue to expend time, money and effort in all areas to achieve and maintain regulatory compliance. We are also required to report certain adverse reactions and production problems, if any, to applicable regulatory authorities and to comply with requirements concerning advertising and promotion for our drug products or product candidates.
If non-compliant inventory is sold or if a regulatory agency determines that we are not compliant with any applicable regulatory requirements, we may be subject to warnings from, or enforcement action by, state and federal government authorities, which may include penalties, fines, injunctions, recall or seizure of products, suspension of production, denial of future regulatory approvals, withdrawal or suspension of existing regulatory approvals, operating restrictions, injunctions and criminal prosecution. If regulatory sanctions are applied, the value of our Company and our operating results could be materially and adversely affected. Our business could also be adversely affected by delays in obtaining necessary regulatory approvals and any restrictions placed by the FDA on our intended marketing or the use of our drug products.
Our failure to comply with applicable regulations could also result in product liability litigation against us. In addition, our failure to comply with applicable regulations with respect to our concentrate products could constitute a breach by us of the Distribution Agreement, providing Baxter with various remedies that would be material and adverse to us. Moreover, changes in applicable regulatory requirements could significantly increase the costs of our operations, which, if such higher costs result in price increases that exceed the thresholds specified in the Distribution Agreement, could give Baxter the right to terminate the Distribution Agreement and obtain a partial refund of certain fees paid to us.
Our business could be impacted as a result of actions by activist shareholders, including as a result of a potential proxy contest for the election of directors at our annual meeting.
The Company was subjected to a proxy contest at the 2017 Annual Meeting of Shareholders, which resulted in the negotiation of changes to the Board and substantial costs were incurred. A future proxy contest would require us to incur significant legal fees and proxy solicitation expenses and require significant time and attention by management and the Board. The potential of a proxy contest could interfere with our ability to execute our strategic plan, give rise to perceived uncertainties as to our future direction, adversely affect our relationships with customers, suppliers, investors, prospective and current team members and others, result in the loss of potential business opportunities or make it more difficult to attract and retain qualified personnel, any of which could materially and adversely affect our business and operating results.
We may also be subject, from time to time, to other legal and business challenges in the operation of our company due to actions instituted by activist shareholders. Responding to such actions, which may include publicity campaigns and, potentially, litigation, could be costly and time-consuming, divert the time and attention of our Board of Directors and management from our business, interfere with our ability to execute our strategic plan, give rise to perceived uncertainties as to our future direction, adversely impact our lobbying efforts, adversely affect our relationships with customers, suppliers, prospective and current team members and others, result in the loss of potential business opportunities or make it more difficult to attract and retain qualified personnel, any of which could materially and adversely affect our business and operating results. We cannot predict, and no assurances can be given as to, the outcome or timing of any matters relating to actions by activist shareholders or the ultimate impact on our business, results of operations, financial position and cash flows.
Our future success depends on our ability to retain executives and key employees and to attract, retain and motivate qualified personnel in the future.
We are highly dependent on the product development, clinical and business development expertise of the principal members of our management, scientific and clinical team. Although we have entered into employment agreements with our
executives and key employees, each of them may terminate their employment with us at any time. We do not maintain “key person” insurance for any of our executives or other employees.
Recruiting and retaining qualified scientific, clinical, manufacturing, sales and marketing personnel is critical to our success. The loss of the services of our executive officers or other key employees could impede the achievement of our development and commercialization objectives and seriously harm our ability to successfully implement our business strategy. Furthermore, replacing executive officers and key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to successfully develop, gain regulatory approval of, and commercialize products. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate these key personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel.
We hired a new Chief Executive Officer and Chief Financial Officer in 2018 and have hired additional executive-level employees who are leading the commercialization of Dialysate Triferic. This leadership transition may be difficult to manage and may cause operational and administrative inefficiencies, added costs, decreased productivity among our employees, and loss of personnel with deep institutional knowledge, which could result in significant disruptions to our operations. In addition, we must successfully integrate our new management team members within our organization in order to achieve our operating objectives, and these changes in key management positions may temporarily affect our financial performance and results of operations as our new management becomes familiar with our businesses. These changes could also increase the volatility of our stock price.
We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating drug product, nonclinical development, clinical development, regulatory strategy, and commercial strategy. Our consultants and advisors may be employed by employers other than us and may have commitments under consulting or advisory contracts with other entities that may limit their availability to provide services to us. If we are unable to continue to attract and retain high quality personnel, our ability to pursue our growth strategy will be limited. If we are unable to mitigate these or other similar risks, our businesses, results of operations, and financial condition may be adversely affected.
We expect to continue to expand our sales and marketing function, as well as our corporate operations, and as a result, we may encounter difficulties in managing our growth, which could disrupt our operations.
During the fourth quarter of 2018 and throughout 2019, we assembled sales and marketing leadership and a field-based sales team to support the commercialization of Dialysate Triferic in the United States. To manage this growth, we must continue to implement and improve our managerial, operational and financial systems, expand our facilities and continue to recruit and train additional qualified personnel. Due to our limited financial resources, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.
We could be found to be infringing intellectual property rights of third parties, which could prevent us from selling products and could require us to pay significant damages and compel us to defend against litigation.
It is possible that we may infringe on intellectual property rights of others without being aware of the infringement. If a third party believes that one of our drug products or product candidates infringes on the third party’s patent, it may sue us even if we have received our own patent protection for the technology. If we infringe the rights of a third party, we could be prevented from manufacturing and selling products, forced to pay damages, compelled to license technology from the party claiming infringement and lose the opportunity to license our technology to others and collect royalty payments, any of which could have a material adverse effect on our business. If Baxter is prevented from selling any of our concentrate or ancillary products due to a patent infringement or if its ability to sell any of our concentrate or ancillary products due to a patent infringement is materially and adversely affected, Baxter may be entitled to terminate our Distribution Agreement and obtain a refund of a portion of the upfront fee and facility fee.
As is common in the biotechnology and pharmaceutical industry, we engage the services of consultants to assist us in the development of our drug products and product candidates. Many of these consultants were previously employed at, may have previously been, or are currently providing consulting services to, other biotechnology or pharmaceutical companies, including our competitors or potential competitors. As such, the Company advises consultants not to disclose, or use trade secrets, or proprietary information of their former employers or their former or current customers. Although no claims against us are currently pending, we may be subject to claims that these consultants or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers or their former or current customers. Litigation may be necessary to
defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management and day-to-day business operations.
Our drug products and product candidates may have undesirable side effects and our product liability insurance may not be sufficient to protect us from material liability or harm to our business.
If concerns are raised regarding the safety of a product candidate as a result of undesirable side effects identified during clinical testing, the FDA may decline to approve the product candidate at the end of the NDA review period or issue a letter requesting additional data or information prior to making a final decision regarding whether or not to approve the product candidate. Following FDA approval, if we or others later identify previously unknown undesirable side effects caused by our product candidate or concentrate products, if known side effects are more frequent or severe than in the past, or if we or others detect unexpected safety signals for such products or any products perceived to be similar to such products, the FDA or other applicable regulatory authorities may require the addition of unfavorable labeling statements, specific warnings or contraindications, may suspend or withdraw their approval of the product, may require it to be removed from the market or may impose restrictions on the distribution or use of the product. Such side effects may also result in litigation against us by private litigants.
We maintain product liability insurance. We cannot be sure that such insurance would be sufficient to protect us against liabilities associated with any of these events in view of our expanding business or that such insurance will remain available at economical levels. We may have significant legal expenses that are not covered by insurance. In addition, our reputation could be damaged by such sanctions or product liability litigation and that could harm our business reputation and marketing ability. Any such sanctions or litigation could also hurt our ability to retain product liability insurance or make such insurance more expensive. In any such event, our business, results of operations, financial position and cash flows could be materially adversely affected.
We may be subject to claims that our employees or directors have wrongfully used or disclosed alleged trade secrets of their former employers.
Many of our employees and certain of our directors were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees and directors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or these employees or directors have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such employee’s or director’s former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management.
Our business and operations would suffer in the event of a security breach, system failure, invasion, corruption, destruction or interruption of our or our business partners’ critical information technology systems or infrastructure.
In the ordinary course of business, we and our business partners store sensitive data, including intellectual property and proprietary information related to our business, our customers and our business partners, on our information technology systems. Despite the implementation of security measures, these systems are vulnerable to damage from computer viruses, unauthorized access, cyber-attacks, natural disasters, terrorism, war and telecommunication, electrical and other system failures due to employee error, malfeasance or other disruptions. We could experience a business interruption, intentional theft of confidential information or reputational damage, including damage to key customer and partner relationships, from system failures, espionage attacks, malware, ransomware or other cyber-attacks. Such cyber-security breaches may compromise our system infrastructure or lead to data leakage, either internally or at our contractors or consultants. In particular, system failures or cyber-security breaches could result in the loss of nonclinical or clinical trial data from completed, ongoing or planned trials, which could cause delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. The risk of a security breach or disruption, particularly through cyber-attacks, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications, or inappropriate disclosure of confidential or proprietary information, including protected health information or personal data of employees or former employees, we could be subject to legal claims or proceedings, liability under laws and regulations governing the protection of health and other personally identifiable information and related regulatory penalties. In any such event, our business, results of operations, financial position and cash flows could be materially adversely affected.
We use biological and hazardous materials, and any claims relating to improper handling, storage or disposal of these materials could be time consuming or costly.
We use hazardous materials, including chemicals and biological agents and compounds, which could be dangerous to human health and safety or the environment. Our operations also produce hazardous waste products. Federal, state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental laws and regulations may impair our pharmaceutical development efforts.
In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. If one of our employees was accidentally injured from the use, storage, handling or disposal of these materials or wastes, the medical costs related to his or her treatment would be covered by our workers’ compensation insurance policy. However, we do not carry specific biological or hazardous waste insurance coverage and our property and casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended, or operations otherwise affected.
We are and may become the target of additional securities and shareholder litigation, which is costly and time-consuming to defend.
In addition to the purported class action, shareholder derivative action and SEC investigation filed against us as described in Note 15 “Commitments and Contingencies” in the accompanying consolidated financial statements for the year ended December 31, 2019, it is possible that other legal proceedings could be brought against us in the future. The results of complex legal proceedings are difficult to predict. These lawsuits assert types of claims that, if resolved against us, could give rise to substantial damages, and an unfavorable outcome or settlement of these lawsuits, or any future lawsuits, could have a material adverse effect on our business, financial condition, results of operations and/or stock price. Even if any future lawsuits are not resolved against us, the costs of defending such lawsuits may be material to our business and our operations. Moreover, these lawsuits may divert our Board and our management’s attention from the operation of our business. For more information on our legal proceedings, see Note 15 “Commitments and Contingencies – Litigation” in the accompanying consolidated financial statements for the year ended December 31, 2019.
Any adverse conclusions from our SEC investigation could result in fines, criminal penalties and an adverse effect on our business.
We received letters in 2017 from the SEC informing us that the SEC was conducting an inquiry into our accounts receivable and inventory, calculation practices regarding such information, as well as disclosure regarding our dispute with Baxter and requesting that we voluntarily provide certain information and documents relating to our accounts receivable and inventory calculations and reporting practices, as well as information relating to the Baxter dispute. In 2018, we received additional requests (including a subpoena) from the SEC asking for certain records and information relating to the termination of our prior Chief Executive Officer and Chief Financial Officer, as well as the facts and circumstances leading up to the resignation of our prior audit firm. The SEC’s letters stated that the SEC’s inquiry should not be construed as an indication that any violation of any federal securities laws has occurred. We have provided all of the requested information and documents to the SEC from the 2017 requests and are substantially complete in providing the requested information and documents from the 2018 subpoena. We have and will continue to fully cooperate with the SEC investigation. At this stage, we are unable to predict when the SEC’s inquiry will conclude or what the consequences may be. Furthermore, any continuation of the SEC inquiry may cause a diversion of management’s time and attention, which could have a material adverse effect on our business, results of operations, financial position and cash flows.
Unfavorable weather or global economic conditions could adversely affect our business, financial condition or results of operations.
Our results of operations could be adversely affected by general weather conditions, as well as conditions in the global economy and in the global financial markets. A severe storm in our locations or those of our suppliers, or prolonged economic downturn, such as the recent global financial crisis, could result in a variety of risks to our business, including our ability to raise additional capital when needed on acceptable terms, if at all. This is particularly true in Europe, where the Brexit has created additional economic uncertainty. A weak or declining economy could also strain our suppliers, possibly resulting in supply disruption. Any of the foregoing could harm our business and we cannot anticipate all of the ways in which the current economic climate and financial market conditions could adversely impact our business.
RISKS RELATED TO OUR COMMON STOCK
The restatement of our previously issued financial statements contained in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 may lead to additional risks and uncertainties, including regulatory, shareholder or other actions, loss of investor confidence and negative impacts on our stock price.
Our Audit Committee, after consultation with management and discussing with outside counsel, external auditors and third-party consultants, concluded on August 12, 2018 that our previously issued consolidated financial statements for the quarter ended March 31, 2018 should be restated for the reasons described in “Explanatory Note” preceding Part I, Item 1 and Note 3 - Restatement of Unaudited Condensed Consolidated Financial Statements of the Notes to Consolidated Financial Statements in Part I, Item 1 of the amended Form 10-Q for the quarter ended March 31, 2018. Our amended Form 10-Q for the quarter ended March 31, 2018 includes restated unaudited financial statements and selected financial data (and related disclosures). Financial information included in our previously filed Form 10-Q for the quarter ended March 31, 2018, and all earnings press release and similar communications issued by us, for the period, should not be relied upon and are superseded in their entirety by our amended Form 10-Q for the quarter ended March 31, 2018. The amended Form 10-Q for the quarter ended March 31, 2018 amends and restates, in its entirety, our Form 10-Q for the quarter ended March 31, 2018.
As a result of this restatement and associated non-reliance on previously issued financial information, we have become subject to a number of additional costs and risks, including unanticipated costs for accounting and legal fees in connection with or related to the restatement and the remediation of our ineffective disclosure controls and procedures and material weaknesses in internal control over financial reporting. Likewise, the attention of our Board and our management team has been diverted by these efforts. In addition, we could also be subject to additional shareholder, governmental, regulatory or other actions or demands in connection with the restatement or other matters. Any such proceedings will, regardless of the outcome, consume a significant amount of the Board’s and management’s time and attention and may result in additional legal, accounting, insurance and other costs. If we do not prevail in any such proceedings, we could be required to pay damages or settlement costs. In addition, the restatement and related matters could impair our reputation or could cause our customers, stockholders, or other counterparties to lose confidence in us. Any of these occurrences could have a material adverse effect on our business, results of operations, financial condition and stock price.
Our plan to remediate the identified material weaknesses in our internal control over financial reporting may not be sufficient to correct all material weaknesses and deficiencies.
AS of December 31, 2019, we had material weaknesses in our internal control over financial reporting, as described below. A “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, management identified control deficiencies related to Information Technology General Controls (“ITGC”) in connection with change management, user access controls and segregation of duties as it relates to user access controls. The Company’s ITGC user access security, change management, operations and third-party management controls to the ERP system were not designed effectively to provide an adequate audit trail for system change management and for the periodic review and testing of user access rights and permissions. The ITGC material weakness in our ERP had a pervasive impact to the various activity level cycles and accounts, including financial reporting, distribution, revenue and accounts receivable, inventory and cost of goods, expenditures and accounts payable, treasury and payroll, and creates a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis and represents a material weakness in the Company’s internal control over financial reporting. Although our Audit Committee and management are implementing improvements to our internal controls to remediate the identified material weaknesses, these improvements may not be effective to fully remediate such material weakness or prevent a material misstatement of our annual or interim financial statements in the future.
Shares eligible for future sale may affect the market price of our common stock.
Any future sales by us of substantial amounts of our common stock, or the possibility of such sales, could adversely affect the market price of our common stock and also impair our ability to raise capital through an offering of our equity securities in the future. In the future, we may issue additional shares or warrants in connection with investments or for other purposes considered advisable by our Board of Directors. Any substantial sale of our common stock may have an adverse effect on the market price of our common stock and may dilute the economic value and voting rights of existing stockholders.
In addition, as of December 31, 2019, there were 6,481,095 shares issuable upon the exercise of the then-outstanding and exercisable stock options and 1,728,929 shares issuable upon the exercise of then-outstanding stock options that were not yet exercisable. The market price of the common stock may be depressed by the potential exercise of these options. The holders of these options are likely to exercise them when we would otherwise be able to obtain additional capital on more favorable terms than those provided by the options.
The market price for our common stock is volatile.
Our stock price, like the market price of many stocks in the specialty pharmaceutical, biotechnology and pharmaceutical industries, is volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:
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our ability to obtain regulatory approvals for our product candidates, and delays or failures to obtain such approvals;
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failure of any of our drug products or product candidates, if approved, to achieve commercial success;
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issues in manufacturing our drug products or product candidates;
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the results of our current and any future clinical trials of our product candidates;
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the entry into, or termination of, key agreements, including key commercial partner agreements;
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the initiation of, material developments in, or conclusion of litigation to enforce or defend any of our intellectual property rights or defend against the intellectual property rights of others;
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announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;
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the introduction of technological innovations or new therapies that compete with our products;
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the loss of key employees;
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changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
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general and industry-specific economic conditions that may affect our research and development expenditures;
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changes in the structure of healthcare payment systems; and
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the reporting of sales, operating results and cash resources.
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In addition, third parties may engage in trading strategies that result in intentional volatility to and control over our stock price. Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock.
In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.
Our ability to use our net operating loss carryforwards to offset potential taxable income and related income taxes that would otherwise be due may be limited.
We have substantial net operating loss carryforwards ("NOLs") available to reduce future taxable income. Our ability to use our NOLs to offset potential future taxable income and related income taxes that would otherwise be due is dependent upon our generation of future taxable income before the expiration dates of the NOLs. In addition to uncertainty regarding our future profitability, our use of the NOLs may be subject to annual limitations under the “ownership change” provisions of Section 382 of the Internal Revenue Code of 1986, as amended, which may result in the expiration of some or all of the NOLs before they can be used. In general, an “ownership change” occurs if, during a rolling three-year period, there is a greater than 50% change in the percentage ownership of the corporation by 5% owners (and persons treated as 5% owners), as defined in Section 382 and related regulations. We may experience an ownership change in the future as a result of future changes in our stock ownership. The inability to use our NOLs to reduce federal taxable income could result in increased future tax liability to us and reduce the cash that would otherwise be available to our business.
We do not anticipate paying dividends in the foreseeable future.
Since inception, we have not paid any cash dividend on our common stock and do not anticipate paying such dividends in the foreseeable future. The payment of dividends is within the discretion of our Board of Directors and depends upon our earnings, capital requirements, financial condition and requirements, future prospects, restrictions in future financing agreements, business conditions and other factors deemed relevant by the Board. We intend to retain earnings and any cash resources to finance our operations. Therefore, it is highly unlikely we will pay cash dividends.
If securities analysts do not publish research or reports about our business, or if they publish negative evaluations, the price of our common stock could decline.
The trading market for our common stock may be impacted by the availability or lack of research and reports that third-party industry or financial analysts publish about the Company. There are many large, publicly traded companies active in the biopharmaceutical industry, which may mean it will be less likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover the Company downgrade our stock, our stock price would likely decline. If we do not receive adequate coverage by reputable analysts that have an understanding of our business and industry, we could fail to achieve visibility in the market, which in turn could cause our stock price to decline.
Our certificate of incorporation, bylaws and Delaware law could prevent a third party from acquiring us (even if an acquisition would benefit our stockholders), may limit the ability of our stockholders to replace our management and limit the price that investors might be willing to pay for shares of our common stock.
Our certificate of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions could delay or prevent a change in control of the company and could limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions, among other things:
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establish a staggered board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time;
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authorize our board of directors to issue new series of preferred stock without stockholder approval and create, subject to applicable law, a series of preferred stock with preferential rights to dividends or our assets upon liquidation, or with superior voting rights to our existing common stock;
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disallow our stockholders to fill vacancies on our board of directors;
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establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at our annual stockholder meetings;
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permit our board of directors to establish the number of directors between three and fifteen;
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provide that stockholders can remove directors only for cause and only upon the approval of not less than a majority of all outstanding shares of our voting stock;
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require the approval of not less than a majority of all outstanding shares of our voting stock to amend our bylaws and specific provisions of our certificate of incorporation; and
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limit the jurisdictions in which certain stockholder litigation may be brought.
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We are not subject to the provisions of Section 203 of the Delaware General Corporation Law, which could negatively affect your investment.
We elected in our certificate of incorporation to not be subject to the provisions of Section 203 of the Delaware General Corporation Law (“Section 203”). In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder” is a person who, together with affiliates and associates, owns (or, in certain cases, within three years prior, did own) 15% or more of the corporation’s voting stock. This may make us more vulnerable to takeovers that are completed without the approval of our Board of Directors and/or without giving us the ability to prohibit or delay such takeovers as effectively.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our certificate of incorporation provides that the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another state court or a federal court located within the State of Delaware) is the exclusive forum for any claims that are based upon a violation of a duty by a current or former director, officer, employee or stockholder in such capacity, or as to which the Delaware General Corporation Law confers jurisdiction upon the Court of Chancery. This provision would not apply to claims brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. This choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees. If a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business.
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Item 1B.
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Unresolved Staff Comments.
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Not applicable.