2023-07-06 04:26:47 ET
Summary
- Rockwell Medical is a micro-cap healthcare company that develops, manufactures, and distributes hemodialysis products worldwide.
- RMTI's Q1 2023 revenue reached a record high with 22% YoY growth, while gross profit improved and operating expenses significantly decreased. The firm is turning around actively.
- Once the company's profitability norm is reached, its EV/Sales multiple should be 1.5-2x, which is 167-222% higher than today.
- If you are comfortable with uncertainty and volatility in the pursuit of potentially higher returns, RMTI stock is a great fit for your portfolio.
The Company
Rockwell Medical, Inc. ( RMTI ) is a micro-cap healthcare company that develops, manufactures, and distributes hemodialysis products worldwide. Their main products, Triferic Dialysate and Triferic AVNU help maintain hemoglobin levels in patients undergoing hemodialysis. They also produce and sell hemodialysis concentrates, including citric acid concentrate, dry acid concentrate, liquid acid concentrate, and bicarbonate concentrate, along with ancillary products like cleaning agents and disinfectants. These products are vital for removing toxins and providing necessary nutrients in the bloodstream of dialysis patients, and despite its modest market cap, the firm is in fact the 2nd largest supplier of acid and bicarbonate concentrates for dialysis patients in the U.S., according to its presentation materials .
Hemodialysis is a standard medical procedure for patients with kidney failure. It uses a dialysis machine and an artificial kidney to clean the blood by removing wastes, excess fluid, and correcting imbalances. In the US, around 475,000 patients receive in-center hemodialysis annually, with about three treatments per week. Each treatment requires 3.3 gallons of concentrate to maintain the necessary balance in the bloodstream. So hemodialysis is crucial for managing kidney failure and maintaining patients' health.
RMTI is also working on therapeutic product candidates for acute heart failure treatment and home infusion therapy. The film primarily serves medium and small-sized dialysis chains and independent dialysis centers, working with >1700 of them as of May 15, 2023.
Rockwell Medical posted its highest quarterly revenue ever in Q1 2023, reporting ~22% year-over-year growth, while gross profit reached ~$2.6 million, compared to a gross loss of $786 thousand in Q1 FY2022. Operating expenses shrank by more than 4.5x YoY, resulting in an 8x improvement in diluted earnings per share:
As of March 31, 2023, Rockwell's cash and cash equivalents stood at $16.8 million, compared to $21.5 million at the end of December 31, 2022. The reduction in cash balance was primarily due to fees associated with the reacquisition of distribution rights from Baxter and one-time severance payments. The share of cash still makes up an impressive percentage of market capitalization:
According to the words of the CEO during the latest earnings call , Rockwell successfully transitioned the Baxter business back to its control, allowing for direct sales and delivery of products to customers. Many Baxter customers were already ordering directly from Rockwell, simplifying the transition process. The firm signed two long-term supply agreements during the first quarter, including multi-year annual minimum purchase commitments. Rockwell is also actively expanding its geographic presence. Recently, they started distributing products on a limited basis to California, Arizona, and Utah. Additionally, the company has a large and growing international business, accounting for approximately 10% of revenue, and recently secured an agreement to supply the UAE.
Moreover, the firm has international partnerships for the development and commercialization of TRIFERIC. Its partner in Turkey, Drogsan Pharmaceuticals, submitted applications for marketing authorization and good manufacturing practice, with accelerated review status. Approval for TRIFERIC AVNU in Turkey is anticipated in 2024.
The CEO says RMTI is implementing changes across all functional areas to reduce expenses. These include selective reduction in headcount, better pricing on raw materials, optimization of distribution networks, and reduced reliance on third-party carriers - that's why I think the ambitious targets for 2024 and 2025 gross profits are impressive but might be entirely justified:
RMTI's IR materials [author's notes]
The company aims to achieve profitability in 2024 and become a leading global supplier of hemodialysis concentrates. The transformation the firm is undergoing should give a lot more in the total addressable market, expanding it from $380 million today to over $500 million by FY2026. Third-party research indicates that the global hemodialysis and peritoneal dialysis market is set to grow at a CAGR of 7.4% through FY2032 - meaning the story of today's active RMTI expansion has every chance of moving toward sustainability once it reaches maturity, as the reason for increasing revenue becomes larger.
Ambitions to move from second to first place in the narrow niche of healthcare and to enter global markets are the drivers of future top-line growth and margin expansion that I currently see. But I am a financial expert, not a medical expert. I found RMTI among the top-rated stocks here on Seeking Alpha, and I judge its prospects based on the most recent financials, management commentary, and analysis of the market conditions - you have to be aware of that. But what about the valuation of the company itself?
The Valuation
Since the beginning of the year, RMTI stock rose by an impressive 465% - at first glance, it might seem like the stock has no room for more growth now. But would you have the same feeling after the stock doubled and then tripled before quadrupling?
The company does not yet have a bottom-line profit, but it is very actively moving toward profitability and promises to break even in FY2024. All we can look at right now are revenue-based and book-based multiples. And here we have a rather contradictory picture, despite the strong "B" rating from SA's Quant System :
Seeking Alpha Premium, RMTI stock
Which is more important - price-to-book or EV-to-sales? In my opinion, revenue-based multiples are more important. Why? Because Health Care Supplies - the industry within the healthcare sector to which RMTI belongs - all have fairly high price-to-book ratios compared to other industries in the sector:
By the logic of the pure price-to-book ratio, investors should avoid this industry altogether - and therefore this is not the most reliable criterion for investors' consideration. Another thing is EV-to-sales, which is only 0.9x for RMTI. Keep in mind that the debt on the company's balance sheet is being actively reduced, and the gross margin is jumping as the firm signs new partnership agreements and enters new geographic markets. I see RMTI as a fairly high-margin player in the industry in the foreseeable future. Measured against the company's direct competitors - Fresenius Medical Care ( FMS ) and DaVita ( DVA ) - RMTI has every chance of achieving an EBITDA margin of 10-15% sometime after FY2024. With such profitability, RMTI's EV/Sales should be 1.5-2x, which is 167-222% higher than today. Of course, this potential for multiple expansions still needs to be earned through continued high-quality execution. But the most important thing is that the growth potential is still there. Then it all depends on the management.
The Risk Factors
The first risk factor I want to address is, of course, the size of the company. When you buy stock in a company with a market capitalization of less than $100 million, you should always ask yourself how reliable that purchase is. In the vast majority of cases, such micro-cap stocks bring a negative ownership experience due to their high volatility and low liquidity - at any time, even a small shareholder looking to trim his/her position can drive the price sharply lower and disappoint "late buyers."
The second risk factor is, of course, the absence of profits. You should agree if I say that it's always safer to buy companies that generate positive cash flows, distribute them among shareholders (through buybacks or dividends), and whose operating activities can be relatively easily predicted for the coming years. Unfortunately, this is not yet Rockwell Medical's story.
Third , although Rockwell claims to be second in its niche (with ambitions to be first), larger companies such as DVA and FMS also offer their products here. If any of these companies seriously consider expanding their presence in what is a small market for them, Rockwell Medical could easily lose a large portion of its revenue. Keep this risk in mind.
Fourth , I mentioned this above, but I will repeat it again - I am not an expert in the field of medicine. I recommend that anyone interested in a potential RMTI stock position take a look at other Seeking Alpha articles on the subject to broaden their understanding of the company.
The Bottom Line
Despite all the risk factors described above, I still think RMTI is a very interesting "Buy" [for non-risk-averse investors] even after the phenomenal growth we have seen since the beginning of this year. The stock looks heavily overbought right now - but on the weekly chart, the upside potential mentioned above (166-222% based on upcoming EPS breakeven and EV/sales expansion) looks quite modest:
TrendSpider Software, RMTI [weekly]
An additional tailwind for the stock may be the recent news that Rockwell Medical was included in the Russell Microcap Index - raising the stock's profile with more institutional and retail investors. This is the usual law of demand - the more willing to buy, the higher the price. And given the freshness of this news, it seems to me that the hype has not died down yet.
So if you are comfortable with uncertainty and volatility in the pursuit of potentially higher returns, RMTI is a great fit for your portfolio. But don't overweight it, as a mean reversion looks quite probable to me.
Thank you for reading!
For further details see:
Rockwell Medical: This Top-Rated Stock Has A Lot More To Show