Executive Summary / Key Takeaways

• Rockwell Medical (NASDAQ:RMTI) is undergoing a significant strategic transition, pivoting from reliance on a large, lower-margin customer towards a diversified, higher-margin business model focused on its core hemodialysis concentrates and new product offerings.
• Despite a projected $34 million revenue decline in 2025 due to its largest customer transitioning volume away, Rockwell expects to maintain adjusted EBITDA profitability for the full year, demonstrating the underlying profitability of its core business excluding the low-margin volume.
• The company is actively pursuing aggressive growth initiatives, including diversifying its customer base, expanding internationally and on the West Coast, and adding new, higher-margin products like the single-use bicarbonate cartridge and a convenience pack for the growing at-home market.
• Operational efficiencies, such as consolidating manufacturing and integrating acquired assets, are expected to drive continued gross margin improvement, supporting the goal of sustainable profitability.
• The 2025 guidance is considered conservative, based on the current customer base, with potential upside from ongoing negotiations with the largest customer and successful execution of new business development opportunities.

Rockwell Medical: Forging a Resilient Path in Dialysis

Rockwell Medical, Inc. is a healthcare company deeply embedded in the hemodialysis market, providing essential products for patients with end-stage kidney disease. Founded in 1996, Rockwell has established itself as a leading supplier of liquid and dry, acid and bicarbonate concentrates in the United States, critical components in the life-sustaining hemodialysis process. The company's products are manufactured under stringent FDA-regulated Quality Management Systems, adhering to cGMP and AAMI standards, a foundational strength in a market where reliability and quality are paramount.

The hemodialysis market is dominated by large players like Fresenius Medical Care (FMS) and DaVita (DVA), which operate extensive networks of dialysis clinics and also participate in the supply chain. Baxter International (BAX) is another significant competitor with a broad portfolio of medical products, including dialysis supplies. Rockwell, while smaller in scale compared to these giants, has carved out a position as the second largest supplier of acid and dry bicarbonate concentrates in the US, often serving regional and independent dialysis providers, as well as larger networks. Its competitive positioning is built on a reputation for high-quality products, reliable distribution (leveraging its own truck fleet), and customer-centric service.

A key differentiator for Rockwell has historically been its focus on specialized products like Triferic, a proprietary iron replacement therapy delivered via dialysate. While the company has paused R&D on Triferic to focus on its core concentrates business, the underlying expertise in developing and manufacturing complex dialysis solutions remains a technological asset. The company's manufacturing facilities in Michigan, South Carolina, and Texas, along with a mixer facility in Iowa, provide a domestic production footprint that allows for greater control over the supply chain, a factor increasingly valued in the current global environment.

Under new leadership since 2022, Rockwell embarked on a strategic transformation aimed at achieving consistent revenue growth, reaching $100 million in annual sales, significantly improving gross margins, attaining sustained profitability, and reducing debt. This involved reacquiring distribution rights previously held by Baxter, allowing direct engagement with a broader customer base, and strategically acquiring assets, such as the Evoqua concentrates business in July 2023. The Evoqua acquisition was pivotal, adding significant revenue, expanding the customer base, and bringing a fully automated manufacturing line that is now being integrated into Rockwell's operations.

This strategic evolution has yielded tangible results. Rockwell achieved net sales of $101.5 million for the full year 2024, surpassing the $100 million goal. Gross profit for 2024 more than doubled compared to 2023, reaching $17.5 million, and the gross margin improved significantly to 17% for the full year, up from 10% in 2023. Crucially, Rockwell achieved profitability on an adjusted EBITDA basis for the full year 2024, a historic first for the company, reporting a positive $5.2 million compared to a negative $3.9 million in 2023.

However, this period of achievement is immediately followed by a significant challenge: the planned transition of volume away from Rockwell by its largest customer, DaVita. Despite initially agreeing to extend their contract through 2025 with increased pricing, DaVita subsequently indicated they would completely transition to another supplier by mid-2025 (specifically, by June 30, 2025). This is projected to result in a revenue decline of approximately $34 million in 2025 compared to 2024. Management noted that this decision was driven by DaVita's desire for supplier diversification and was not related to issues with Rockwell's product quality or service.

This impending volume loss necessitates a strategic pivot. Rockwell is actively working to mitigate this impact by focusing on replacing the lost, lower-margin volume with new, higher-margin business. Management highlighted that the largest customer's business did not contribute significantly to gross margin, implying that while the top-line revenue will decrease, the impact on overall profitability is expected to be less severe.

Operational optimization is a key component of this strategy. Rockwell is consolidating manufacturing operations, including integrating the automated line acquired from Evoqua and terminating a third-party contract manufacturing agreement in Minnesota, which is expected to yield over $2 million in annual fixed overhead savings. These efforts, combined with streamlining production and improving processes, are aimed at driving continued gross margin expansion, with a long-term target of up to 30%.

Diversifying the customer base is paramount. Rockwell is aggressively targeting regional, national, and global hemodialysis providers and health systems, as well as independent clinics, to secure new contracts. The company estimates there are approximately 14.5 million gallons of potential available business within its existing distribution footprint to pursue.

Product portfolio diversification is also central to the growth strategy. In the first quarter of 2025, Rockwell added a single-use bicarbonate cartridge to its offerings through a distribution services agreement. This product addresses a rapidly growing segment of the market, estimated at $100 million, and is noted by management as a "much higher margin product" than the core concentrates. This addition also enhances Rockwell's competitiveness when bidding for full-range concentrates business. Furthermore, the company introduced a convenience pack (two one-gallon containers) in 2024, specifically designed for the expanding at-home and acute care markets. This format supports the patient-centric shift towards home dialysis and is also described as a higher-margin product. Sales of the convenience pack are increasing and expected to contribute more significantly in the second half of 2025. Rockwell is also actively exploring adding entirely new product lines outside of concentrates and evaluating acquisition opportunities to further expand its capabilities and offerings.

Geographic expansion efforts continue, particularly in international markets (currently selling in over 30 countries, with a focus on Latin America) and the Western United States. International sales are attractive due to higher potential margins as customers often handle distribution. The West Coast is viewed as a significant opportunity, largely serviced by a single competitor (Fresenius), and Rockwell is building a critical mass of customers there before committing to establishing a permanent physical presence.

Financially, the first quarter of 2025 reflected the beginning of the transition. Net sales were $18.9 million, down 17% from $22.7 million in Q1 2024, primarily due to the $5.9 million reduction in volume from the largest customer, partially offset by price increases. Gross profit remained relatively stable at $3.0 million in Q1 2025 compared to $3.1 million in Q1 2024, with gross margin improving to 16% from 14%, reflecting the impact of price increases and the removal of some lower-margin volume. Net loss for Q1 2025 improved to $1.5 million from $1.7 million in Q1 2024. Adjusted EBITDA for Q1 2025 was a negative $400,000, attributed partly to seasonal expenses.

Liquidity remains a key focus. As of March 31, 2025, Rockwell had $17.3 million in cash, cash equivalents, and investments available-for-sale, and working capital of $21.8 million.

Net cash used in operating activities increased to $3.5 million in Q1 2025 from $2.4 million in Q1 2024, primarily due to changes in working capital accounts.

Management believes current liquidity is sufficient for at least the next twelve months, supported by the $21.1 million remaining under the ATM facility and the ability to control the timing and price of capital raises. The company's debt structure was favorably amended in January 2024, extending the maturity to January 2029 and providing a 36-month interest-only period, easing near-term cash requirements. As of March 31, 2025, Rockwell was in compliance with all debt covenants, although a revenue-based covenant tied to projections remains a factor to monitor given the volume changes.

For the full year 2025, Rockwell has provided guidance projecting net sales between $65 million and $70 million, gross margin between 16% and 18%, and adjusted EBITDA between negative $500,000 and positive $500,000. This guidance explicitly incorporates the expected volume loss from the largest customer. Management characterizes this outlook as achievable and conservative, emphasizing that it does not include any potential upside from ongoing discussions with the largest customer or the successful execution of new customer contracts and business development opportunities currently being pursued. The revenue cadence is expected to see Q2 2025 as the low point for the year, with sales building thereafter as new business comes online.

Key risks to the investment thesis include the successful management of the transition away from the largest customer and the ability to secure new business at a pace and margin profile sufficient to offset the lost revenue. While management is confident in their strategy and execution capabilities, there is no guarantee that ongoing negotiations with the largest customer will result in a new agreement or that new customer acquisitions and business development initiatives will materialize as planned or on the expected timelines. The company is also exposed to broader macroeconomic uncertainties, including supply chain issues and inflationary pressures, and is actively monitoring the potential impact of cyberattacks in the industry, such as the recent incident affecting its largest customer.

Conclusion

Rockwell Medical is at a critical juncture, strategically pivoting to build a more resilient and profitable business. The planned departure of its largest, lower-margin customer presents a significant top-line challenge in 2025, but it also accelerates the company's focus on higher-margin opportunities and diversification. By leveraging its core strengths in manufacturing quality and distribution, coupled with strategic initiatives in new product development (like the bicarb cartridge and convenience pack) and customer/geographic expansion, Rockwell aims to replace lost volume with more profitable sales. The achievement of adjusted EBITDA profitability in 2024 and the projection of near-breakeven adjusted EBITDA in 2025, despite the revenue headwind, underscore the improving fundamentals of the underlying business. The investment thesis hinges on management's ability to successfully execute this strategic pivot, turning the challenge of customer concentration into an opportunity for sustainable, higher-margin growth, with potential upside from new business development exceeding current conservative guidance.