Earnings Call Transcript - KRMD Q3 2021

Operator, Operator

Good day. And welcome to KORU Medical Systems Third Quarter 2021 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Greg Chodaczek, Managing Director. Please go ahead, sir.

Greg Chodaczek, Managing Director

Thank you, Chuck and good afternoon, everyone. Earlier today, KORU Medical Systems released financial results for the third quarter of 2021. A copy of the press release is available on the company's website. During this call, we will make certain forward-looking statements regarding our business plans and other matters. These comments are based on our predictions and expectations as of today, actual events or results could differ materially due to many risks and uncertainties, including those mentioned in the associated press release and our most recent filings with the SEC. We assume no obligation to update any forward-looking statements. I encourage listeners to have our press release in front of you, which includes our financial results as well as commentary on the quarter. During the call management will discuss certain non-GAAP financial measures in our press release and in our filings with the SEC, each of which are posted on our website. You will find additional disclosure regarding non-GAAP measures, including reconciliations of these measures with the comparable GAAP measures in our press release and those filings. For the benefit of those listening to the replay, this call was held and recorded on Wednesday, November 10, 2021 at approximately 4:30 PM Eastern Time. Since then the company may have made additional comments related to the topics discussed, and please reference the company's most recent press releases and filings with the SEC. Joining us on the call today is Linda Tharby, President and CEO of KORU Medical Systems; and Karen Fisher, KORU's Chief Financial Officer. Linda, please go ahead.

Linda Tharby, President and CEO

Thanks, Greg. Good afternoon, everyone, and thanks for joining us today. I want to kick off today's call by welcoming three new members of the KORU Medical Leadership team. Chris Pazdan, joining as a VP Quality and Regulatory; Rob Cannon as VP of Sales; and Brian Hertzog as VP of Biopharma Business Development. Chris has been on Board for two months and has already begun to make a great contribution to building a world-class quality and regulatory function, including a recent 510(k) announcement today. Rob and Brian, who joined in October, each bring an impressive set of experiences. Rob brings deep expertise in specialty pharmacy, alternate site on the plasma and biologics industry with over 30 years dealing with our customer base, and will be responsible for accelerating growth in our core domestic business. Brian brings over 15 years of relevant experience in drug delivery and will be responsible for increasing the number of new biopharmaceutical drugs on the Freedom platform. Both will be integral to our growth strategy. Welcome to the team. During today's call, I will report on the highlights of our third quarter results and the continued progress on our near-term strategic objectives. Then I will turn the call over to Karen to discuss the quarterly financials in more depth before ending with a few closing remarks. After our prepared remarks, Karen and I will open the call for Q&A. Now let's jump into our results and key highlights for Q3. Beginning with our results for the third quarter, we were very pleased with our revenues of $6 million. On a sequential basis, we grew by 9% over Q2 '21, marking our third consecutive quarter of positive sequential growth. Our adjusted quarterly year-over-year growth was also 9%. Our strong top-line results reflect continued momentum in all areas of our business, driven by our domestic core net sales with solid demand for our pumps. In addition, our early-stage novel therapy revenues grew as we continue to progress our pipeline, and our international sales were up year-over-year. As reported, our gross margin was down compared to the third quarter of 2020. We have begun the transition of our production to a third-party manufacturing services company, and we have had delays in implementation resulting in increased costs. We remain confident in our outsourced manufacturing strategy and anticipate improving our gross margin to the low 60% range in 2022. I now want to take some time to discuss the progress we've made in executing our strategic objectives. As healthcare continues to transition to home settings, we believe KORU Medical can make a significant difference in enabling that transition with our leadership position in large volume home infusion being extended to new drug therapies. We highlighted three key areas of focus and investment that we believe are essential in driving near- and long-term impact and revenue growth during our previous call. As a reminder, the three areas of focus include increasing penetration and growth in our core subcutaneous immunoglobulin therapy business, via a targeted plan to improve the caregiver and patient experiences at all stages of the therapy process; extending our leadership position in subcutaneous immunoglobulin into a targeted pipeline of new large volume drug candidates addressing a significant unmet need in this area; and investing in building our foundation to support our growing core and novel therapies business through increasing our capabilities and innovation in quality and regulatory expertise to support growth, while executing on our operational excellence initiatives to generate a stronger gross margin profile. Regarding our first objective, our primary focus for the third quarter has been increasing our market penetration and share across the subcutaneous immunoglobulin at-home infusion therapy market within our core business. The key area of focus in this area is improving the patient and caregiver initiation of therapy process, with the key driver being the movement to prefilled syringes. As part of this strategy, we filed the 510(k) with the FDA to expand the label for the FreedomEdge pump to include CSL Behring's Hizentra 20 ml prefilled syringe. I'm excited to announce that we received FDA clearance for this indication yesterday, and KORU is now the only product specifically 510(k) cleared for use with a subcutaneous immunoglobulin prefilled syringe. Prefilled syringes simplify the infusion process by eliminating the steps of a challenging drug transfer process and are the fastest growing segment in the immunoglobulin therapy market. As the market continues to fluctuate in part due to waves of the pandemic, we remain focused on executing strategies that will also increase the number of new patients on subcutaneous immunoglobulin therapy. To increase the number of new patients on subcutaneous immunoglobulin therapy, we have stepped up our progress in Q3 in several areas. First, we expanded our collaborations with our immunoglobulin pharmaceutical partners who focus on the physician channel and the initial route of administration. Second, we held an advisory board with our specialty pharmacy channel partners. They do the initial transition to patient self-administration of immunoglobulin, and these generated multiple opportunities. These leading pharmacies further confirm the opportunities to switch patients who have initiated therapy and are aligned that subcutaneous therapy is under-penetrated and will continue to grow. And finally, we have started our initial pilots of value-added new patient start kits intended to educate users and make onboarding to the Freedom infusion system easier. We have witnessed some early success and will broaden this offering. We also completed the go-to-market review by specialty pharmacy to define a targeted commercial plan to drive initial pump placements with the KORU Medical brand and to understand where to employ resources to increase our subcutaneous immunoglobulin penetration and market share. We've also targeted continued international expansion efforts in general supporting the planned geographic expansion of our pharmaceutical partners and in Germany, where our efforts are progressing well. As a measure of success in our core subcutaneous immunoglobulin business, a key performance indicator of new patient starts is new pump placements, where we experienced a double-digit increase in pump volumes, outperforming the market. Our second near-term focus is our pipeline, which represents a total opportunity that we've reported on our last call of approximately $1 billion. We have identified over 70 new large volume drug candidates above 10 milliliters. The space for KORU Medical is the domestic market leader. We are pleased with our progress in the quarter in securing new collaboration to build our funnel. We signed three new agreements during the quarter and expanded our pipeline of opportunities by 50%. With the majority of these in new drug therapies, biopharma has expressed strong interest in using our FDA and EU cleared Freedom system to expand opportunities in our core subcutaneous immunoglobulin market and for new drugs. Our funnel for core subcutaneous immunoglobulin opportunities is primarily for Phase 3 trials. As our partners grow geographically, pursue new indications and develop product enhancements, our new drug opportunities span the entire development cycle ranging from early feasibility work to Phase 1, 2, and 3 studies, including new to market drugs, and intravenous to subcutaneous reformulations. The third area of near-term focus is investing and building on the company's foundation to support our growth strategy. These initiatives include building our innovation capabilities to bring new products to market faster, building a world-class quality and regulatory system, and continuing the work we have started on operational excellence. We have made innovation a core near-term focus, and we are excited to have kicked off our collaboration with Gilero as we look to continue evolving our at-home infusion products and portfolio. We are increasing our innovation efforts, and Gilero will be a valued partner in this process. Additionally, we began the next phase of our implementation with our outsource manufacturing partner Command. While we experienced some delays in the rollout of this next phase, we remain confident in the plan to increase our long-term gross margins. Both of these relationships will be a vital part of our foundation moving forward. We're excited about the progress we've made this quarter in all areas of our strategy as we continue to build momentum. I will now turn the call over to Karen for a more detailed financial review.

Karen Fisher, Chief Financial Officer

Thank you, Linda. And good afternoon everyone. Total net sales for the third quarter of '21 were $6 million or negative 0.7% compared to last year. Removing inventory stocking of approximately $600,000 last year, adjusted net sales grew 9% year-over-year. Sequential quarter net sales growth was 9% with domestic core growth of 10% driven by Pumps and Needle. International sales increased 6.4% from the prior year, driven by increased consumable sales. Novel therapy sales also increased for the three months ended September 30, 2021, as compared with the same period last year as we continue to expand our pharmaceutical pipeline. Gross margin was 57.9% for the third quarter of '21, a decline from the prior year, which was 64.8%. The majority of the decline was driven by delays in the transition to our secondary manufacturing source. We also recorded a reserve for in-process material scrap. This was partially offset by favorability in product mix. We are confident in our path to accelerate margin improvement in the second half of 2022. Selling general and administrative expenses increased $800,000 or 26.9% in the third quarter compared to the same period last year, due primarily to higher salary and related benefits as we build our team, as well as fees for our 510(k) filings and commercialization efforts. Research and development expenses doubled to $800,000 in the third quarter compared with the same period last year, as we have higher salary and related expenses due to building our internal research and development team and consulting fees to support product development for novel therapies. Net loss for the quarter for the third quarter of 2021 was $1.1 million or negative $0.02 per diluted share, a decrease of $0.03 from the same period in 2020. Turning to our balance sheet, we ended the third quarter of 2021 with $26.2 million in cash compared to $27.3 million at year-end 2020. I will now turn it over to Linda for closing remarks.

Linda Tharby, President and CEO

Thank you, Karen. In closing, I want to thank the team for their hard work in the third quarter as all three areas of our business produced solid growth. Throughout the third quarter, we strengthened our foundation with strategic hires and we are laser focused on executing our growth strategy. In addition, we have scheduled an update toward our strategic plan in early December and look forward to sharing more on our growth strategy and our plans to increase value for our patients, our customers, and our shareholders. I'll now turn the call back over to the operator for Q&A.

Operator, Operator

And the first question will come from Matthew O'Brien with Piper Sandler. Please go ahead.

Unidentified Analyst, Analyst

Hi, good afternoon, ladies. This is Simran on for Matt, thank you for taking the questions. To start, congrats on the FDA approval for Hizentra. Can you detail what the rollout of this product looks like now that you're able to distribute it in a prefilled form? Are you focusing on converting existing users or driving new patient starts? Or is it a combination of those things?

Linda Tharby, President and CEO

So Simran, thanks for the question. Yes, we're very excited by the 510(k) approval, which we received yesterday, but has been long in the works with CSL. I think the great part about this is that the pump we're using, the FreedomEdge, has been in the market for several years. So there's no need for any patients to switch the pump that they are using. The prefilled syringes will also be sent into the same channel, our specialty pharmacy channel. What the combination of these two products aims at is, when we did our patient research, one of the biggest, most difficult factors is really drawing up the drug from a vial to a syringe. So prefilled syringes allow you to place that directly into a FreedomEdge pump, eliminating the challenging vial transfer process. So we are very excited about that. You'll see the marketing materials on it immediately.

Unidentified Analyst, Analyst

Okay, yes, that makes a lot more sense. Thank you. And then on that note, you had mentioned having three FDA clearances for new indications for the pump by year-end. Are you still on track to hitting that goal post? And can you remind us what those indications are? And how's your most near-term opportunity? I think it was hematology; how's that coming along?

Linda Tharby, President and CEO

Yes, so the two new indications are both in subcutaneous immunoglobulin. No one can predict what the FDA will do, but we remain on track in terms of our filing process with the FDA for what we reported. So I said three; we've got one completed and we hope to get two more by the end of the year. The hematology indication is also on track for early 2022 for us to submit that, maybe late 2021, when we get that one in.

Unidentified Analyst, Analyst

Okay. And then just lastly, we've been hearing broadly about supply chain challenges and labor shortages in the medtech space. Can you talk a little bit about if that has had any impact on the business, both from an internal workforce perspective and then like a distributor perspective?

Linda Tharby, President and CEO

Yes, so first, we are not experiencing any disruptions in our supply chain, either from a material or a labor perspective. I think we got a little bit ahead of this earlier this year, and we did a complete change to how we're paying our workforce, which I think has helped us to retain what is a very loyal workforce for us in our manufacturing space. Also, with the outsource manufacturing, it represents a dual source of supply for us. So again, we don't see any interruptions in our supply chain that would affect our year.

Operator, Operator

The next question will come from Alex Nowak with Craig Hallum Capital Group, please go ahead.

Trenton McCarthy, Analyst

Great. This is Trent McCarthy on for Alex. I just want to talk about the strategic plan update that you had scheduled in December. It's great to see that you guys finally have it on the schedule here. But is there anything you can preview for us leading up to this event?

Linda Tharby, President and CEO

Well, I think I previewed a lot of it on the call today. Fundamentally, what we're trying to do and our core is we have a very strong, healthy core business with subcutaneous immunoglobulin. The challenge today is only 20% of patients are on subcutaneous at-home therapy. We see a huge opportunity to increase that, with today about a $30 million overall market potential close to $300 million. So that's the number one core focus area. Number two, we have a great position in large volume or the leaders in large volume home infusion therapy. There are 70 new drug candidates, many of whom do not know about KORU. So, really, we got some exciting things going on for the static. So, the second part is really extending that leadership position into new drugs and therapies. And of course, what we did with a palace is a prime example of how we do that. So we're excited by the progress in the pipeline. We first started reporting our pipeline last quarter; now we have eight signed agreements in total this year. So we're really excited to be talking more about that potential. And that really is about getting new candidates, of course, with commercialization taking a little bit longer, but really extending our overall total addressable market to the billion-dollar range is pretty exciting for us. And then third, we're going to talk about what are the core foundational capabilities that make that happen with a focus on innovation, quality and regulatory, and what we're trying to do to build that out to biopharma standards, and also about our operational excellence initiative. And we'll also include our plans for international, so a lot to share. And what you're seeing is a lot of the progress that we're already beginning to roll out related to that plan. And of course, which is our longer-term revenue potential, including our spending plan or our cash flow projections, etc.

Trenton McCarthy, Analyst

Okay, yes, that's helpful. And you kind of just spoke to it there at the end. My follow-up was how are you thinking about the growth next year, and when you take the core immunoglobulin business and layer on whatever you see in the pipeline, what sort of growth rate will you be expecting?

Linda Tharby, President and CEO

Yes, so we'll talk all about that in early December. We'll discuss what we project for 2022. So stay tuned.

Unidentified Analyst, Analyst

Great. Thanks very much you have the Brian on for Kyle. And I guess to start from my end, anything to call out in the third quarter in terms of COVID impact? Maybe from a month-over-month perspective, was there any sort of outsized impact in terms of new patient starts or novel drug therapy sales? And maybe what are you seeing in the fourth quarter? Thus far? And how are you thinking about the next couple of months going into the beginning of next year? Thank you.

Linda Tharby, President and CEO

Okay, Brian, those were a lot of questions. Let me try and unpack. So first, what did we see in terms of quarter-on-quarter? We saw a little bit of softness in the overall market in quarter three, likely due to the waves of the pandemic that we're seeing. That's why we were so pleased with our quarter three results that really outperformed the market and saw high single-digit growth. So we were very pleased with that. In terms of how we're thinking about quarter four, I think we'll do more of an update when we speak to you in early December. I have been on record saying that we project to go from low single digits to high single digits and getting ourselves back to a double-digit position in 2022. We're going to look to see how the market continues to progress and we'll update you in December. I think I've addressed all your questions, Brian.

Unidentified Analyst, Analyst

No, that's great. Linda, appreciate you unpacking that. I guess maybe to dig in a bit more on Hizentra, how are you thinking about the cadence of that rollout? And maybe what does the incremental opportunity start to look like there over the next 12 months? And how do we start to translate that over some of the other prospects that you have coming up over the next few months too?

Linda Tharby, President and CEO

Yes, again, we really we’ll show you what we think the prefilled opportunity can look like for us but let me just highlight a couple of things. First of all, you have to think that the KORU FreedomEdge system is the only pump on the market today that has an indication with a prefilled syringe. Second, you have to acknowledge that prefilled syringes have grown from being virtually unknown— they were launched into the market just over a year ago, kind of mid-2020 during the pandemic, and they've already captured about 3% of the market. So we look for this to be a major growth area for KORU, not only for, as I said, helping us move more patients to subcutaneous therapy but also as an opportunity to increase our share position. So we'll give you more details on what we think that looks like over the next four to five years. But certainly, all of our immunoglobulin pharmaceutical partners are thinking about their strategic entries into the prefill market, so it will be exciting. All right, I think we are done with questions. I again want to thank the team and thanks to everyone for quarter three. I'll turn it back over to the operator to close the call.

Operator, Operator

Thank you so much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.