Earnings Call Transcript - KRMD Q1 2022

Operator, Operator

Greetings, and welcome to KORU Medical Systems' First Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to hand the conference over to your host, Greg Chodaczek, Managing Director. Please proceed, sir.

Greg Chodaczek, Managing Director

Thank you, Peter, and good afternoon, everyone. Earlier today, KORU Medical Systems released financial results for the first quarter ended March 31, 2022. 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 our commentary on the quarter. During the call, management will discuss certain non-GAAP financial measures in our press release and accompanying investor presentation and our filings with the SEC, each of which are posted on the website. You will find additional disclosure regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures in our press release and accompanying investor presentation and those filings. For the benefit of those listening to the replay, this call was held and recorded on Wednesday, May 4, 2022 at approximately 4:30 p.m. Eastern Time. Since then, the company may have made additional comments related to the topics discussed so 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 Chief Executive Officer of KORU Medical Systems; and Karen Fisher, KORU Medical's Chief Financial Officer. Linda, please go ahead.

Linda Tharby, President and CEO

Thank you, Greg. Good afternoon, everyone, and thank you for joining us today. Before we begin, I want to express a heartfelt thank you to the KORU team for their dedication and passion in delivering another strong quarter in our mission to improve the quality of life for patients self-administering infusion therapy in the home. During today's call, we will use slides to support our commentary. I will begin with a brief overview of financial results before turning to a business update. I will then turn the call over to Karen to discuss the quarterly financials before ending with updates to our 2022 guidance. Karen and I will then be happy to open the call up for Q&A. Before jumping into Q1 highlights, a few comments on our progress and vision as a leading drug delivery provider. Our FREEDOM Infusion System is being used today by over 25,000 patients to subcutaneously infuse large volume drugs in a home setting supporting a growing trend to healthcare delivery in the home. With our label expansions, we continue to increase our penetration into the subcu Ig total addressable market population of over 300 million. We continue to expand our pharmaceutical partnerships with our on-label indications now totaling 12 with our announcement of another new label addition this week. As a market leader and provider, we deliver our pumps and disposables into the home through our specialty pharmacy partners as we continue to strengthen our relationships with them. And as the overall market for subcu development continues to expand, we are extending our leadership position into new drug categories. With further agreements and pipeline expansion that I will discuss today, we are driving closer to the $1.3 billion total addressable market. Turning to our first quarter results. We reported net revenues of $6.2 million for the first quarter of 2022. This represents a 15% increase year-over-year and marks the company's second consecutive quarter of double-digit growth. Our domestic core business led our growth with a 13.2% increase. The strong quarter in our U.S. business is indicative of our continued implementation of our strategic plan to outpace the underlying market growth. The overall SCIg drug market also saw an uptick in growth from 1% in Q4 to 7% in Q1. We believe these trends signal market recovery as patients return to the regular cadence of therapy, and we see increases in patient diagnosis as concerns over the pandemic subside. Net revenues were down 8.6% year-over-year for international core due to ordering patterns at a few of our smaller distributors. Novel Therapies revenues increased to over $350,000 for the first quarter as we began to recognize pre-commercialization revenues from our pharmaceutical pipeline deal expansion. We are very pleased with our solid start to the year. In December of '21, we rolled out a strategic plan, and I will now turn our focus to providing a Q1 update. The 5-year plan strategic initiatives include increasing core SCIg penetration, extending to Novel Therapies and continuing to build our foundation to support growth. In our efforts to increase penetration in our core business, the U.S. business nearly doubled the pace of overall SCIg drug market growth, driven by a 40% increase in our pumps as an indicator of new patient starts. One of the biggest areas of progress has been the expansion of our label with 4 new drug device additions over the last 5 months and in particular, the prefilled syringe clearance in November. This has assisted in the expansion of pre-fills in the market in Q4 of 3.4% to 5% penetration in Q1. In support of expansion in our international business, we are also pleased to announce the signing of a distributor agreement with iExpert, a leading provider in the German market of products and services for patients administering therapy in the home. In our Novel Therapies business, we continue to see an uptick in our pipeline with one non-Ig deal signed this quarter and 5 total deals in the last 2 quarters. We are also pleased to announce a scope expansion of an innovation development agreement signed last quarter and for which we have begun to recognize revenues for milestone completion this quarter. In support of all of these initiatives, we continue to build a stronger foundation for growth at KORU. We are on track to move our new building location to Mahwah, New Jersey on June 1. We have built out our executive team with the hiring of a new Chief Technology Officer, Brian Case, who brings us 20-plus years of experience in technology and product development. Finally, the final phase of our outsourced manufacturing is on track for Q3 implementation to support expanding our core business margin to the 60%-plus range. I'm now going to dive a little deeper into our expanded label indications. Our label expansion is critical as it does two things. First, it enables us to work prelaunch with our pharmaceutical partners and ensure a safe and effective drug delivery device experience for patients. Second, with a broad label, we make it easier for specialty pharmacy accounts to service patients with an FDA-cleared platform. So two key highlights on this slide. First is the pace of label expansion. We have seen four new indications in the past five months, indicating an uptick in both new drugs and subcu delivery and our efforts. Second, the two new clearances we announced this week expand our use of the KORU FreedomEdge Infusion System outside of Ig. The pump is now clear to deliver EMPAVELI marketed by Apellis in the United States and branded as Aspaveli and marketed by Sobi outside the United States. EMPAVELI and Aspaveli are prescription drugs used to treat PNH or rare blood disease. The total U.S. addressable market population is approximately 1,500 patients with about 150 new diagnoses each year. With the treatment occurring twice per week, this could expand KORU's total addressable market by approximately $2 million to $3 million. The most critical part of this new indication is that we established our platform outside of Ig as proof of concept as we look toward the future and further solidifying KORU Medical as a leader in high-volume subcutaneous drug delivery. Turning towards the prefilled syringe market. This represents a significant opportunity in an early-stage, fast-growing market. Prefilled syringes are rapidly capturing market share and represent 5% of the total SCIg grams infused today, up from 3.4% in the prior quarter and driven by expanded efforts from our label expansion for prefilled syringes in November. Prefilled syringes offer a distinct advantage to patients by removing 5 steps from the infusion process. As the only pump specifically 510(k) cleared for the use of Hizentra's 20 ml format, this provides us an excellent opportunity to capitalize on this growth. We have focused on commercialization with a specific effort on new patient adoption and conversion. We also have coordinated efforts with our partners as they roll out their marketing strategies. We look forward to continued work with our pharmaceutical and specialty pharmacy partners to increase prefilled penetration and simplify the lives of our patients. To date, we have focused our strategic efforts on our U.S. core and novel therapies businesses. However, having just returned from a multi-country European tour, I'm excited to announce progress on our strategy to expand geographically in our international business. Germany is one of the largest SCIg markets where we did not participate. It has a large population, high utilization of SCIg and double-digit growth. After a thorough search, we have signed an exclusive distribution agreement with iExpert. We chose iExpert based on several key capabilities: first is the scale to serve the German market; second is their track record of success; and third, is a best-in-class capability to deliver clinical training and patient care over many years serving diabetes patients in the home. We expect commercial activities to begin in Q2. This geographic expansion is also relevant to our Novel Therapies business as KORU's broad regulatory approval and distribution is a differentiated offering to pharmaceutical companies. Moving to our Novel Therapies business. During the first quarter, Novel Therapies was driven by revenue associated with the support of feasibility work for the aforementioned innovation agreement. We are encouraged that Novel Therapies continues to play a more prominent role in our strategy and believe there is room for broad application beyond immunology as evidenced by our recent successes. We continue to expand our pipeline, and we are currently pursuing over 18 opportunities for new drug candidates for our pump. This quarter, we are pleased to announce that we have signed one additional deal outside of Ig in the hematology area and have expanded the scope of a prior signed innovation deal with an Ig manufacturer. We have dedicated significant time to expand our engagement regarding our Novel Therapies pipeline, and we are beginning to see the results, both in signed deals and pre-commercialization revenues. In conjunction with the progress on the initiatives discussed above, we are continually building out our team, including a strengthened executive team. I'm pleased to highlight another addition. In late April, we announced that we hired Brian Case, an R&D veteran with over 20 years of experience as KORU Medical's new Chief Technology Officer. As previously discussed, investing in innovation is a significant strategic growth area for KORU as we build out our Novel Therapies pipeline. Brian will lead technology and product development and innovation as the company defines and executes its innovation strategy. Near-term innovation goals include line extensions, new product introductions, and a next-generation system. Brian will be instrumental to our long-term business success. I will now turn the call over to Karen for a discussion of our Q1 financials.

Karen Fisher, CFO

Thank you, Linda, and good afternoon, everybody. I'm pleased to report our second consecutive quarter of double-digit net sales growth, ending the first quarter of 2022 with net sales of $6.2 million, a 15% increase from $5.4 million from the same period last year. Results were driven by domestic core growth of over 13% year-over-year with higher pumps and consumables sales outperforming a rebounding subcu Ig market growth at 7%. As we expand our Novel Therapies pipeline, we are also excited to report Novel Therapies sales were $355,000 for the 3 months ended March 31, 2022, a $300,000 increase from the same period of 2021, primarily due to recognition of initial NRE revenues from an innovation milestone achievement for a large SCIg customer, which is expected to continue to generate NRE revenues through 2022 and clinical and commercialization revenues in the years following. International core was down 8.6% year-over-year due to quarterly buying pattern changes on a few smaller customers. As Linda mentioned previously, we are excited to report that we have a signed distribution agreement in Germany. With reimbursement, a great distribution partner and a large subcu patient base in Germany, we are excited about this expanded opportunity in Europe. Gross profit increased by $400,000 or 12.1% in the first quarter of 2022, while gross margin decreased by 150 basis points to 58%. While we are excited to record the higher NRE revenues from the customization effort described earlier, this revenue had a dilutive impact on gross margin for the quarter. Also contributing to lower margin were higher manufacturing costs in our core business from increasing raw material costs and labor costs that were partially offset by increased price and mix. Total operating expenses were $6.7 million for the quarter of 2022, an increase of $1.3 million for the same period last year. The majority of the increase came from R&D expenses, which drove just over half of the increase or approximately $800,000 in the first quarter of 2022 compared to the same period last year. The increase was driven primarily by higher salaries and related costs as we build out our internal innovation capabilities as well as consulting fees to support accelerated product development efforts through our previously announced agreement with Gilero. Our EQA drove 30% of the incremental spend over the prior year in support of our expanded label indications and our EU MDR registrations. The remainder of our SG&A expenses were driven by new hires to support commercialization and business development. Net loss for the first quarter of 2022 was $2.5 million or negative $0.06 per diluted share compared to a net loss of $1.3 million or a negative $0.03 per diluted share in the first quarter of 2021. The loss was driven by our investments to execute on our strategic initiatives as we just described. As you can see from the previous slide, our use of funds remains focused on driving innovation and growth and on strengthening our foundation, including a Q1 investment in our new location. We used $2.7 million in cash in the quarter, which includes $700,000 for leasehold improvements, manufacturing and office equipment for our new location. We have preapproved financing arrangements in the amount of $1 million, which we will execute in Q2 upon commissioning of the assets. Additionally, we expect to receive cash for build-out credits under our new lease of $200,000, and we're still waiting for our ERC credit of $700,000, which we recorded a receivable for at 12/31/2021. The company ended the quarter with $22.6 million of cash, and we were well capitalized to continue to execute on our strategic plan. I will now turn the call back to Linda for guidance and closing comments.

Linda Tharby, President and CEO

Thank you, Karen. Turning to our expectations for fiscal 2022. As a reminder, our outlook is rooted in several key drivers, underlying market growth, continued recovery from COVID-19 pandemic, plasma supply, clinical trial activity and supply chain impact. For the full year 2022, we are tightening our revenue guidance to the top end of the range at $26.5 million to $27 million, previously $26 million to $27 million, due to the Q1 U.S. market growth, which is approaching our high single-digit range prior communicated for the year and an expansion in our novel therapies pipeline. The company reiterates its guidance to exit the year at a 60% gross margin run rate. Additionally, Q1 2022 supply chain disruption impacts, which are not expected to recur, have resulted in non-favorable manufacturing variances in Q1, which will be recognized in the second quarter of 2022 as we turn our inventory. And finally, we reiterate our operating expense range in support of our strategic plan. We anticipate higher sequential Q2 expenses due to one-time building move expenses. In closing, our first quarter represents a very strong start to 2022. We are making great progress in advancing our strategic priorities. We have met our second quarter of double-digit growth. We are progressing our label expansions with our fourth FDA clearance in 5 months, and our first clearance outside of Ig with EMPAVELI and Aspaveli. We are expanding our Novel Therapies pipeline in both clinical trials and innovation agreements as a leading indicator of longer-term commercial opportunity, and we are beginning to build out our international strategy as we continue to build a strong team. We are pleased with our ability to execute against our strategic plan to date as we work towards our longer-term vision of becoming a broad drug delivery player. Thank you again to the KORU team. And I will now turn the call over for Q&A.

Operator, Operator

Our first question is from Alex Nowak with Craig-Hallum Capital Group.

Chase Knickerbocker, Analyst

This is Chase on for Alex. So to start from me, penetration for prefilled syringes is great to see. Have you seen any impact to overall subcu penetration of the Ig market yet in your data? And any color on what you may be seeing as a result of this concerning new patient adds and pump orders for you guys would be helpful.

Linda Tharby, President and CEO

So Chase, great question. We are very encouraged by the prefilled growth that we see this year. And we are seeing that it is impacting subcu patient starts. Although there are many factors that influence it, we did see a 0.5-point improvement from Q4 in overall subcu penetration into the marketplace. So that was encouraging for us. And then obviously, you saw the pump number that recorded a 40% growth in Q1 and a significant part of that growth was attributable to our FreedomEdge, which is the pump that's specifically cleared for indication with prefilled syringes. So we see prefills, we're thrilled as being the only on-label indication. We see it as a market opportunity with only 5% penetration with a lot of headroom for growth for us this year and the years following.

Chase Knickerbocker, Analyst

No, very helpful. And then with the CTO announcement, any update on the new pump developments? Any other products in the works besides the new pump we should know about? Any color on how you're thinking about the pipeline strategically as the new CTO starts rolling here?

Linda Tharby, President and CEO

Yes. First, I want to express our excitement about having Brian join our team. He brings a wealth of experience in developing various pumps for different applications throughout his career, including both technological advancements and in-licensing opportunities. His expertise is invaluable to us. Innovation remains a significant focus for our efforts, as reflected in our spending results, aimed at capturing more drug opportunities in our overall pipeline. In the short term, we will concentrate on comfort and convenience. You'll notice enhancements to our FreedomEdge platform, which we consider a second-generation Freedom platform specifically designed for prefills. Additionally, we are working on our next-generation pump along with various new initiatives associated with it. Think of our three main themes: comfort, convenience, and connectivity. We expect to begin rolling out this pipeline by next year in the form of line extensions, followed by new products and our next-generation pump.

Chase Knickerbocker, Analyst

And then just concerning what you're hearing from the specialty pharmacies, as prefilled have started to roll out here, have you heard some feedback about potentially addressing some of previous pushbacks with switching to subcu? And how do you think things are trending in the specialty pharmacy?

Linda Tharby, President and CEO

So great question, and we have done a lot of work. Our head of sales now is in meetings with all of them at one of our biggest conferences. But to date, we have certainly heard that the clearance of the 20 ml from CSL that Hizentra has helped because it allows the patient to just put the prefilled syringe directly into our pump, which is fantastic. I think the challenges that we hear today are obviously with the 5 and 10 formats and the fact that not everybody is in a 20, 40, or 60 that patients still at times have to draw up from the prefilled syringe into another syringe to put into the pump. So that's a little bit of additional work. So we're looking forward to CSL building out their prefilled pipeline so that we can bring an even better patient experience to the marketplace. But overall, I would say we're working on our clinicals today. We're working on training a lot of new pharmacies and patients on the therapy. And I would say expectations for prefills have outperformed our early expectations on this product.

Operator, Operator

Our next question is from Jason Bednar with Piper Sandler.

Joseph Downing, Analyst

This is Joe on for Jason. Yes. So my question, so back in Q4, and obviously, reiterated today, you guys mentioned the Novel Therapies pipeline and investments in Europe and internationally as levers to pull to return to 20% growth. So we're curious how we should be thinking about future developments of the Novel Therapies pipeline as well as progress in Europe? Obviously, particularly with the announced distribution agreement in Germany is impacting the top line in 2022 and beyond. And then the odds that we can actually get back to 20% growth moving forward with these levers.

Linda Tharby, President and CEO

Thanks, Joe. That's a great question. I'll connect this back to our goal of reaching 15%, which we feel increasingly confident about, and then I'll discuss how we can work towards achieving 20%. The recovery in the U.S. market is likely our most significant driver for returning to that 15% growth range. I mentioned an average growth of 7% for the quarter, with 3% in January, 7% in February, and 10% in March, which is very promising. Additionally, our focus on novel therapies and our pipeline developments play a crucial role. I noted the expansion of an innovation agreement we established in the fourth quarter, which is encouraging for us. Regarding the deal in Germany, while it's still early and we have training to conduct to equip all their representatives with our product, we view this as a valuable opportunity. To move from 15% to 20%, there are three main factors to consider. First, we need the U.S. market to grow in double digits this year. If that happens consistently on a quarterly and yearly basis, it would be quite promising. Combined with our ability to finalize the innovation agreement on schedule and secure additional deals for novel therapies, we can make significant progress. Lastly, we're also focusing on international expansions beyond Germany, which would contribute positively towards reaching 20% growth. I also want to highlight that our prefill rate at 5% is encouraging, as prefill customers represent an opportunity to grow our market share from 70% to 100%. Therefore, I see multiple opportunities to achieve our target of going from 15% to 20%. We just need a bit more time to see the market recover and to further develop our novel therapies pipeline. With all these indicators, we believe we're making progress each quarter towards our goals.

Joseph Downing, Analyst

That's really helpful. And then just one more for me. So congrats on the recent 510(k) approval for EMPAVELI, great to see for the business, obviously. Can you just talk a little bit about how we should be thinking about the contribution from this approval looking forward? And to what extent patients may have already been using it off-label with the FreedomEdge pump?

Linda Tharby, President and CEO

I cannot comment on off-label indication, but we know the KORU pump was preferred in the early clinical trials for approval. We assume that pharmacists and doctors may have continued some patients on the pump. Looking at the numbers that Apellis is reporting, particularly in the U.S. market, we recognize the potential. We face competition from electronic pumps on this platform. Of the approximately 150 new patients who start each year and the patient base we aim to convert, we see an opportunity this year for Apellis ranging between 100,000 and 200,000. That number aligns with prior communications. If their current reporting shows improvement, we hope it will positively impact our numbers. I believe this label indication will significantly enhance our ability to promote the FreedomEdge pump along with Aspaveli and EMPAVELI.

Operator, Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Linda Tharby for closing remarks.

Linda Tharby, President and CEO

Thank you, everyone, for listening in today. And I want to say thank you to the entire KORU team, again, for a fantastic start to 2022.

Operator, Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.