Earnings Call Transcript - KRMD Q1 2021

Operator, Operator

Greetings. Welcome to the KORU Medical Systems First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Greg Chodaczek. Mr. Chodaczek, you may begin.

Greg Chodaczek, Host

Thank you, Alex, and good afternoon, everyone. Earlier today, KORU Medical Systems released financial results for the first quarter 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 which are posted on our website. You will find additional disclosure regarding these 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, May 12, 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. We are excited to have Linda joining us from a successful 25-year career at Becton Dickinson, with a great breadth and depth of experience in global business leadership roles. Linda, please go ahead.

Linda Tharby, CEO

Thanks, Greg. Good afternoon, everyone, and thanks for joining us today. During today's call, I would like to share my thoughts in three key areas. First, I would like to share my excitement in joining KORU Medical at this time in its evolution. I will then go over a few highlights from our first quarter and my early thoughts on the opportunity ahead. I will then turn it over to Karen to discuss the quarterly financials in more depth before ending with a few closing remarks. When I was approached with the opportunity to lead KORU Medical, it was a great fit for several reasons. It's a company with a strong purpose, with a leading market position and a growing space. It's a company that has the ambition and the opportunity to be a global leader. And it's a company where I could grow and develop the team. Over the past four weeks, I've had the opportunity to talk with and work alongside our dedicated employees and have met with many of our customers. During these discussions, my initial thoughts about the company were confirmed. KORU Medical improves the daily quality of lives for patients with the KORU Freedom Integrated Infusion System, has the potential to increase our leadership in a growing global home infusion market and has a tremendous emerging opportunity in the pharmaceutical drug delivery space. I'm excited to join this team merging my skills and capabilities gained over the last 25 years. Those most relevant to KORU are the decades spent building and leading strong performing and diverse global teams, the development and commercialization of multiple products and service innovations and delivering drug delivery device solutions to patients in the home, working in partnership with pharmaceutical companies. I look forward to working with the team here at KORU and defining and executing on our current strategic plan, as we evolve it to drive even more meaningful value for our customers and shareholders. Turning to our results for the first quarter, our revenues were affected by one-time prior year purchases, as well as the current year COVID-19 impact on new patient starts. 2020 was a complex year for our business, as the pandemic affected ordering patterns from our customers in the US and abroad, as well as our initiatives in novel therapies. I'm encouraged by several key fundamentals from the quarter. We are very excited by the sequential revenue growth from Q4 2020 to Q1 2021, which together with a review of our inventory levels at our distributors, reaffirms that there is no excess inventory in the channel. Additionally, our end-user sales data, which measures sales to the specialty pharma channel confirm strong sequential quarterly growth in our new pump placements as a measure of new patient starts. Further, although we can't necessarily rely on this to be indicative of the full quarter, April net sales exceeded the monthly sales of each of the prior six months. Looking ahead a few comments on our critical areas of focus over the next several quarters. First, in the US market, we will continue to advance our efforts to have newly diagnosed Ig patients start their therapy with the KORU Freedom system. We will review the larger US market opportunity to convert the 75% plus patients who receive IVIg therapy in a hospital and clinic setting to subcutaneous, working in partnership with our pharmaceutical customers. In Europe, we will accelerate our focus on growing our distribution and reimbursement. Finally, a significant opportunity for KORU Medical, as the market leader in delivering millions of safe subcutaneous large volume home infusions annually is to expand our focus on indications with new drug therapies. As a foundation for these plans, we will review our portfolio and build out the team necessary to take KORU Medical to the next level. We look forward to sharing our progress. I will now turn the call over to Karen, who will take you through our first quarter results.

Karen Fisher, CFO

Thank you, Linda and good afternoon, everyone. Total net sales for the first quarter of 2021 were $5.4 million, a decrease of 14% from $6.3 million in the first quarter of 2020 with strong sequential quarterly growth versus Q4 2020. The biggest drivers of the decline were lower novel therapy sales of $400,000 due to non-recurring clinical trial for domestic core comm sales of $400,000, primarily related to ordering patterns and a one-time pharmaceutical customer pump purchase. Domestic core business also reflected our first quarter 2021 market slowdown in the growth of new patient starts for subcutaneous Ig therapy as the pandemic continued to delay provider visits and new diagnoses. With our sequential quarterly growth and new pump placements, we’re encouraged that market growth is returning to pre-COVID levels. International revenues were $1 million, flat with the prior year. Net of one-time purchases, we saw double-digit growth and it was the strongest quarter of the last four. Gross margin for the first quarter of 2021 was 59.5%, 30 basis points lower than the same period of 2020, primarily due to lower volume and pump sales where we have higher gross margin. This was partially offset by favorable production variances. Selling, general and administrative expenses were $5 million for the first quarter of 2021, compared to $2.9 million for the same period in 2020. This increase is mostly due to $1.3 million in costs associated with leadership changes, which includes non-cash equity expense of $400,000 and the recruitment of two new board members. Further contributing to the increase was higher salary and related benefits of $600,000, from new hires in the second half of last year to support commercialization, business development and medical affairs for our novel therapies initiatives. Net loss for the quarter of 2021 was $1.3 million, compared to a net gain of $400,000 for the first quarter of 2020. Driven by lower gross profit and higher selling, general and administrative expenses, as previously described. Offsetting the loss was a tax benefit of $500,000, resulting from book-to-tax differences related to stock option expense. Diluted earnings per share was negative $0.03 for the quarter compared to $0.01 diluted earnings per share for the same period last year. On a non-GAAP basis, adjusted diluted earnings per share was $0.00 for the quarter of 2021 and $0.02 for the same period of 2020. Non-GAAP adjusted EBITDA for the first quarter of 2021 was negative $400,000, compared to $1.3 million for the first quarter of 2020. Turning to our balance sheet, we ended the first quarter of 2021 with $26.8 million in cash, compared to $27.3 million at the year ended 2020. Our inventory position grew from $6.8 million at December 31, 2020, to $8.1 million at March 31, 2021, due to the efforts to transition our manufacturing to our secondary source. As you know, the Board authorized a stock buyback in Q4 of last year for $10 million, of which we have used $3.5 million and have not made any repurchases in Q1. We are in the process of reviewing our strategic plan and cash requirements with the Board and we will update you accordingly. I will now turn the call back over to Linda for closing comments.

Linda Tharby, CEO

Thank you, Karen. Today marks my one month anniversary with the company and what a month it's been. I want to thank our analysts and our long-term shareholders who took the time early in our relationship to share their thoughts and feedback on KORU Medical. I appreciate your time and your feedback. And I want to assure you that we are committed to increasing visibility with respect to our business and our results. I especially want to thank the incredible team here at KORU Medical, who have done a great job through this pandemic in keeping the company growing and fully operational. We are continuing to execute and evolve our strategic plan to improve the quality of life for our patients, provide further value add to our customers and maximize long-term value creation for our shareholders. We look forward to sharing our updated plan with you later this year. I’ll now turn the call back over to the operator for Q&A.

Operator, Operator

Thank you. At this time, we will be conducting a question-and-answer session. Our first question is from Matt O'Brien with Piper Sandler. Please proceed with your question.

Unidentified Analyst, Analyst

Hi, good afternoon. Actually Drew on for Matt. First off, Linda welcome and congrats. I was just wondering if you could speak to some of your strategic priorities over the next 12 months, there's obviously been a couple dynamics in the channel, you had COVID, a lot of things like summer last year, so maybe you could speak to what your focus will be or where you want investors to cover the next couple months?

Linda Tharby, CEO

Yeah, thanks, Drew. So, I think first focus is, the team here has done a great job of ensuring that every new drug that's coming into the IG space is using the KORU Freedom system. So continuing to ensure that in the IG market, we are capturing all new drugs coming into that space. Second, clearly is ensuring that every one of those new patients that get started start on a KORU Freedom system. And we’ve shared today, I think the team has continued to do a great job there, so continued energy there. The opportunities that I see putting further focus on first is the biggest part of the U.S. market today is the conversion from IV therapy to subcutaneous IG therapy in the home that today is over 75% of patients who are still doing their IVIg therapy in a hospital setting. So that's first. Second is Europe, really accelerating our efforts in Europe on the reimbursement and distribution side. And finally, an initiative that we started last year with success is the novel therapies initiative. So, with the KORU Freedom system and the millions of safe infusions we deliver every year, I think it's a great opportunity for future candidates in the pipeline.

Unidentified Analyst, Analyst

Okay. Super, super helpful. And then just turning to the performance in the quarter, I think you referenced COVID is having an impact on new patient starts on subcutaneous and new diagnoses in general. So as we're just thinking about 2021 from a cadence perspective, maybe you could help us understand how it’s trending through the quarter. I think I caught your comment correctly that you said April was the strongest month out of the last six. And then second part to that question, just your overall comfort level and KORU delivering some year-over-year growth in 2021?

Linda Tharby, CEO

Yeah. So first maybe just start. Overall on the quarter, I mentioned that we saw some overall slowdown, and we look at data sources that we buy externally. And we saw overall slowdown in the market, still some growth in the market, we expect that to rebound with vaccinations beginning and we're encouraged; what we also look at is our new pump placements. And we're seeing a trend in our new pump placements month-on-month that are growing very healthy. In terms of overall outlook for the year, we don't guide for the year, I would say that April was strong, I would say we should see the overall category come back to high single-digit, low double-digit, and expectations would be that we track with or slightly outperform the overall category.

Unidentified Analyst, Analyst

Okay, that's helpful. And then last one for me in your press release, I think part of that $1.3 million you called out was associated with new hires. Historically, the business has been run through distributors and in large portions, so I guess, is the intention to build out a larger direct sales force? And if so, is there anything we need to be thinking about from the SG&A modeling perspective? Thank you.

Linda Tharby, CEO

Yes, probably, I would say two opportunities that we’ll focus on. One is, as you mentioned, we will do this in close correlation with market data that we purchased to understand where we have areas of opportunity, either on a share basis our large areas that are heavily IBIG focus. So if we find those areas, putting a rep in those places, where we can quickly gain share and/or new starts will be a top priority for us. So yes, you can absolutely think about adding some commercial efforts there. And then secondly, in the R&D area. As we begin to work with the pharmaceutical companies and understanding the requirements there, both for testing with their drugs and for future portfolio evolution, those would be the two biggest places that I see as adding to SG&A.

Unidentified Analyst, Analyst

Okay. Thank you.

Linda Tharby, CEO

Thanks, Drew.

Operator, Operator

Thank you. Our next question is from Alex Nowak with Craig-Hallum Capital Group. Please proceed with your question.

Alex Nowak, Analyst

Greg. Good afternoon, everyone and welcome, Linda. I just wanted to touch on the last piece there. Around the new market dynamics, ordering has been pretty lumpy, historically. And that's obviously distorted. What's been the underlying growth rate out there? So, what sort of improvements do you plan to make? Or are there any improvements to help kind of smooth out this lumpy ordering practices to distributors and pharma, and then ultimately, how your underlying sales back to the demand that you're seeing?

Linda Tharby, CEO

So Alex, the easiest way to smooth out the lumps is to make the business bigger. So, that would be my first response is, obviously to grow the business overall. But we have really focused a lot over the course of, I would say the last several months, the team prior to me with gentlemen, and certainly me in the last month to ensuring that we have a keen handle on not only our distributor inventory levels, but also our specialty pharma inventory levels that are in the channel. So, we're going to monitor those, but when the business, you know, one big order from a distributor that falls behind the quarter by a few days can affect things, but at least we'll have visibility to those and we can talk you through those as they occur. But overall, the biggest way to do it is, we're going to grow the business.

Alex Nowak, Analyst

No, that's good to hear. As you see the new sub-q IG drugs come online this year, more so exemplifying CUVITRU, I guess, what are you hearing out there from the pharma companies about those rollouts? Those drugs have been out there for a few years now, they're really starting to get going according to the script volume, but what are you hearing specifically about the uptake there?

Linda Tharby, CEO

Overall, the starts began late in 2019, so for us, 2020 is really just getting underway. I believe a significant opportunity lies in the pre-fills, as one of the indications could represent an interesting start for gaining market share. Having two new drugs in a category can only help grow the overall market, which we view positively.

Alex Nowak, Analyst

No, that makes sense. And maybe just pivoting over to the hematology drug launching, which should be this summer, just how are you anticipating the rollout there and then the ramp of demand going into that approval? And then ultimately, once that product starts to sell through into the market, just curious how you're modeling it or just generally thinking about it?

Linda Tharby, CEO

Yeah, what I would say Alex is, we'll be more comfortable talking about that next quarter, as you know, that drug is expected to have its PDUFA date, May 19. So, we look forward and anticipate. And then, you know, we've got lots of modeling that we're doing on that. But I would say it's probably a little too early to share all of that data publicly.

Alex Nowak, Analyst

That makes sense. And maybe just a bigger picture question on the pipeline here. I think one of the challenges investors had is, the pipeline's always been pretty okay. And we know who's involved with pharma, but we just don't quite know where? So, as you're going forward here, and again, not looking for specific this quarter. But as you go forward to review the contracts and learn the business. How do you plan to communicate the opportunities there, the numbers in the pipeline and communicate that back to investors?

Linda Tharby, CEO

Thank you for the question. One of our key focuses is reviewing our pipeline on a monthly and weekly basis as needed. We will keep you updated, particularly regarding opportunities like using prefilled pockets in the KORU Freedom system, which can enhance patient convenience for subcutaneous Ig therapy. We will discuss the class of prefilled Ig and other drug classes including oncology in future calls. Our approach is to identify currently marketed drugs that could be easily converted to more convenient administration methods, such as syringe systems. The first targets we will consider are those that are currently underutilized in the market. The second area includes drugs that have received expanded indications for subcutaneous use but are not yet marketable. Lastly, we will also look at drugs in development that have subcutaneous indications. We will cover these general areas and may share code names for candidates until they become marketable or partners are ready to discuss them publicly.

Alex Nowak, Analyst

Now that makes a kind of sense. Appreciate the update. Thank you.

Linda Tharby, CEO

Thank you, Alex.

Operator, Operator

Thank you. Our final question is from Kyle Rose with Canaccord Genuity. Please proceed with your question.

Kyle Rose, Analyst

Thank you for the questions and congratulations on the opportunity. Linda, I know a lot has already been discussed, but I would like to take a broader view. I appreciate your insights on the predictability of ordering patterns. Considering you have been in your role for about a month now, can you share if the channel appears to be at a steady run rate moving forward? Is there any destocking or additional stocking needed to reach a normal status moving ahead? Additionally, regarding demand, we know that patients have faced challenges accessing physician appointments. Do you believe there is a backlog forming, or do you expect things to return to normal once patients can see their doctors?

Linda Tharby, CEO

Okay. So first, just I'll reaffirm, we think the business now is at a normal state. We have reviewed not only inventory levels at our largest distributors but also in the channel itself and our specialty pharma channel. And we are confident that we don't have to work through that any further. Now of course, you're going to continue to see those year-on-year comparisons in Q2 and Q3. So we obviously will be talking about that for the coming two quarters. On the demand, I guess that's a great question. And I wish I had further insight for you, I guess what we look at is we look at our new pump starts, which is our biggest indicator that we have new patient starts. And I would say we've seen that demand for our new pumps growing at a pretty healthy pace, both through quarter one and then again, we saw a big month for us in April.

Kyle Rose, Analyst

Great. And then just the last question I have is just we get questions from investors just around the overall impact COVID had on plasma supply and plasma donations through the last call 12 to 18 months. And how that might trickle down to the supply chain over the course of the next 12 to 18 months? Just any commentary there around conversations you've had with your pharma partners, do you think that might be an issue? Or is that something you're not worried about?

Linda Tharby, CEO

So at this point, what we have heard is that they had talked about shortages earlier in the year. What we're hearing of late, as they think they've worked through most of that, but do we still see a lag effect that could occur from something that happened six months ago? I think if we do, we'll see it impact non-US markets rather than US markets is what we're understanding. So I think it's a great question, but I haven't heard anything that overly concerns us in this area.

Kyle Rose, Analyst

Great. Thank you very much for taking the question.

Linda Tharby, CEO

Thank you.

Karen Fisher, CFO

Thank you, Kyle.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Linda Tharby for closing remarks.

Linda Tharby, CEO

All right. So thank you to all of you for joining us on my first quarter as CEO of KORU Medical. I look forward to many more and I look forward to speaking with you in person. Thank you, operator.

Operator, Operator

Thank you. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation. Have a great day.