Earnings Call Transcript - KRMD Q1 2024

Operator, Operator

Greetings and welcome to the KORU Medical Systems First Quarter 2024 Financial Results Conference Call and Webcast. As a reminder, this conference is being recorded.

Louisa Smith, Host

Thank you, Rachel, and good afternoon, everyone. Earlier today, KORU Medical Systems released financial results for the first quarter ended March 31, 2024. 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 accompanying investor presentation and in our filings with the SEC, each of which are posted on our website. You will find additional disclosure regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures in our press release. For the benefit of those listening to the replay, this call was held and recorded on Wednesday, May 1, 2024, at approximately 4:30 p.m. Eastern Time. Since then, the company may have made additional comments related to the topics discussed. Please reference the company's most recent press release. Joining us on the call today are Linda Tharby, President and CEO of KORU Medical Systems; and Tom Adams, KORU Medical's Chief Financial Officer. Linda, please go ahead.

Linda Tharby, CEO

Thank you, Louisa. Good afternoon, everyone, and thank you for joining us today. During our call today, we will use slides to support our commentary. I will begin with our first quarter 2024 results and key business updates, followed by Tom, who will review our financials and 2024 guidance. Following the prepared remarks, we will open the line for questions. I'm very pleased with our first quarter results, with progress against multiple key milestones of our Vision '26 growth strategy. We have started the year with an $8.2 million quarter and double-digit revenue, delivering the highest quarterly revenue in the company's history. The core business grew 14% overall, driven by double-digit growth in consumables and strong performance internationally. Underlying this was another solid quarter in the global immunoglobulin market. We also continued with great progress in our Novel Therapies business, which is the catalyst for getting new drugs approved on our FREEDOM infusion systems and for new patients in our core business. Year-to-date, we have signed 3 new collaborations, and I'm also very excited to announce the addition of a new oncology collaboration, which I will discuss in more detail later. From an operational perspective, we have hit several key milestones. I'm pleased to report our third consecutive quarter of gross margin above 60%, hitting 62.3%. We finished the quarter with a cash burn of $700,000, a significant decrease from a $5.2 million burn in the same period the prior year. This reduction is the outcome of disciplined operating expense management and continued efforts to decrease our working capital, further evidence of our meaningful headway towards cash flow breakeven and profitability. Finally, we are reaffirming our 2024 guidance metrics. Overall, I'm very pleased with our performance this quarter as we continue to execute on our Vision '26 growth agenda. Moving to the next slide. I'd like to detail the progress we are making in our strategy across our 3 growth pillars: increasing penetration in our domestic core, international expansion, and adding multiple large volume subcutaneous drugs to our label, our Novel Therapies business. Starting with domestic core, we saw a growth of 4% over the first quarter of 2023. I want to highlight that similar to last quarter, we saw a double-digit increase in our sales from our distributors to end user specialty pharmacies. This is indicative of strong patient demand in our core business. Our growth was largely attributable to competitive share gains and growth in new patient starts, driving double-digit growth and recurring consumable volumes. Our consumables growth following strong pump volumes in prior quarters represents a recurring revenue stream and becomes increasingly valuable as we continue to expand our customer base and win new patient starts. Q1 was the fifth consecutive quarter of sequential market growth for immunoglobulin, indicating growing patient diagnosis. Prefilled syringes continue to drive penetration into the Ig market, remaining the fastest-growing segment in subcutaneous immunoglobulin, a key catalyst for potential increased levels of subcutaneous penetration and growth in '24 and beyond. We also continue to make good progress towards the Q4 510(k) submission for our new consumables, designed for a more convenient and comfortable experience for our patients. Moving to international core, we saw explosive growth in the quarter with a 63% year-over-year increase in revenue. I want to begin the international results with great news. We were successful in the previously communicated appeal regarding ongoing certification of our products in Europe, our international notified body, BSI. As a result, we intend to proceed with the routine BSI assessment process. In the quarter, we saw strong Ig supply versus the prior year, continued geographic expansion, and increased penetration, and approved indications. We saw strength in our established ex U.S. geographic markets as we penetrate deeper into these markets and into targeted indications, specifically in CIDP, a neurological condition requiring large subcutaneous volumes and a typical twice per week dosing schedule, and SID, secondary immunodeficiency. During the quarter, we entered multiple new markets, including the Middle East and North Africa, increasing our global footprint and patient base, and onboarded multiple new distributors. Expansion in further geographies remains a key focus for our business for the remainder of the year, namely Japan, where we remain optimistic that we will receive clearance for the FreedomEdge and consumables by Q2 or Q3. Within novel therapies, we now have a total of 16 collaborations and have already hit our goal of 3 new deals signed within 2024, highlighted this quarter by the addition of the first drug therapy in oncology. The oncology collaboration is exciting for many reasons. First, the oncology therapy patient population is large with up to 500,000 patients as an addressable population for this drug therapy. Second, it will be our first entry into oncology infusion centers with administration via health care professionals. This is a large and growing market as several launch subcutaneous oncology drugs require health care professional administration due to potential side effects post-administration. Finally, this new collaboration is with a launched drug which removes the risk and time related to the drug's approval. We are currently in feasibility testing of the drug with a FREEDOM infusion system prior to an FDA 510(k) submission which we anticipate in the next 6 to 12 months. I'm also pleased to report ongoing progress within our pipeline. The endocrinology drug, which we first announced last year, has successfully passed validation and will enter Phase III trials with the FREEDOM infusion system, another pivotal step towards commercialization. We also progressed the development of our efforts with the previously announced collaboration with the launched rare disease biologics. This drug has successfully passed its feasibility testing, and we'll be moving into product development with a customized FREEDOM infusion system. We anticipate a 510(k) submission for the use of the drug with the FREEDOM system in the fourth quarter of this year. Overall, it was a successful quarter across all 3 strategic growth areas.

Tom Adams, CFO

Thank you, Linda, and thanks to everyone joining us this afternoon. We are pleased with our first quarter results as we saw a return of double-digit top line growth and a record-setting quarter. Net revenues for the first quarter were $8.2 million, an 11% increase compared to the prior year period. Domestic core grew 4% with net revenues of $6 million, driven by double-digit consumable volume growth due to new patient starts and share gains. Our international core business grew 63% year-over-year with revenues of $1.8 million, driven by an improved Ig supply versus the prior year, increased sales, and improved indications, and the strong growth in our geographic expansion strategy. The 63% growth rate for international core consisted of approximately $260,000 of revenue for expedited inventory orders relating to the BSI regulatory determination as Linda addressed earlier. Normalized growth, excluding these orders, was approximately 40% in the OUS business. Novel Therapies revenue was $500,000, a 21% decline compared to Q1 2023, driven by a major collaboration milestone that occurred in the prior period. It's important to note that our novel therapies business consists primarily of nonrecurring revenues, which are variable in nature and are generally milestone-based. The compensation of our revenue mix has diversified with an expanded customer base, highlighted by 2 additional novel therapies agreements and advancements in pipeline progress for multiple drugs in the quarter. Our first quarter gross margin improved to 62.3%, a 620 basis point increase compared to the prior year. The strong improvement was largely due to the consolidation of our U.S. manufacturing sites. This marks the third consecutive quarter that we have achieved margins greater than 60%, and we continue to work diligently to realize manufacturing improvements and efficiencies across our operations. Additionally, we have improved gross margins realized in our Novel Therapies business through the in-sourcing and service revenue costs at lower rates. Moving over to cash. As of March 31, we had an ending cash balance of $10.8 million, representing cash usage of $700,000 in the quarter, a substantial reduction from the $5.2 million spend incurred during the prior year period. This year, our cash spending will be lighter than previous years as we continue to achieve operating leverage. Our cash deployment in the first quarter came primarily from our cash basis net loss of $1 million, which was nearly 50% lower than the prior year. Other drivers include investing and financing activities of $300,000 for new production line capital expenditures and financing for insurance premiums. This was offset by a significant improvement in working capital, driven by reductions in inventory levels resulting from operational efficiencies in manufacturing and higher accounts payable due to the timing of receipts. We remain focused on our cash and cash flow targets. We substantially reduced spending since the beginning of 2023. We expect the first half of 2024 cash usage pattern to remain consistent with the prior year with higher spend relative to the second half, but at a significantly lower burn rate. The spend will be driven by equipment for our new production lines. We remain confident that we will hit our goals of at least an $8 million ending cash balance as well as being cash flow positive in the fourth quarter of 2024 and for the full year of 2025. Moving on to guidance. We are reaffirming each aspect of our 2024 outlook, expecting the following for the remainder of the year: revenues of $31.2 million to $32.2 million, representing a 10% to 13% growth driven by growth of a mid- to high single-digit SCIg market; 3 new novel therapy collaborations, and an approximately prefilled syringe penetration of 20% to 25%. We anticipate a full year gross margin between 59% and 61% as we expand into lower ASP regions. We will also face and manage inflationary pressures within our supply chain and incur production line start-up costs later in the year. Lastly, as I mentioned before, we expect to finish with an ending cash balance of more than $8 million, which includes approximately $23.5 million to $24 million in operating expenses. This ending balance is exclusive of stock compensation and includes the expectation that we will reach cash flow breakeven in the fourth quarter of 2024, and cash flow positive for the full year of 2025. Our credit facility remains available to us for strategic growth opportunities, but is not included in our estimates for the 2024 ending cash balance. I will now turn the call back over to Linda for closing remarks.

Linda Tharby, CEO

Thanks, Tom. I'm very pleased by our first quarter results and the momentum ensuing across all businesses. We remain committed to the milestones I highlighted in our last earnings call. We have achieved one quarter of double-digit net revenue growth with a commitment to this type of growth for the remainder of the year. We continue to see accelerating levels of growth in our core business, driven by share gains, new patient starts, international expansion and increasing prefill penetration. We've completed our goal of 3 new novel therapies collaborations, and we'll continue to actively pursue new opportunities as we work to move our collaboration closer to commercialization. We are projecting the submission of two 510(k)s, one for a new product and the other for a new drug indication on the FREEDOM platform by the end of the year. And finally, it is our commitment to breakeven cash flows in Q4 of 2024, and cash flow positive for the full year '25. Each of these milestones is a strong indicator of the progress we are making toward KORU's overarching Vision '26 goals. I'm strongly encouraged by our start to the year as we continue to evolve our company into a global leader in subcutaneous drug delivery in both the clinic and at-home setting. In closing, I'm incredibly proud of the team at KORU Medical, and the effort they put into their work each day as we strive to improve the patient experience and deliver increasing value to our customers, patients, and shareholders. Operator, I will now turn the call over to you for Q&A.

Operator, Operator

Thank you. We'll now be conducting a question session. Your first question comes from Frank Takkinen with Lake Street Capital Markets.

Frank Takkinen, Analyst

Great. Congrats on a solid first quarter. I was just hoping to start with the guidance reiteration. Obviously, a really strong start to Q1 understanding it's early in the year, but also understanding if you kind of annualize what happened in Q2 even after adjusting out some of the one-time stuff that happened internationally. It looks like the guide is very derisked and maybe a little bit conservative. So maybe just kind of walk through some of the different elements you considered when reiterating the guide versus bringing that up a little bit given the strong momentum year-to-date.

Linda Tharby, CEO

Thank you, Frank. We're optimistic about the first quarter. We believe our performance aligns with our guidance, achieving 11% in that period. We expect to begin the year at the lower end of our guidance range while the latter half could lean towards the upper end. Our focus on potential growth includes international expansion, which is a priority. In the first quarter, we encountered a one-time event with BSI, which Tom detailed. We also received several initial orders from new distributors, and we need to observe how this develops before making any adjustments to our guidance. We're excited about the advancements in Novel Therapies, as more deals could offer additional opportunities, but we need to complete our efforts in these areas first. Regarding our U.S. core business, we're noticing an increase in market share; however, distributor inventories have not kept pace with end user sales. These factors represent both our positives and challenges. Overall, we’ve had a strong beginning to the year, and we are pleased to reaffirm our guidance, with updates to follow when appropriate.

Frank Takkinen, Analyst

Got it. That's helpful. And then maybe just for my second one, any update on the 15-milliliter prefill. I don't think I heard an update in the prepared remarks, so maybe just explain to us how that's going, positive, negative, expectations versus reality versus expectations year-to-date? And looking at 2024.

Linda Tharby, CEO

Yes. So if you recall, we launched that product into the market, we did our initial load-in inventories in Q4. Q1, we've started to see conversion of patients to prefill therapy, but it is the first quarter of the product's launch. So we anticipate those increased penetration levels as we move through the year. It continues to be off a small base, but the fastest-growing area of subcutaneous therapy. We also believe that over the longer term, what we're really watching out for is a tipping point to get more people on subcutaneous therapy. I guess maybe the only other update I would make is that CSL, which is the leader in prefills and the only company to date that has prefills in the market for SCIg has announced their intention to discontinue their vials. So that, I think, will be another big impetus to prefills.

Operator, Operator

Your next question comes from Chase Knickerbocker with Craig-Hallum.

Chase Knickerbocker, Analyst

Linda and Tom, congratulations on your impressive progress. First, let's discuss the commercial rare disease product and the newly approved oncology asset. These products are particularly exciting considering their near-term impact. It seems that from the initiation of formal collaboration to approval for the use of your system, it takes about a year for the rare disease product. Should we expect a similar timeline for the oncology asset? Additionally, looking further ahead, are there any commercial drug products that are already approved and only require your regulatory processes?

Linda Tharby, CEO

Yes. Provided the FDA cooperates with the unknown part of the equation, but our internal process generally would take about 6 and sometimes 9 months, if there's customization required, and then an FDA approval process somewhere between 3 and 6 months would be what we're looking at.

Chase Knickerbocker, Analyst

Got it. And I know you're not going to give names, certainly. But should we think of this oncology drug as being sort of a recently launched asset or one that's more mature and has some meaningful volume in the market already maybe in a different kind of dosage medium?

Linda Tharby, CEO

Yes. Most of the subcutaneous therapies in oncology have moved from IV to subcutaneous. So most of them have launched within the last 3 to 5 years. So it is a fairly recent launch is what I would say.

Chase Knickerbocker, Analyst

But there's some volume that already where you won't be launching kind of the drug newly with, obviously, with your system. So there's some kind of volume to chase down already.

Linda Tharby, CEO

Correct.

Chase Knickerbocker, Analyst

Got it. And if we think about those open collaborations kind of in the pipeline, so to speak, can you give us a sense if there's any more of these kind of quickly impactful collaborations around kind of already approved therapies? And kind of along those same lines, you had previously guided towards 3 for the year. And I know you've got a lot to chew on with your current formal collaborations. And sorry if I missed this in your prepared remarks, but it seems like a lot in the pipeline there to not add a couple more kind of through the last 9 months of the year here. Kind of help us think about it.

Linda Tharby, CEO

Yes. So our business development team within Novel Therapies has their sights set on Phase III and launch drugs. That is one of the key reasons why I am so excited about the oncology asset because there are multiple drugs that have launched that have the same sort of unmet needs that we're going to capitalize on with this drug. So I see a lot further potential there. We also are working on geographic expansion opportunities where some of the prior innovations we've done with some of our Ig partners are now looking to consolidate their base of consumables to ourselves on a global basis. So that's also exciting for us.

Chase Knickerbocker, Analyst

Got it. And just one more question on guidance to build on what Frank said. If we consider that commentary, is it accurate to say that Q1 met your expectations and that's why you're reiterating the guidance? It seems like if we continue to see a minimal impact from the 15-milliliter launch, the second half could be promising as it picks up pace. And Tom, regarding gross margins, can you clarify the sequential decline that is expected in guidance? Is this related to the anticipated launch in Japan?

Tom Adams, CFO

You want to start, Linda?

Linda Tharby, CEO

So just on the guidance, I'm not sure that I heard a question there, Chase. But what I would say is we obviously, yes, you are correct that the first quarter kind of came in about where we were expecting. So at this point, we see several shots on goal to outperform. But at this point, we're also watching several areas including overall growth in the domestic core market. And we're looking at, frankly, how our distributors fill what we see as strong end-user demand. We also have to see what the recurring underlying international growth is once we get through what we saw was a lot of new distributors coming into our network in the first quarter.

Tom Adams, CFO

Yes. Regarding the question about gross margin, I would say our gross margins began the year very strong. We do have some product launches planned for the latter half of the year. Typically, with these launches, there are some inefficiencies during the start-up phase. However, as production and volumes increase, those margins tend to normalize. Additionally, margins have been stronger in the Novel Therapies area to help offset this. We have been in-sourcing much of the work for our novel therapy services agreements, which has been beneficial. Another factor impacting gross margin is that as we expand into international markets, we notice some changes in average selling prices as we enter these new regions. When combining all of these elements, along with ongoing manufacturing improvements, we are mostly maintaining our margin guidance at this time.

Operator, Operator

Next question comes from William Wood from B. Riley Securities.

William Wood, Analyst

Congratulations on a successful quarter, and thank you for addressing our questions. I would like to get an update on the growth or expansion in Japan and Canada. I know you discussed Japan earlier, but it seems like progress might be slowing down. Are we still expecting advancements in the second or third quarter? Is there anything specific causing delays or anything additional that may be necessary? Additionally, could you provide an update on the Canadian pilot study? I understand there have been some customs-related delays, so I would appreciate any information on that and how we should view the upcoming launch of that program.

Linda Tharby, CEO

So starting with Japan, we expect regulatory approval within the next few quarters. A final set of questions was received months ago, and all of them were easily addressed. There's no cause for concern; it appears to be typical regulatory delays we encounter in markets outside the U.S. While we did anticipate some delays in the regulatory timeline, we did not include significant estimates for Japan in our annual forecast. As for Canada, everything is progressing well. The product is in the country, and we expect the trial to start soon. However, this is not a clinical trial; it will be a study conducted by the nursing body with the product before involving patients. We will keep you informed about the study as the quarters go on.

William Wood, Analyst

Awesome. If I may, you mentioned successfully appealing the EU Notified Body as well as today. However, you still have to navigate the regulatory process there. Could you provide a brief update on what that involves and any potential challenges you anticipate for your international EU expansion?

Linda Tharby, CEO

Yes. We undergo a regular review process with them, which we successfully passed an audit of our internal facilities. Then they review all of your technical files for all of your products. We have one product with an outstanding finding that we feel confident we can resolve in due course, and we're working with them in their normal process, which is generally 3 rounds of questions. We just completed our first round. So we anticipate closing that in the coming months and having a pathway to our MDR certification.

William Wood, Analyst

Got it. I appreciate the extra color there. And congratulations again on a very nice quarter. Thank you.

Operator, Operator

Your next question comes from Caitlin Cronin with Canaccord Genuity.

Caitlin Cronin, Analyst

Congrats on a great quarter. Maybe just to dig into U.S. core a bit more. What is really driving the share gains there? And on the core SCIg market, any updated growth expectations this year?

Linda Tharby, CEO

Thank you. I can address the first part. The U.S. core gains are primarily fueled by a heightened focus on our key accounts, which make up about 65% of our business. We have taken the time to analyze our share position with each of these accounts and implemented targeted programs for each one. Additionally, we have realigned our sales territories and directed our representatives to concentrate on areas where we see the most potential. As for your second question regarding growth expectations in the overall SCIg market, we continue to anticipate mid- to high single-digit growth globally. Notably, our core business is achieving 14% this quarter, significantly surpassing the underlying growth expectations.

Caitlin Cronin, Analyst

Got it. Okay, awesome. And then just a quick one on the electronic pump trial that still set to close in the first half of this year.

Linda Tharby, CEO

No. We have noticed a slight delay in the pump trial primarily because we are working on enrolling patients across multiple countries, each with its own clinical trial system. This has caused some delays, but I want to emphasize that it has not hindered our overall progress in international markets. As demonstrated in the first quarter, we are experiencing an underlying growth rate of well over 40%, which is encouraging.

Operator, Operator

Next question comes from Joseph Downing with Piper Sandler.

Joseph Downing, Analyst

Congrats on the quarter. I guess just piggybacking off the U.S. market on the previous question and thinking about longer term, can you frame what kind of growth you need to see from the U.S. market in order for the company to hit the 2026 revenue targets?

Linda Tharby, CEO

So clearly, this year is a landmark year for us in the U.S. business in terms of we're looking to take that business into double-digit growth territory. So how do we intend to do that is obviously new products will be a tremendous driver of that. So I mentioned the new consumables and the new pump launch, which we anticipate certainly happening within the next 6 to 12 months. So both of those drivers, I think, will allow us to increase our share position, and we intend to get some ASP overall growth drive from there. In addition, expanded indications, particularly in CIDP and SID, which I mentioned in Europe, continue to be a key focus area for us in the U.S. And as those new drugs launch that I mentioned in the Novel Therapies business, those automatically go into our core business. So our Novel Therapies business is just recording the revenue for the nonrecurring engineering revenues, but several of those new products which I laid out on one slide, 7 new shots on goal to launch before 2026, will all be factored into our core business. So all of those in combination would be how we expect to see the overall business growing in that double-digit range that we anticipate with the biggest lever over time being new drugs added to the label.

Joseph Downing, Analyst

Great. That's helpful, Linda. It seems that SCIg trends are clearly improving. Can you comment on your level of visibility and confidence for the upcoming quarters?

Linda Tharby, CEO

We expect to continue seeing strong sequential growth and stable levels of Ig supply. The Ig drug companies have indicated that they have established their vertical capabilities and are not worried about the overall Ig supply, and we are now beginning to observe that in the market. Additionally, we are witnessing an increase in patient diagnoses. I mentioned a few quarters ago that overall patient diagnoses had decreased due to a COVID lag effect, where patients need multiple infections to be diagnosed with the underlying conditions requiring Ig. During the period when everyone was sheltered, there was a decline in patient diagnoses. Now that people are out enjoying themselves, we are unfortunately seeing more illness occurring. Many have likely noticed an uptick in flus and infections over the past season, and this is reflected in the rising diagnoses we are currently seeing. We maintain a positive outlook for the Ig market. The main uncertainty for us right now is whether the introduction of prefills will drive even greater growth in subcutaneous Ig, as we are observing a significant shift from intravenous usage. This remains to be seen, but it's something we are closely monitoring.

Operator, Operator

There are no further questions at this time. That concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.