Earnings Call Transcript - KRMD Q2 2023

Operator, Operator

Greetings and welcome to the KORU Medical Systems Second Quarter 2023 Financial Results Conference Call and Webcast. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would like now to turn the conference over to your host, Hannah Gilmartin Group. Please go ahead, Hannah.

Unidentified Company Representative, Company Representative

Thank you. And good afternoon, everyone. Earlier today, KORU Medical Systems released financial results for the second quarter ended June 30, 2023. 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 presentations and 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 and accompanying investor presentation and those filings. For the benefit of those listening to the replay, this call was held and recorded on Wednesday, August 9, 2023, at approximately 4:30 p.m. Eastern Time. Since then, the company may have made additional comments related to these topics discussed. And please reference the company's most recent press release and filings with the SEC. Joining us on today's call is Linda Tharby, President and CEO of KORU Medical Systems, and Tom Adams, KORU Medical's Chief Financial Officer. Linda, please go ahead.

Linda Tharby, President and CEO

Thank you, Hannah. Good afternoon, everyone. And thank you for joining us today. During today's call, we will use slides to support our commentary. I will begin by walking through key business updates for the second quarter. Tom will then review our financials and updated '23 guidance. I will then close with a milestone progress update against Vision 2026. Following our prepared remarks, we'll be happy to open the call for Q&A. We're very pleased with the progress and milestones achieved in our second quarter, as we continue to make important advancements towards Vision '26. A few key highlights on the quarter that I will dive into further in today's presentation. First, in our core business, we saw growth of about 8%, which continued to outpace the U.S. subcutaneous immune-globulin or SCIg drug markets, which contracted in the quarter. In our international business, our efforts over the past year continued to progress, and we had another quarter of double-digit growth. We signed another novel therapies collaboration for the use of our Freedom system in a Phase 3 trial. And we submitted ahead of schedule a 510(k) for the Freedom 60 Infusion system, the Hizentra 50 ml prefilled syringe dose. Finally, we're updating the company's full year '23 outlook to reflect the Q2 decline in the U.S. SCIg market and a change in the timing of novel therapies, deal signings, and subsequent revenues. Before jumping into the details of the quarter, I would like to take a moment to welcome Tom to his new role as our CFO. Tom has been integral to the company achieving many of the milestones I discussed, as well as building out our finance team processes and systems. I'm excited for him to continue to grow and add value as he steps into his new role. I want us to begin today by taking a moment to remind everyone what we do. Our mission at KORU continues to be making subcutaneous drug treatment a reality at home. Our Freedom Infusion systems have more than 35,000 patients, and new ones are being added every day. Many of them are chronic patients who self-infuse their drugs in the comfort of their homes. Our Freedom system can be customized for drug and infusion volumes from 5 to 100 mls, supports multiple therapies and disease states, and has established regulatory approval in over 25 countries. Our novel therapies business supports biopharmaceutical companies with products in non-recurring engineering, innovation, and services on our Freedom system to support their clinical efforts towards their drug launch. Once a drug completes clinic requirements and receives regulatory approval, we become an approved drug delivery provider, and it becomes a part of our core business. The core business includes our domestic and international commercialization of our Freedom system to specialty pharmacies and home care organizations. We have a broad label of indications predominantly in the SCIg market, with less than 20% of that market penetrated. The majority of our patients suffer chronic illnesses, and they are lifetime users of the system, offering a valuable source of recurring revenues. Our business model has both a recurring revenue core business and future revenue with our NT business, with 15 total collaborations to date, offering the potential for several new drugs on the KORU system. Moving to a deeper dive in our Vision 26 strategy and our three growth drivers. Starting with the first, growing our leadership position in SCIg. Today, KORU has over 35,000 patients in the U.S. and strong relationships with our specialty pharmacy partners to transition the patient to drug therapy in the home. During the quarter, we saw a larger than normal Q2 seasonal fluctuation in overall SCIg recorded scripts, down 13% on the quarter. Our conversations with specialty pharmacies, pharmaceutical partners, industry researchers, and reimbursement specialists saw no concern over these growth levels returning to historic levels of high-single digit and low-double digit growth over the coming quarters, as they continue to focus efforts on supporting the movement of health care to the home. Many saw this as a blip due to lower infection rates versus the prior year, which is generally a preceding event to an immune deficiency diagnosis. We remain confident in our ability as we have shown we can outperform. Our growth again outpaced the underlying market. The growth was led by recurring consumables revenue, and we had double-digit new pump sales growth. A key driver of our U.S. core business is continued strength in prefilled syringes, and the second quarter was no different from recent trends. The overall convenience and patient preference continued to drive prefilled adoption and overall prefilled syringe penetration increased to about 12.5% for the second quarter. During the quarter, the company submitted a 510(k) to the FDA for the use of our Freedom 60 Infusion system, the Hizentra 50-ml prefilled syringes. This submission marks another milestone in KORU Medical's mission to simplify subcutaneous therapy for patients. The FDA approved the 50-ml Hizentra prefilled syringe in April 2023. Hizentra is the most prescribed subcutaneous immunoglobulin and the first to be available in prefilled syringes, currently offering 5-10 and 20-ml formats that satisfy a further two-thirds of the market, and the 50-ml when available in 2024 will satisfy an additional two-thirds of the patient market. The conversion to prefilled syringes is an important growth driver for us as it increases market share, and we believe over time it will increase new starts and conversions to subcutaneous therapy. As a reminder, our Freedom Edge system remains the only pump with FDA clearance for use with prefilled syringes. Moving to our NT business, where we are focused on new biopharmaceutical collaborations for clearance of our Freedom system for at-home use. We announced a few weeks ago the signing of another Novel Therapy collaboration. This agreement is with a biopharmaceutical company to validate the Freedom Infusion system for use with a novel endocrinology biologic. The drug developers expect to begin Phase 3 studies by the end of 2023 for treatment of a rare genetic disease with global prevalence of roughly 10,000 that currently has no pharmaceutical treatment. With the closing of this collaboration in July, we brought our year-to-date new collaborations to two, and we remain on track for six new collaborations in 2023. In total, we have 15 signed collaborations, and we also have a pipeline of 15 additional high-potential opportunities. Lastly, we are excited about our growth opportunities geographically. We ended the quarter with growth across several key markets, representing growth of over 17% year-over-year. New patient starts fueled by the increase in immunoglobulin supply in the EU continue to drive growth, and we're well positioned to benefit from our distribution, which is now in over 80 countries. International has become a vital key third growth strategy for the company. I will now dive a bit further into our NT business in this slide, which shows our total pipeline of NT opportunities. We now have two active collaborations today, including over 2 million potential patients and a total addressable market of roughly $2.5 billion. Our immunoglobulin base at the top of our pipeline becomes an important source of recurring revenue as we support the work of the IG manufacturers in increasing subcutaneous penetration, lifecycle management strategies and growing their label indications. The bottom of this pipeline represents nine additional candidates outside of IG across six additional drug categories, with the potential to launch five new drugs in the next five years. We know that not all of these will likely succeed, but with two of these having patient populations over 100,000 and three with patient bases up to 50,000, any combination has the potential to double our current patient base. I have bolded our newest entry; we are excited to add late-stage pharmaceutical collaboration, which is a significant step closer to launch that will resolve a major unmet patient need. We are excited by our Novel Therapies business as we continue to progress our relationships to help drive greater knowledge and adoption around the benefits of subcutaneous delivery for patients in the home. This next slide brings both our core and NT business together to show our growth potential over the coming five years. Our core business with multiple commercialized drugs gives us strong recurring revenue today. Furthermore, with over 90% of those drugs comprising immunoglobulin, which has less than 20% penetration of subcutaneous treatment today, we see significant growth ahead. As we build our NT pipeline based on projected drug launch timing, we anticipate multiple revenue opportunities over the next one to five plus year timeframe. As we look to the remainder of '23, we are confident that we will continue making important additions to our Novel Therapies collaborations and are excited to provide ongoing updates. In addition to the progress in our business, advancements in new products and innovation are also key to driving KORU to the next phase. This slide lays out both our products and expected new commercial label milestones over the next few years. Our product strategy is centered on comfort, convenience, and connectivity. During the second quarter, we completed two milestones for 510(k) submission for 50-ml prefilled syringe label expansion with the Freedom 60 Pump line extension. Looking further ahead, we are extremely excited about the next generation pump platform for immunoglobulin and novel therapies and multiple new drugs on the Freedom system. Another very good quarter of strategic progress across both core NT and innovation. I will now turn the call over to Tom to review our financials.

Tom Adams, Chief Financial Officer

Thank you, Linda. And good afternoon, everyone. We experienced a challenging quarter in a declining U.S. SCIg market, but I am excited to report a solid quarter of 6% growth with total net sales of $6.9 million. Domestic core growth of 8% was primarily driven by increased growth in consumables and pumps, new accounts, and increased prefilled syringe adoption. International core growth of 17% was driven by strength across several EU markets and growing global immunoglobulin volume availability. Novel Therapies' net revenue declined by 28% in the second quarter of 2023, primarily due to strong NRE revenues in the comparable quarter last year, as well as the timing of some of our 2023 pipeline wins. Gross margins increased to 56.1% compared to 51.1% in the second quarter of 2022. The increase in gross margin was primarily driven by increased efficiencies in manufacturing. We completed the first half of the year with gross margins in the midpoint range of our guidance. As we look at the second half of the year, we expect significant improvements in gross margin driven by two full quarters of lower outsourced products, which, as we reported in Q1, has been fully completed. We also see lower overall labor costs overhead and improved efficiencies as we have now consolidated our U.S. manufacturing from two sites to one. The outsourcing and reduction of the manufacturing site contributes about 400 basis points to our gross margin increase, combined with a 100 basis point improvement in pricing, which will lead to increased back half gross margins of 500 basis point improvements. We project to exit the year between 60% and 62% and a full year gross margin of 58% to 60%. Our cash balance at the end of Q2 was $11.7 million, which represented a $500,000 cash burn from the prior quarter. Our biggest driver of cash burn was our net cash operating loss of $2.1 million, excluding non-cash items for stock compensation and depreciation. We also invested $300,000 in CapEx for equipment for our next-generation products. Offering these cash flows, working capital improvements of $1.9 million were driven by DSO improvements worth $500,000 and executing on our planned reduction of inventory of $1.4 million as we draw down finished goods and raw material inventories from our outsourced manufacturing transition. We continue to control and plan our cash according to our revenue, gross margin and expense guidance, reaffirming our end-of-year guidance of having a cash balance greater than $10 million, which I will elaborate on as I discuss guidance. We are updating our guidance for full year 2023 to reflect the Q2 decline in the U.S. script market, resulting in a change of our outlook on underlying U.S. core market growth assumptions from 10% to the mid-single-digit range. Additionally, we are updating our guidance to reflect a change in the timing of novel therapies revenues. Full year 2023 revenue is now expected to be between $31 million to $32.5 million, representing growth in the range of 11% to 17%. This implies a growth rate of 15% in the back half of the year at the midpoint versus 12% that was delivered in the first half. Key drivers that will get us there include SCIg drug market returns, growth, and execution on our current and future NT, Novel Therapeutics pipeline deals, as well as continued double-digit international growth. Gross margin guidance remains between 58% to 60% for the full year, and to exit the year between 60% to 62%. With the completion of the manufacturing transition now behind us and the first half gross margin on plan, we expect to see a progressive step change in our second-half gross margins, as we continue to see two full quarters of the lower cost of goods benefits from our outsourced manufacturing initiatives and improvements in average selling prices. We expect our cash balance at year-end 2023 to be greater than $10 million. We expect our operating expenses to be approximately $29.5 million versus $30 million reported previously, with phasing that will vary between quarters driven by our R&D program spend. We will invest in capital equipment for our innovation projects and continue to improve working capital, including lowering inventory by a further $1 million during the second half of the year. It's also essential to note we will see lower cash burn in the second half driven by improvements in net losses from stronger second-half revenue, our gross margin improvements and the working capital increments. While we may look to increase the cash on our balance sheet through non-dilutive debt financing, we are not anticipating or planning any equity raise at this time. I will now turn the call back to Linda for closing comments.

Linda Tharby, President and CEO

Thanks, Tom. In December 2021, about 18 months ago, we launched Vision 26 to transform the company over five years from an IT company to a leading drug delivery provider with revenue of $60 million. This laid out a series of key milestones, and I want to take a moment to review our progress. Our first milestones target Phase 3 trials, the final phase before drug launch. We projected five Phase 3 trials by the end of '26, of which we now have two in progress. We projected one significant new commercial drug indication or a patient population of over 100,000. We have launched one with a patient population of 15,000 and five potential drug candidates by 2026. We projected eight new products and indications which drive our core revenue, of which we have four completed, one further expected with 50-ml prefilled syringe clearance by the end of this year. And we remain confident in future progress. Our revenue projections of $60 million are now supported by five key strategic areas. Our core business and current approved products and increased subcutaneous penetration into that base is our largest driver, followed by NT revenues, further share gains driven by innovation, and the final major opportunity being OUS expansion. We're excited to reflect on our advancements to date, and we look forward to further updates. In closing, I'm encouraged by our second quarter progress across all our businesses. And on the innovation front, we continue to have exciting work ahead that will evolve the company strategically as a leader in drug delivery in the home and add continued value to patients, customers, and shareholders. Finally, I want to thank the entire KORU team for their exceptional efforts on another great quarter. Operator, I will now turn it over to you for Q&A.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Alex Nowak with Craig-Hallum Capital. Please go ahead.

Alex Nowak, Analyst

Okay, great. Good afternoon, everyone. Linda, just curious, what theories are you hearing out there to kind of explain this first-half slump in the SCIg market? Just you mentioned, you spoke with pharmacies, the drug companies, I'm sure patients as well. Just what are you hearing out there that would explain the weakness? And then ultimately, how is the SCIg market evolving so far in Q3?

Linda Tharby, President and CEO

Hi, Alex. Thank you for your question. I anticipated it might be the first one we received. As you know, we had a very strong fourth quarter of 2022, with the overall market growing between 7% and 10%. January and February continued to show robust performance, with January seeing high single digits and February achieving double digits. However, we began to notice a decline, which is typical for the second quarter, but this decline was more significant than in previous periods. Our discussions with pharmaceutical companies, specialty pharmacies, and reimbursement agencies revealed that the diagnosis of immune deficiency disorders primarily stems from infections. When individuals experience infections, they visit doctors, which is often when diagnoses occur. Considering we reported lower infection rates in the last quarter of 2022, we suspect this may have resulted in a delayed impact into 2023. This was a consistent factor we heard. Additionally, I noticed that both Takeda and Grifols publicly reported strong immunoglobulin businesses, and both highlighted subcutaneous immunoglobulin therapy as a major growth driver for their future initiatives.

Alex Nowak, Analyst

Very helpful. And then maybe expand on how CSL is getting positioned here for the 50-milliliter prefilled launch. What are they saying this can do to their business regarding the IV subcue conversion, and also with regards to their market share for Hizentra?

Linda Tharby, President and CEO

I will speak more broadly about how we feel at KORU, which is informed by all our discussions because any conversations we have would be confidential unless they are public. But now, three of the four major pharmaceutical immunoglobulin providers are working towards presales. Why are they doing this? The comfort and convenience that is offered with prefilled syringes reduces the number of steps by over 25%, and in some cases as much as 60% to 70% for a particular user. We project that in the coming five years, 50% to 75% of the market will be converted to prefilled syringes. With that kind of conversion, we believe it will drive significant share and revenue for KORU and will also bring new patients into therapy as doctors see at-home therapy becoming that much easier to perform with prefilled syringes. We have a very exciting short-term outlook as we prepare for the 50-ml launch over the next year and a promising midterm as we see the penetration rates rise. Ultimately, we are most excited by how this will impact overall subcutaneous penetration.

Alex Nowak, Analyst

Yes, absolutely. Last question and little multipart one here. It's regarding the Novel Therapies pipeline. I think it was 15 in the pipeline last quarter; you added one during the quarter and ended the quarter at 15. So just want to confirm that one of the drugs dropped off, any details there? And then the funnel beyond the 15 is another 15. Maybe expand on either Phase 3 studies and any reformulations, any details there? Thank you.

Linda Tharby, President and CEO

Yes, thanks, Alex. Yes, you are correct. You did the math well. We had one drop off, which was an oncology candidate; the actual program was canceled at that pharmaceutical company. It was an opportunity for oncology therapy in the home. So that one was canceled, which brought our total down from 16 to 15 collaborations. We know that will happen over time, and that's why 15 overall feels like a great number to us. Over the last quarter, we've seen a significant increase in the overall number of new opportunities that we see in our pipeline, including further oncology targets as well as in autoimmune disorders. We have a lot of work to keep us busy. I wish that we could get all the paperwork signed sooner so we could ink deals faster and get the work done. Thank you.

Operator, Operator

The next question comes from Kyle Rose with Canaccord Genuity. Please go ahead.

Caitlin Cronin, Analyst

Hi, everyone, how's it going? It's Caitlin on for Kyle. So OUS growth was strong this quarter. Where's the growth surge being driven from? And can we think about this growth rate as sustainable moving forward? And then on the electronic pump comparison trial, where are you with progress on that? Thanks.

Linda Tharby, President and CEO

Hi, Caitlin. So OUS growth, yes, we are excited by the uptick in growth. The growth is driven from a couple of areas. First of all, last year, we experienced shortages in the supply of immunoglobulin internationally. Now that drug supply is back, we're seeing growth across several markets, including the Nordics, the UK, and Saudi Arabia. We see lots of potential opportunity and we see higher levels of penetration of subcutaneous therapy in international markets. Governments are strongly driven to support the movement of healthcare into the home. As for sustainability, while we will see some challenges this year, given that we had a new drug launch in the second half, we project for the back half maybe not to match the growth that we saw in the first half. We anticipate 23% growth through the first half of the year, but expect some tightening in the back half due to those new launches. The trial we are continuing to enroll patients in is comparing our KORU mechanical pump system to the electronic pump systems available in Europe. We expect the first reported outcomes from that trial in the latter part of this year, likely in December.

Caitlin Cronin, Analyst

Great. And then could you provide a little more color on the Novel Therapy deal signing cadence that caused you to change your guidance a little bit? That would be great. Thanks.

Linda Tharby, President and CEO

Coming into the year, we anticipated signing a few more deals in the first half of the year. We've currently signed two, and it is now evident these deals are lagging into the back half of our year. This caused us to push out the overall revenues. Not a significant cause for concern; we still feel confident about our target of six overall for the year. However, just some slippage by a couple of months affects our projections. The real prize comes with the commercial launch, but all of these deals we sign lead to some pre-commercial revenues that we account for in our revenue projections.

Caitlin Cronin, Analyst

Thank you.

Operator, Operator

The next question comes with Jason Bednar with Piper Sandler. Please go ahead.

Unidentified Analyst, Analyst

Hey, Linda and Tom. This is John on for Jason. Can you just frame your level of confidence that the U.S. market will not take a further step backwards? And then one of the longer-term targets, what does the U.S. market need to grow at in order for the company to hit its 2026 revenue target?

Linda Tharby, President and CEO

Excellent question. Thanks, John. If I could show you the number of charts we've projected for the U.S. market. Your best projection of the future is looking back. We have not seen a quarter like that happen in any prior history except during COVID. So unless we are predicting another surge, I don't anticipate seeing a continued downward trend. We reported earlier that we saw significant growth in subcutaneous therapy in the fourth quarter of '22 and the first two months of '23, so we really think this was a temporary dip due to likely an Omicron overhang, where we saw increased infections drive greater Q2 '22 prescriptions. I'd like to conclude by saying we believe the overall market will definitely see a comeback. Our July month was strong, and we think that's a precursor indicating that the overall market is recovering. Also, our end-user demand, which reflects our sales to specialty pharmacies, was very strong in quarter two and outperformed our RGL numbers. To reach our longer-term revenue projections, we estimate that the market needs to grow at a rate between 8% and 12% depending on the year. Ideally, we would like to see the market starting at a baseline of 8% or 9% and then increasing to 10% to 12% overall as we anticipate the effects of prefilled syringes begin to manifest.

Unidentified Analyst, Analyst

Great, thanks, Linda. Can you also speak to any feedback you've received thus far from the FDA regarding the 510(k) submission for the 50-milliliter PFS for Hizentra?

Linda Tharby, President and CEO

The good news is it passed the first stage and is currently in formal review, which is the substantive review phase. That's great news for us. The submission was accepted without any technical rejection, which we take as a positive outcome. We hope to receive clearance in the November timeframe, which would enable us to either pre-ship at the end of Q4 or more likely at the beginning of Q1 in '24, positioning us well for a strong start.

Unidentified Analyst, Analyst

Great, thanks, Linda.

Linda Tharby, President and CEO

Thank you.

Operator, Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Linda Tharby, President and CEO of the company, for any closing remarks. Please go ahead.

Linda Tharby, President and CEO

Thank you everyone for joining us for the Q2 call. I just want to say thanks again to the KORU team and wish everyone a wonderful rest of your day.

Operator, Operator

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a good day.