KORU Medical Systems, Inc. (NASDAQ:KRMD) Q3 2023 Earnings Call Transcript

KORU Medical Systems, Inc. (NASDAQ:KRMD) Q3 2023 Earnings Call Transcript November 8, 2023

KORU Medical Systems, Inc. beats earnings expectations. Reported EPS is $-0.03, expectations were $-0.04.

Operator: Good day. And welcome to the KORU Medical Systems Third Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this conference is being recorded. I would like now to turn the conference over to Hannah Jeffrey of Gilmartin Group. Please go ahead, Hannah.

Unidentified Company Representative: Thank you, Jason. And good afternoon, everyone. Earlier today KORU Medical Systems released financial results for the third quarter ended September 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, November 8, 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 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: Thank you, Hannah. Good afternoon, everyone and thank you for joining us today. During today’s call we will use slides for our commentary. I’ll begin by reviewing key financial and business highlights for the third quarter. Tom will then review our financials and updated ‘23 guidance. Following our prepared remarks, we will open the call up for Q&A. While a challenging quarter from a revenue perspective, I want to start today's call by emphasizing KORU’s commitment to improving the quality of life for patients and caregivers with our Freedom Subcutaneous Infusion System with the twofold strategy. This strategy includes penetration into an installed base of over 30,000 chronic global subcutaneous immunoglobulin infusion patients and by building a continuum of new drugs on our account .

During the third quarter, we saw revenue decline roughly 10% versus the prior year. The majority of the decline was due to our novel therapies business which was impacted by a large clinical trial order in the prior year and by timing of collaborations. This is a business composed of sales of product for clinical trials and nonrecurring engineering services that are dependent on milestone completion, all of which can be subject to timing changes. The biggest value in this business is the signing of the collaborations which leads to commercial revenue when launched. In addition, our Domestic Core business was impacted by slower than anticipated SCIg market growth. Script volumes were down year-on-year, and overall drug volume was down versus our expected growth.

While a difficult quarter from a revenue standpoint, we make progress in several key initiatives and continued momentum with our growth strategy. We have a solid U.S. core business which continues to outpace the underlying market and includes strong recurring revenues with over 27,000 patients. We remain the broadest label for subcutaneous drug indications in the home, and with our latest 50 ml prefilled syringes, we remain the only clear device for prefilled syringes, the fastest growing part of the market. We continue to grow our novel therapies pipeline, winning a new novel therapies innovation collaboration, and overall now have 15 close collaborations. On our pathway to breakeven, we posted an impressive 630 basis point growth in our gross margin, and executed a disciplined strategic operating expense plan.

We are committed to 2024 yearend cash flow breakeven with a profitable core business and disciplined prioritization of investments related to innovation in our novel therapies business. We also continue to build capability, naming Kim Miller as our Chief Commercial Officer. Kim brings over 30 years of experience in leading high performing teams in commercialization and marketing strategy, international expansion, and driving sustainable growth and profitability. And I'm personally delighted to be working with him again. With Kim leading our global commercial operations, it will allow me more time to dedicate for our innovation agenda and our novel therapies business, key drivers of our longer-term success. Although a difficult quarter, we continue to lay the groundwork with strong growth catalysts ahead, including new product introductions, novel therapies collaborations, and new geographies.

A lot of progress this quarter in advancing our three strategic growth drivers. As a reminder, these include growing our leadership position in Domestic Core SubQ IG business, expanding this leadership position and to expanding novel therapies business and geographic expansion. We've made advancements in each of these areas during the quarter. A few key highlights. In our Domestic Core business on an underlying basis on the quarter and on a year-to-date basis, we continue to outperform the market. Our pump growth, a leading indicator of consumables growth was up over 40% and we are excited to have our prefilled syringe 510-K approval in a record 119 days from submission. In our NT business we announced another close collaboration and we have the largest pipeline of new opportunities in our history.

In our geographic expansion efforts, we are seeing wins in several markets and are excited by a recent submission to enter the Japanese market, one of the top five IG markets with expected approval in late ‘24. Let's now take a deeper dive into the US market. This quarter, we have done an analysis to evaluate the factors affecting the overall SCIg market. While we did not anticipate the market to be where it is today. KORU’s outperformance to the market continues. The overall SubQ IG drug volume market is up 45% year-to-date. This was lower than recovery we anticipate in the back half and we now expect Q4 to be up 3% to 4%. Previously, we expect to the faster rebound in PID diagnosis over 80% of SubQ use given a very strong flu season in ‘22 and into ‘23.

But it appears that rebound to pre-pandemic levels is taking longer than we anticipated. We are encouraged by the drug market being up sequentially in Q2 by over 2.5%. And this combined with growing awareness and diagnosis and SCIg should set up for good 2024. In the interim, we are generating above market growth of 6% year-to-date as a result of continued account wins and prefill adoption. We are also excited by our pump performance up 40% year-on-year and 24% from prior quarter. This is often a leading indicator to consumable sales, who have multiple factors for future in the coming year. And now let's discuss prefills. A key growth driver of our US businesses continued market share growth driven by prefilled syringes. The chart on the left shows our prefilled syringe 510-K clearance for our 20 ML prefilled syringes led to an immediate uptick in the market as our pump facilitated, prefilled market penetration going from about 3% to about 12% of the overall market.

Last week, we received 50 ML 510-K clearance for our FREEDOM60 Infusion System for use with Hizentra 50 ML prefilled syringes. We expect a full market launch to occur in early 2024. In our recent patient market studies, we found significant preference for use of our system with prefilled syringes due to the increased convenience of reduced drug preparation tasks and faster setup time. We estimate that over 70% of patients are on doses of greater than 50 ML, and this approval opens up the majority of the patient market. Our Freedom Infusion Systems remain the only pump with FDA clearance for use with prefilled syringes. We believe this will lead to increase share with expected growth of prefilled penetration from 12% to an expected 50% penetration by 2025.

We also believe that due to the increased needs and ease of use, and it could drive overall further penetration of SubQ IG therapy, which today sits at around 15% to 20%. Moving to our anti-business, we're focused on new biopharmaceutical collaborations for clearance of our Freedom System for at home use. This page illustrates our current close collaborations both on our Core IG business at the top and the new therapy areas, in total for $2.5 billion tam over 2 million total patient population opportunity. Although, we know that not every one of these will make it to launch each new sign collaboration provides the opportunity for commercial launch revenue. We continue to advance with our new look collaborations this quarter signing one additional collaboration with our net total remaining at 15.

With the reduction of one Phase 2 neurology program that was terminated by the pharmaceutical company in the quarter. We also have 18 additional open opportunities. We added three new this quarter making this our largest opportunity list to date. These opportunities represent pharmaceutical companies where we are in active discussions related to a qualified drug for our system. All of these represent future opportunities for close collaborations. More than two thirds of our opportunities are for late stage drugs that could be commercialized with KORU by 2026 or earlier. They span multiple therapy areas with a significant concentration in oncology. Our new collaboration site in the quarter is our first for our next generation pump optimized for delivering all SCIg products, including prefilled syringes.

A medical professional in a hospital room with modern medical devices in the background.

This collaboration includes obtaining 510-K clearance of this next generation pump, with the pharmaceutical companies SCIg drugs. We think these novel therapies as the biggest mid to long-term opportunity for the company. We’ve started building this business just over two years ago, so very much still in its infancy. We've had many learning since its inception as we continue to build our strategy and form relationships with pharma companies. And we're excited by its trajectory. Moving to international, we continue to expand our opportunities. We ended the quarter with international growth of 12% year-to-date driven by deeper penetration into secondary immunodeficiency and growth in new countries. We believe we have plenty more runway in our international business and are excited about key milestones.

One of our international growth drivers is new markets and we have successfully completed launches in several smaller markets this year. As we look ahead to ’24, we anticipate the Japanese market launch for SCIg, one of the top five IG markets in the world. We have previously discussed our ongoing electronic pump trial, which we now expect to be completed in the first half of 2024. We have a great value proposition versus the electronic pumps and we are excited to generate clinical evidence to prove that. This week the team is at our largest international IG show, IPIC, International Primary Immunodeficiency Conference, KORU will present its third abstract this year, titled Infusing Subcutaneous Immunoglobulins Comparison of the Constant Flow System or Electronic Pumps to the Constant Pressure System, the KORU Mechanical Systems, the abstract aims to provide valuable insights into the comparisons of two subcutaneous infusion systems.

Reviewing the considerations associated with both system highlighting the global benefits of a constant pressure system and contributing to the understanding of optimal infusion methods for improved patient outcomes. We're excited to showcase our efforts at this prestigious conference. Another key area that is exciting for us the use of Freedom System in infusion clinics. The key value driving the nursing time saving and alleviating significant dexterity challenges versus current manual push methods. Use of our broad products more broadly in infusion clinics is an area we will be actively pursuing for future growth. International has become a vital key third growth strategy for the company. In addition to our three growth drivers, innovation is always at the forefront of our strategy.

As we believe progressing new label indications and new products that solve significant unmet patient needs is a key element that will drive KORU to the next phase. We've laid out our upcoming new products and commercial label milestones that we expect over the next few years. This quarter, they have completed two milestones one for products with the launch of the new prefilled syringe pump and one for commercial label indication with the approval of that come with high venture 50 ML prefilled syringe. Looking ahead, we plan to have a new consumable 510-K submission in 2024. We remain extremely excited about our innovation pipeline with the opportunity to launch of a new KORU pump and consumable platform by the end of ‘25 and with prospects for multiple new drugs on the Freedom System.

I will now turn the call over to Tom to review our financials.

Tom Adams: Thank you, Linda and good afternoon, everyone. In the third quarter we reported to revenues of $7 million, a decline of 10% or $800,000 from prior year. The majority of this decline was due to our novel therapies business, which declined by 78% or $600,000 in the Quarter. This decline was driven by a large clinical trial order of about $500,000 record in the prior year. And by timing of our NRE milestone completion. Our Domestic Core reported revenues of $5.8 million, a 2% decrease versus prior year, driven by lower consumable volumes, as the prior year included a backorder of $300,000 for consumables that were cleared during the period. Partially offsetting the decline was a 40% increase in pump nits sold that are leading indicators of future patients driving consumables revenue.

Despite the year-over-year decline in the quarter, our domestic core has grown 6% year-to-date, as we continue to outpace the underlying market growth driven by new account wins and prefills. International Core decline of 3% was caused by lower volume as a result of a country specific tender order in the period partially offset by growth in new markets. On a year-to-date basis, International Core continues to perform well with 12% growth over prior year. Gross margins increased by over 600 basis points in the quarter to 62%, compared to 56% in the third quarter of 2022. The increase in gross margin was primarily driven by our exit from the Chester site in Q1 of this year, as well as increase efficiencies from our outsource production initiative.

With this performance, we achieved the high end of our second half gross margin guidance. As we look forward, toward the end of the year, we expect to hold these levels of gross margins between 60% and 62% in Q4 and deliver a full year margin between 50% and 60%. Driven by lower cost of outsource products, lower labor and overhead and improved efficiency from the consolidation of our US manufacturing from two sites to one, along with contribution from price and volume mix. During the quarter, we recorded operating expenses of $6.1 million, and we expect second half operating expenses to come in at approximately $13 million, versus our first half run rate of $14.3 million driven by reductions of G&A and operational headcount as well as external consulting.

We will continue to flex operating expenses levels with revenue projections while maintaining investments in our strategic initiatives. And we'll keep expenses under $28 million in order to maintain planned net losses, we significantly reduced our net losses. In the second half aided by improvements in gross margin and discipline, operating expense control, and we are on a runway towards cash flow breakeven in Q4 2024. Our cash balance at the end of Q3 was $10.8 million and represented $900,000 cash burn from the prior quarter. Our biggest driver of cash burn was our net loss of $900,000, excluding noncash items for stock compensation and depreciation. Adding to these cash flows were working capital changes of $300,000 driven by timing of higher AR and lower AP during the quarter of $900,000.

This was offset by $600,000 for a planned reduction of inventory, making additional progress towards our $2 million end of the year reduction target. We also have $300,000 cash improvement driven by financing activities for annual insurance renewal. We continue to control and plan our cash according to our revenue, gross margin and expense guidance and are increasing our end of year guidance to having a cash balance greater than $10.5 million. Cash burn for the year has been $5.7 million in the first half, and is estimated to be less than $1.2 million in the second half. We are updating our guidance for full year 2023 to reflect novel therapies timing of closing collaborations, clinical trials and milestone achievement. In addition, we are adjusting our underlying US core drug market growth assumption of 3% to 4% in Q4, versus a prior expectation of 8% to 10% for Q4.

Our full year revenue is now expected to be between $28 million to $28.5 million. This implies a flat sequential growth rate in the fourth quarter at the midpoint to reflect the changes that I just mentioned in our novel therapies and core businesses. While our novel therapies pre-commercial revenue has been and will continue to be lumpy driven by timing, we remain bullish and our novel therapies business with our current backlog of fine collaboration and our pipeline of opportunities, adding short term and most importantly long-term commercial revenue. In our assumptions, we are planning 3% to 4% Q4 growth rate in the underlying SCIg drug market. And we expect higher market growth in future quarters, as a rise in respiratory infections lead to increased diagnosis of PID, which we'll see the favorable impacts of in ‘24.

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 behind us and year-to-date gross margins on plan, we expect to continue to see our Q4 gross margins remain at the mid high and above range as we continue to see lower cost of goods benefit from our outsource manufacturing initiatives, and improvements in average selling prices. We are raising our expected cash balance at year end 2023 to be greater than $10.5 million. We expect our operating expenses to be lower than $28 million inclusive of stock compensation expense versus lower than $29.5 million recorded in our prior guidance. This is inclusive of approximately $2.1 million in stock comp, which is offset by continued working capital improvements of $2 million of inventory reduction, which we are about 75% complete to date.

We continue to expect to reach cash flow breakeven by Q4 2024 based on our current strategic outlook. I will now turn the call back to Linda for closing comments.

Linda Tharby: Thanks, Tom. In closing, while we always want to see significant revenue growth. I'm encouraged by our third quarter progress across all of our businesses. And on the innovation side. 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. As we look ahead, we're excited about our upcoming milestones including our 50 ML prefilled launch, progressing our novel therapies collaboration milestones and signing, our innovation agenda and continued global expansion. I'm also excited to share that we'll be hosting an Analyst Day on December 5, at our headquarters in Mahwah, New Jersey. We'll be sharing additional updates and progress to our plan. And finally, in closing, I want to thank the entire KORU team for their exceptional efforts on the quarter. Operator, I will now turn it over to you for Q&A.

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