Earnings Labs

KORU Medical Systems, Inc. (KRMD)

Q1 2023 Earnings Call· Sun, May 7, 2023

$3.95

-3.31%

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Transcript

Operator

Operator

Greetings, and welcome to the KORU Medical Systems First Quarter 2023 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded today, Thursday, May 4, 2023. I would now like to turn the conference over to Greg from the Gilmartin Group.

Gregory Chodaczek

Analyst

Thank you, Grant, and good afternoon, everyone. Earlier today, KORU Medical Systems released financial results for the first quarter ended March 31, 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 presentation 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 Thursday, May 4, 2023, at approximately 4:30 p.m. Eastern Time. Since then, the company may have made additional comments related to the topics discussed and please refer to the company's most recent press releases and filings with the SEC. Joining us on today's call is Linda Tharby, President and CEO of KORU Medical Systems; and Tom Adams, Core Medical's Interim Chief Financial Officer. Linda, please go ahead.

Linda Tharby

Analyst · Piper Sandler

Thank you, Greg. Good afternoon, everyone, and thank you for joining us today. During today's call, we will use slides to support our commentary. To start, I will walk through business updates for the first quarter and provide updates on our progress thus far for '23. Tom will then discuss our financials and '23 guidance. I will then end with an innovation update and closing comments. Following our prepared remarks, the call will be opened up for Q&A. The first quarter of 2023 marked a strong start to the year for the company as our team continues to make meaningful progress towards our Vision '26 strategy of achieving $60 million in revenue. This strategy is focused on one of the largest healthcare macro trends, the movement of care from the hospital to the home. In the quarter, we made significant progress in all 3 of our core business areas, delivering our sixth consecutive quarter of double-digit growth. In our U.S. core business, we saw growth accelerate to 15%, and we remain focused on increasing our leadership position in the growing subcutaneous immunoglobulin market. In the quarter, we saw growth in several key areas, most notably our pump business, indicating increases in new patient starts and continued penetration of prefilled syringes. In our international business, an increase in SCIg drug availability, combined with our expansion efforts, led to a strong uptick in growth in the quarter to 23%. Importantly, we continue to progress our Novel Therapies business with the goal of adding additional drugs to our Coral Freedom subcutaneous pump infusion system. In the first quarter, we grew Novel Therapies revenue by 62% and added another pharmaceutical collaboration, bringing our total to 15. And our focus on building our foundation, I am pleased to report that we passed a significant milestone…

Thomas Adams

Analyst · Piper Sandler

Thank you, Linda, and good afternoon, everyone. I'm excited to report a strong quarter of 18% growth with total net sales of $7.4 million, an increase of $1.2 million over the prior year. Domestic Core led with 15% revenue growth that was driven by increases in volume for pumps and consumables from new account wins in our key specialty pharmacy accounts and continued strength in prefilled penetration. International core net revenues increased by 23%, with growth across several key markets. Driven by international expansion efforts and increased availability of SCIg drug, Novel Therapies net revenues grew by 62% driven by a nonrecurring engineering innovation service agreement with revenue supporting progression toward a clinical supply milestone. As we look at our gross margin, we can think about margin progression in 2 halves for 2023. In the first half, we expect margins to range from 55% to 57%. We are on track with the 56.1% gross margin reported in the quarter. During the quarter, we completed our manufacturing transition to a third-party CMO, and we consolidated manufacturing into our new site in Mala, New Jersey. This consolidation allowed us to close down and exit our Chester facility. In Q2, we will be recognizing on the P&L the incremental costs incurred from Q1 during the manufacturing transition period and, therefore, expect to see a similar margin profile to Q1. As we look at the second half of the year, we expect significant improvements in gross margin with 2 full quarters of lower-cost outsourced products, lower labor and overhead, and improved efficiency in Modelo. This will lead us to achieving strong second-half margins and a plan to exit the year at a gross margin rate between 60% and 62%. Our cash balance at the end of Q1 was $12.2 million and represented a $5.2…

Linda Tharby

Analyst · Piper Sandler

Thanks, Tom. Given our investment in R&D, I wanted to spend a few moments laying out our progress in this area. We have a product today with our Freedom Infusion system that is trusted and preferred by patients, and we are continuously looking at ways to further support our patients and customers. As we think about innovation, we consider both new products that we are launching and new label indications that we add with the ongoing work of our pharmaceutical collaborations. As a reminder today, the Coro Freedom system has the largest drug label for large-volume subcutaneous drug delivery with 9 label indications in the U.S. and 13 ex-U.S. and participation with biopharmaceutical companies. From a new product perspective, our focus is on comfort, convenience, and connected, the 3 Cs as it applies to our Freedom Infusion System. For 2023, we have a few exciting innovation milestones, including a Freedom Etch and Freedom 60 line extension and a new 510(k) filing for our consumables, high-flow needle and Precision Flow tubing in the fourth quarter. Looking ahead, we are working towards our next-generation pump platform, which we expect to roll out before 2026. The second focus of innovation for the company is new indications for commercial use. In the near term, we expect a new core SCIg indication for prefilled syringes, 50 ml in the second half of 2023, and we expect multiple new drugs on the Freedom system over the course of the next 3 to 5 years. Innovation will continue to be an important priority as we look to drive further improvements for our patients and customers and expand our leadership as a drug delivery company. In closing, another great quarter of performance of the company. as we continue to demonstrate significant progress in advancing our strategic priorities. We have built strong fundamentals in our U.S. and international commercial business, strong business development capabilities in our Novel Therapies business, and our innovation efforts are beginning to yield progress. The future of the company remains bright. As we move through the remaining quarters, you can expect to see continued execution toward our milestones, backed by a strong and determined team with a great vision and continued momentum. In closing, I want to thank our employees for another great quarter. Operator, I will now turn it over to you for Q&A.

Operator

Operator

[Operator Instructions]. The first question comes from the line of Jason Bednar with Piper Sandler.

Jason Bednar

Analyst · Piper Sandler

As we think forward to the balance of the year with 1Q in the books, the comps do get a little bit tougher here. You have a lot of momentum around the core business right now. How would you have us think about the cadence of revenue growth? Is there anything you would suggest we have in mind when thinking through the model in the next few quarters, again, whether that's at a company level or looking at the individual segments?

Linda Tharby

Analyst · Piper Sandler

Yes. Thanks for the question, Jason. Maybe I'll start, and I'll turn it over to Tom for additional commentary. First of all, if you recall from last year, our overall core business between our core U.S. and international business grew in the range of about 11%, and we're looking to uptick that growth this year somewhere from the range of 10% to 15%. We see strong fundamentals. Obviously, the U.S. core, we see the SCIg market coming back. We see continued penetration in prefilled syringes. So we feel quite good, but we would probably expect overall, not huge elevations until we start to see that IG market growth continue to elevate. For our international business, again, strong performance relative to, if you recall, last year, we kind of had single-digit growth in the first half, up to 15%, and now we got it above that 20% range. I would continue to expect that kind of outlook given the return to IG supply in those markets and our increasing penetration into several different countries of note this quarter was Canada. We see increases in Germany. So we feel good about our international business as well. So think about an overall uptick of a couple of points from where we were last year between our total core between domestic and international.

Jason Bednar

Analyst · Piper Sandler

Okay. But just maybe on a growth rate basis, like meaningful inflections one quarter to another, maybe staying within the full-year growth rate band as we think forward on the growth rate per quarter?

Linda Tharby

Analyst · Piper Sandler

Maybe I'll hand that one over to Tom.

Thomas Adams

Analyst · Piper Sandler

Thanks for the question Yes. On the core business, we follow, obviously, the market trends, and we grow with the market, as you know, and we lag the market generally by a quarter. We saw nice growth in this past quarter, as you can see, of 15% with a market growth -- a nice market growth that we saw in Q4 last year. So we continue to watch that market growth. And when you look at, as Linda mentioned, when you look at the U.S. performance, we saw a nice volume performance here in the first quarter. We expect that trend to continue. And then obviously, in our U.S. business, we expect to continue to increase our business on the U.S. side with our projections.

Linda Tharby

Analyst · Piper Sandler

So Jason, I don't know, overall, if you're looking for a specific number in terms of core business and its elevation, what I would say to you is that overall, you saw our growth in the first quarter in core between domestic and international at about 16%. I would say within our overall guidance range for the remainder of the year is probably the right place for us to be.

Jason Bednar

Analyst · Piper Sandler

Okay. Yes. No, that's kind of exactly what I was looking for. I mean, I think there's maybe a little bit of a tough comp there in 3Q, but I think we'll all probably acknowledge it. But otherwise, that's exactly kind of what I was looking for.

Linda Tharby

Analyst · Piper Sandler

We have it right on Q3, yes, Q3, given we cleared the back order.

Jason Bednar

Analyst · Piper Sandler

Totally. Got that. And then the 50 ml opportunity with Hizentra, it sounds like that could be pretty large. I don't want to get too far over our skis here, though. So maybe first, how are you thinking about that in terms of contributions next year? And I know it's early, but again, it sounds like it's going to be pretty big. And then I think that's 1 of the 2 510(k) filings that you're referencing there, Linda. Can you help us out with what the other one is? And sorry if I missed it on the call.

Linda Tharby

Analyst · Piper Sandler

So first, let me just start with prefilled syringes. So overall, we continue to see great growth, over 100% growth again in prefilled syringes, and you really see these dominating versus vials and what we see in the overall market performance. So prefills overall will continue. We expect the penetration at about 11% now to elevate to at least 15% by the end of the year. That assumes that we don't have anything on the 50 ml, which comes into 2023. Our current expectation is that we won't have that product in market with CSL until early 2024. With that, what we can see there is 65% of patients take over 50 ml of therapy. So obviously, as you know, it will be a big driver when it comes. We see patients loving the prefilled format. We see prescribers and we see pharmacists continually pushing that because of the patient convenience. So certainly, a lot to come in that area. So yes, one of the 510(k) we expect is on the 50 ml clearance with prefill in the back half. The other one, as noted on the last slide, is on our consumables business. We're pretty excited about that one and expect to see some major improvements in both comfort and convenience for our patients.

Jason Bednar

Analyst · Piper Sandler

And then maybe one final question here. It looks like the milestones here on the operational front in terms of the facility transition, and everything should give you some pretty good line of sight on gross margins. Are there any other puts or takes that we should consider kind of a similar question as I had on the revenue growth side, but more on margins. Is there anything that might move you to the upper end or lower end of gross margin, whether it be a mix or, again, any other factors?

Linda Tharby

Analyst · Piper Sandler

Yes. I'll let Tom handle that one.

Thomas Adams

Analyst · Piper Sandler

Yes, Jason. Certainly, as I mentioned in the script, 56% is where we're targeting for Q2, and then you'll start to see some significant improvement in the second half of the year as we start to recognize the benefits of the outsourced facility and the benefits locally with a more efficient facility. When we look at potential upsides, mix is certainly one which could go one way or the other depending on our unit volume. We generally have a higher mix for our pump product versus our consumables. So depending on customer demand, you could see some puts or takes on the mix side. But I would say, generally, we have our forecast pretty well built. And as I mentioned in the script, those margins are pretty much -- we're pretty much on track to deliver those margins that I mentioned earlier.

Linda Tharby

Analyst · Piper Sandler

And maybe the only other thing I would mention is NRE revenues that, as you know, if there are more innovation, we tend to sometimes see lower margins on innovation agreements because we trade those for longer-term commercialization opportunities. If it's clinical, the margins will be higher, and we can't always project the mix on that one.

Operator

Operator

And the next question comes from the line of Alex Nowak with Craig-Hallum Capital Group.

Alexander Nowak

Analyst · Alex Nowak with Craig-Hallum Capital Group

I was hoping just to expand on the SCIg market. With regarding the weakness in March there, maybe expand on it. What are the drug companies saying out there for why March did come in flat year-over-year despite January and February being up? And then what are they seeing in April and even to start May here?

Linda Tharby

Analyst · Alex Nowak with Craig-Hallum Capital Group

Yes. So overall, I would say the outlook for the total year from everyone that we've spoken with continues to be positive and looking for double-digit growth, which we saw in quarter 4 and for the first 2 months of January and February. Nobody has any real insight or explanations for that droppage in March. So we're anticipating everything to come back in Q2 forward. So no concerns around plasma supply, no concerns around overall patient diagnosis rates. So nothing extraordinary that would explain that. There were some consolidations that we saw. I mean just maybe Alex, from our side and not them. If you recall, we certainly saw CBS had sold off a number of their pharmacies and consolidated, and that did affect our business through the fourth quarter of last year and a little bit into this year. So that could be also an explanation for some of that drop-off.

Alexander Nowak

Analyst · Alex Nowak with Craig-Hallum Capital Group

Okay. There could be some dynamics with that. Okay. Understood. With the 58 milliliter prefill cartridge coming out, do you need to do anything with pumps to make that cartridge work? is the 510(k) really just a clarity showing that your device is approved for that new cartridge?

Linda Tharby

Analyst · Alex Nowak with Craig-Hallum Capital Group

Yes. We did perform human factor studies with our device and the prefilled syringe. There is one small change in the adapter that we're adding to our system. We don't see it as being anything that given our human factor studies, we don't see it as being anything that will be a complication for our patients. And again, the overall reduction in steps is pretty significant now that you've got prefilled syringes across the entire range from CSL. So a great job on their part.

Alexander Nowak

Analyst · Alex Nowak with Craig-Hallum Capital Group

Okay. Understood. And then on the Novel Therapies pipeline, again, I haven't had a chance to look at the deck either, but maybe walk to the 15 deals that you now have signed? Were there anything in the quarter, whether it be some of those clinical developments move forward, maybe move from Phase II to Phase III, or we got some sort of data or any of those clinical developments where maybe it took a step back or maybe it's going to be cut from the program? Just help us update on the 15, net of the pipeline.

Linda Tharby

Analyst · Alex Nowak with Craig-Hallum Capital Group

Yes. So first, a couple of key positives. I was thrilled that nothing had fallen out. With everything going on right now with clinical trials in biotech in general, I was really pleased that we didn't see any of our clinical trials drop out or fail. Second, I would say, clearly, we're pleased with having another IG indication. And third, there's probably one candidate that we believe will progress to Phase III. We're hoping in this quarter. Having said that, I would say the other big thing that we're excited about is we have a double number of opportunities on deck as we have in the pipeline -- sorry, in the signed collaborations. So think about it like it took us about a year to get those 14, 15 collaborations signed. Usually, from the time we start talking to a customer until we close, it is 6 to 12 months. So you can expect most of our increases in collaborations to come in the back half of '23. And overall, I would say good movement, good progression. We're excited. Our teams are busy. I measure that by halves and I see any of our R&D people associated with that business or business development people, and they've been out of the office a lot this past quarter. So that's great news for us.

Alexander Nowak

Analyst · Alex Nowak with Craig-Hallum Capital Group

That's good to hear. Maybe with regards to that, when you think about the funnel, does that include names where you already have a deal signed with the company, and they'd like to add a second, third, fourth drug on that list? Or are those considered additional on top of that? Just how do you classify it?

Linda Tharby

Analyst · Alex Nowak with Craig-Hallum Capital Group

So they're both. They could be current companies we already do business with. So best place to get new businesses from your current customer base. So several of those are companies that we may already be at collaboration with, but they're adding additional drugs or additional indications. So that's some of what we work with or they're working geographically to expand. And then many of them are, I would say, 75% of them are brand-new companies that are new to what we're doing today.

Operator

Operator

And there are no further questions at this time. I will now turn the presentation back to the hosts.

Linda Tharby

Analyst · Piper Sandler

Thank you. Again, I'll just close by saying thank you to the KORU Medical Systems entire team. And with that, thank you to our investors, and we'll close the call.

Operator

Operator

That does conclude today's conference. We thank you for your participation and ask that you please disconnect your line.