KORU Medical Systems, Inc. (NASDAQ:KRMD) Q1 2023 Earnings Call Transcript May 7, 2023
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: 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: 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 in the quarter as we completed our transition to a dual-source contract manufacturer for our consumables business. We also completed the closure of our Chester, New York facility and consolidated operations in our Mawa facility. Our operations and project management team’s great efforts will pave the way for further margin improvement and inventory reduction throughout the year. With the momentum with which we started the year, we remain confident to reaffirm our guidance and expect to end the year with revenues between $32.5 million and $33.5 million, representing growth in the range of 17% to 20%.
I would like to begin today with our U.S. business, where our team is focused on continuing to build our leadership position in Subcu Ig therapy. Again, this quarter, we saw our growth exceed the overall market as we reported 15% core U.S. domestic growth. We continue to see the number of patients on Subcu therapy rise as all IG drug suppliers have reported consistent supply and continue to focus their efforts in this area. While there are occasional fluctuations in reported monthly IG gram data, the overall SCIg drug market trends remain positive. This is evident by the fact that volumes grew 7% and 11% in the first and second half of ’22, respectively. Volumes jumped to 12% through the first 2 months of ’23, but fell in March, consistent with scripts, resulting in a flat Q1 versus 2022.
Based on our review and conversations with IG drug manufacturers, we remain confident of double-digit market growth for ’23. Additionally, overall, KORU’s U.S. pump volumes grew by 16% for the first quarter of 23, a strong signal of our strength in our specialty pharmacy account activity and new patient starts. We continue to see increasing penetration of prefilled syringes in the market due to their overall convenience and patient preference. The conversion to prefilled cringes is a critical business driver as our Freedom Edge is currently the only pump with FDA clearance for use with prefilled syringes. The first quarter saw over 130% prefilled range growth, with overall penetration increasing to 12% of the market. The current formats available in prefilled syringes are 5, 10 and 20 ml, which address approximately 1/3 of the overall market.
Last month, CSL, the leader in SCIg therapy, reported exciting news. They received FDA clearance for their HIZENTRA 50 amount. This approval will enable a much broader addressable prefilled market, as over 60% of patients require greater than 50. CSL expects the 50-ml prefill syringe will be available in early ’24. We expect to have 10-K approval ahead of their launch, and we will be well-positioned to capitalize on the opportunity. Overall, a great start by our U.S. team outperforming the underlying drug market growth. Moving to our international business. We have seen increasing positive momentum. We ended the first quarter with growth across several key markets, representing 23% year-over-year growth. Expanding internationally is a key growth driver for the company.
Photo by Hush Naidoo Jade Photography on Unsplash
New patient starts fueled by the increase in IG supply in the EU continued to drive growth, and we are well positioned to benefit with our distribution in over 25 countries. In the first quarter, we strengthened our international distribution with sales into Canada, all contributing to our overall double-digit international pump sales year-over-year. We have also begun to focus our efforts on the conversion of electronic pump patients in Europe, and I would like to provide a few updates. The early feedback on our electronic pump conversion efforts is positive, with healthcare professionals and patients appreciating the benefits of our Freedom system. The electronic pump comparison trial is expected to be delivered and completed in December of 2023.
Moving to our Novel Therapies business. During the first quarter, we brought our Novel Therapies collaborations to 50. As previously announced, we signed a development agreement with an SCIg pharmaceutical manufacturer to use the Freedom System from upcoming SCIg prefilled syringe product. This builds on our leadership position in the SCIg prefilled market and demonstrates that our market experience, patient insights, and pharmaceutical collaborations capabilities make KORU Medical a partner of choice for SCIg device innovation. This program does not require human clinical trials, and we expect it to launch commercially in the next 1 to 2 years. New collaborations are essential to our MT strategy and the novel therapies pipeline is the fuel for increased signed collaborations.
Our NT team has worked hard to build a funnel of 10 to 15 additional pipeline opportunities. This funnel spans new therapy areas, indication opportunities from existing partners, geographic expansion, and phase progression. We have seen a steady intake into the funnel, including a new interest in infectious disease, increasing interest from oncology opportunities, and new geographical targets. Taking a look at our collaborations. In total, we now have 15 collaborations, including over 2.8 million potential patients and a TAM of roughly $2.5 billion, roughly 2x our original aspirations. With the execution of our Q1 collaboration and our current pipeline of new opportunities, we are one step closer to our milestone of ending ’23 with 20 total collaborations.
We feel we have a clear line of sight to our 26th commercialization goal with multiple Phase III opportunities. As we look to the rest of ’23 with the pace of pipeline to a signed deal, we expect our collaborations to increase in the back half of 2023. Thanks to the team for a great start to 23. I will now turn the call over to Tom to review our financial results and guidance.
Thomas Adams: 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 million decrease from the beginning of the year. Similar to last year, we plan for a higher level of cash burn in the first half than in the second half. For instance, you might recall that our cash burn in the first half of 2022 was about $7 million, and we reduced that to under $1 million in the second half. We expect a similar cash usage pattern this year. We’re about a 90-10 split between the first and second half. Given this pattern, I want to spend a few minutes on first-quarter cash burn, and we’ll come back to the outlook and expectations for the remainder of the year on the guidance slide.
As we look at the usage of the $5.2 million of cash in the quarter, we saw the majority, or $2.8 million coming from working capital in 3 major areas: in the form of higher accounts receivable driven by higher March revenues, a higher level of transition inventory to avoid supply disruption as we move manufacturing locations and a higher level of payments driven by bonus and year-end accruals. Net losses, excluding noncash items, were $1.8 million, of which the biggest driver was total operating expenses for the first quarter of 2023 of $7.2 million, primarily due to innovation investments in research and development. We expect a lower overall cash burden in 2023 and continue to prioritize our expenses and capital plans according to our revenue growth goals.
We will come back to the cash outlook on the next slide. We reaffirm our year-end guidance of a cash balance greater than $10 million, driven by working capital improvements, revenue growth, and gross margin expansion. We are reaffirming our outlook and expect the following for the full year 2023, revenue to be between $32.5 million to $33.5 million, representing growth in the range of 17% to 20%. And as previously stated, we have identified several key milestones we will attract throughout the year that will serve as the foundation for revenue growth. These include an expanded Novel Therapies pipeline with 5 additional new collaborations, expecting more of these in the back half with one already signed, bringing our total collaborations to at least 20 by the end of the year and 2 to 510(k) filings in the second half of the year.
For SCIg drug market growth of greater than 10% and prefilled penetration increasing to the 15% range. Our gross margins are between 58% to 60% for the full year and to exit the year between 60% to 62% gross margin. Key drivers behind the increase in our 2023 gross margins that were successfully completed in Q1 include: completion of the manufacturing transition, including the Chester site closure and consolidation in Kamala and ramp-up of our outsourced consumables and contract manufacturing. With this, we target 55% to 57% gross margin for the first half and more than 60% margins in the second half of 2023. We expect our cash balance at year-end 2023 to be greater than $10 million. Given our revenue and gross margin guidance, the other major drivers include: total operating expenses for the year inclusive of stock compensation expense of $30 million, and we expect to see a higher sequential level of R&D spend in Q2 as we advanced several of our key product development programs into its next phase of development.
An improvement in working capital, including lowering inventory by approximately $2 million throughout the course of the year and then keeping our DSO and DPO balances in the range of 45 to 50 days, and finally, receiving the ERC credit of $700,000. With these assumptions, this gets us to the ending cash balance of greater than $10 million. We continue to expect a breakeven in the second half of 2024 and with enough cash to execute our strategic plan. While we may look to increase the cash on our balance sheet through non-dilutive debt financing to fund our growth, we are not anticipating or planning any equity raises at this time. I will now turn the call back to Linda for our closing comments.
Linda Tharby: 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.
See also 20 Countries With the Most Skyscrapers and 30 Most Unstable Countries in the World.
Q&A Session
Follow Koru Medical Systems Inc. (PINK:KRMD)
Follow Koru Medical Systems Inc. (PINK:KRMD)
Operator: [Operator Instructions]. The first question comes from the line of Jason Bednar with Piper Sandler.
Operator: And the next question comes from the line of Alex Nowak with Craig-Hallum Capital Group.
Operator: And there are no further questions at this time. I will now turn the presentation back to the hosts.
Linda Tharby: 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: That does conclude today’s conference. We thank you for your participation and ask that you please disconnect your line.
