KORU Medical Systems Inc (KRMD) 2021 Q2 法說會逐字稿

Greetings, and welcome to KORU Medical Systems Second Quarter 2021 Financial Results Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Hannah Jeffrey with the Gilmartin Group. Please go ahead, Hannah.

Thank you, Sherry, and good afternoon, everyone. Earlier today, KORU Medical Systems released financial results for the second quarter of 2021. 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 our filings with the SEC, each of which are posted on our website. You will find additional disclosures regarding the non-GAAP measures, including reconciliations of these measures with comparable GAAP measures in our press release and those filings.

For the benefit of those listening to the replay, this call was held and recorded on Wednesday, August 11, 2021, at approximately 4:30 p.m. Eastern Time. Since then, the company may have made additional comments related to the topics discussed. And please reference the company's most recent press release and filings with the SEC.

Joining us on the call today is Linda Tharby, President and CEO of KORU Medical Systems; and Karen Fisher, KORU's Chief Financial Officer. Linda, please go ahead.

Thanks, Hannah. Good afternoon, everyone, and thanks for joining us today. During today's call, I will review our second quarter results and our strategy to accelerate top line growth, increase our pharmaceutical pipeline of new drug candidates and build a strong foundation for a continued bright future at KORU Medical. I will then turn it over to Karen to discuss the quarterly financials in more depth before ending with a few closing remarks.

Our mission at KORU Medical is to improve patients' quality of life through the development and delivery of high-quality therapeutic drug delivery solutions for use in the home. Our FDA-cleared, market-leading Freedom Integrated Infusion System is used today by patients to self-infuse life-improving immunoglobulin iG treatments in the convenience of their home and at lower overall cost to the health care system. With more than 85% of patients on iG therapy receiving treatment intravenously in a hospital or infusion clinic setting, there is a great opportunity in the subcutaneous iG market with a greater than $250 million total addressable U.S. market potential.

Expanding beyond iG, we have also characterized a potential pipeline of over 60 new high-volume drug candidates in development that capitalize on the Freedom system's leading position in this space. Later in the call, I will share our progress in both of these areas.

Turning to our results for the second quarter. We reported revenue of $5.5 million compared to $7.7 million in the second quarter of 2020. Our year-on-year revenue growth was negatively impacted by 2 onetime events in the second quarter of 2020: The first was $1.1 million in sales due to increased inventory levels related to COVID-19. The second was approximately $1.2 million in sales from Apellis Pharmaceuticals for the clinical trials of Empaveli.

When normalized for these onetime events, we experienced positive year-on-year growth of approximately 3%. And on a sequential basis, we reported an increase in revenue of approximately 4% versus last 2 quarters -- versus last quarter.

The 2 key indicators that we measure in our core domestic business: the subcu iG market data, measuring total grams sold into the market; and our end user data, which measures sales to our specialty pharmacy channel, both saw high single-digit growth in Q2.

In our novel therapy franchise, we saw a small but encouraging increase in our quarter-over-quarter revenues as we increased our early-stage feasibility agreements with pharmaceutical companies.

This quarter marks my first full quarter with the company. I've been able to meet with the majority of our specialty pharmacy customers and our pharmaceutical partners. I've spent a great deal of time with our team, and we have engaged in market research to better understand market and patient needs.

The company has a great reputation with our customers, a very high retention rate with our patients. And we have a very knowledgeable, tenured team here at KORU. We have characterized a large opportunity, both in our core subcu iG business and in the new drug pipeline. And we are focused on building out the team and executing on our plan. In the late fall, we will be prepared to share a 3-year plan.

Today, I will share the continued evolution of our near-term strategy as we have focused our efforts over the past quarter in further defining the specific actions, milestones and resourcing required. While the plan is still in its early stages of execution, we are confident that we have laid out a road map for future success to accelerate top line growth and increase pipeline drug therapy candidates.

Our strategy will focus in 3 areas: First, a targeted commercial plan to increase penetration and growth in core subcutaneous iG therapy. Second, a plan to increase our overall pipeline of new drug candidates focused in KORU's leading market position and large volume, which we characterize as above 10 milliliters. And finally, improving our foundation focused in the areas of innovation, operational excellence and quality and regulatory.

The short-term opportunity to accelerate growth is through increasing share and penetration of at-home therapy in our core domestic subcu iG business. The total addressable market for subcu iG in the United States is approximately $250 million. And currently, subcu iG makes up less than 15% of patients in this market.

We have 3 focus areas: First, increasing our go-to-market presence in targeted accounts based upon recently purchased data at the specialty pharmacy level. Second is converting the greater than 85% of patients on IVIg to subcu iG based upon the overall health care economics, improve patient outcomes and convenience for the patient. The third area is value-added services to ensure we gain an increasing share of new patient starts, make the onboarding process to the Freedom system and at-home therapy as easy as simple as possible.

Over the next few quarters, we will be launching these services in the select accounts before rolling them out at scale. We are also focused on expanding our presence in Europe with an expected new distribution partnership completed by Q4 in Germany.

The second phase of our strategy is increasing the pipeline of new pharmaceutical drug candidates focused on high volume, which we define as over 10 milliliters, the market today where the Freedom platform has leadership. In order to complete their clinical trials for subcu drug candidates, pharmaceutical companies are seeking a regulatory approved product with an effective safety profile that has modularity to span dosing requirements. The Freedom system meets all of these requirements.

Over the past quarter, we have identified a target pipeline of over 70 high-volume drugs with the majority of these in Phase I to III clinical trials and a handful that are currently on market. This pipeline includes candidates across oncology, immunology, cardiology, hematology and endocrinology. We have 5 small-scale committed agreements and 7 in feasibility discussions across both our core SCIg business and in new drug therapies targeted for geographic expansion, reformulation and new clinical developments. We also anticipate 3 FDA clearances on new indications for the Freedom pump by the end of this calendar year.

Our third area of focus is building the foundation for the company with a focus on innovation, operational excellence and quality and regulatory. The biggest area of investment and focus is on innovation. Over the last several quarters, we have done market research to better understand the patient experience with the KORU system, and we will focus our near-term attention on patient comfort and ease of use. Longer term, we are focused on new technologies and partnerships.

Our operational excellence strategy is focused on reducing our overall cost with the first stage being an outsourcing initiative already underway and expected to reduce our overall cost position between 2.5 and 3.5 percentage points. Given the impact of COVID on patient starts and volume, we expect to see the impact of these initiatives delayed to the early part of 2022.

The final area of focus is building quality and regulatory competency that will lead to competitive advantage with our pharmaceutical partners. Underlying this strategy is building out our executive team with top-tier talent.

We are pleased to announce that we've hired both a Director of Regulatory and a Vice President of Quality and Regulatory with deep backgrounds in Class II regulated devices. We are also in active recruitment for both the VP of Sales for the U.S. market and a Chief Technology Officer.

Before turning the call over to Karen, I want to reiterate a few points. KORU Medical is a market leader in delivering millions of safe subcutaneous high-volume infusions per year. The market for subcu iG therapy is in the early stages of penetration with a greater than $250 million total addressable market potential. And we have identified a large potential pharmaceutical pipeline of new drug candidates.

We're in a solid financial position with the resources to begin implementing our strategic plan. Plan is designed to increase top line growth while expanding our pipeline and increasing spend in a focused manner. As we look towards the second half of 2021, we look forward to updating you and executing our plan with discipline.

I will now turn the call over to Karen to review our financial results.

Thanks, Linda, and good afternoon, everyone. Total net sales for the second quarter of 2021 were $5.5 million, a decrease of 28% from $7.7 million in the second quarter of 2020 resulting from difficult year-over-year comparisons due to 2 onetime events, including increased inventory build due to the uncertainty of the pandemic last year and large novel therapy sales from nonrecurring trials during the second quarter of 2020, in aggregate, totaling $2.3 million.

Sequential quarter net sales growth was 2% driven by a 4% increase in domestic core and growth in novel therapy revenues. Both the overall domestic market growth in Q2 and our end user sales, which measure sales to the specialty pharmacy channel, grew high single digits, we believe indicating market recovery and new patient starts for SCIg therapy. International sales increased 1% from the prior year quarter.

Gross margin for the second quarter of 2021 was 58.1%, a decrease of 5.6 percentage points, negatively impacted primarily by lower volumes resulting in unfavorable absorption.

Total operating expenses for the second quarter of 2021 were $4.6 million compared to $5.9 million for the same period in 2020, which included litigation fees of $2.3 million last year. Excluding the litigation fees, expenses grew with spend focused primarily in areas related to our strategy, including market research, testing and consulting fees, all to support commercialization, research and development and strategic and regulatory initiatives.

Net loss for the second quarter of 2021 was $1.1 million or a negative $0.03 per diluted share, unchanged from the same period in 2020. On a non-GAAP basis, adjusted diluted earnings per share was negative $0.02 for the second quarter of 2021, $0.04 lower than the same period in 2020.

Non-GAAP adjusted EBITDA for the second quarter of 2021 was a loss of $300,000 compared to a loss of $1.8 million for the second quarter of 2020.

Turning to our balance sheet. We ended the second quarter of 2021 with $26.5 million in cash compared to $27.3 million at the end of the year. Our inventory position grew, $6.8 million at December 30, 2020, to $7.6 million at June 30, 2021, due to efforts to transition our manufacturing to our secondary source.

I'll now turn it back over to Linda.

Thanks, Karen. Before turning the call over to the operator for Q&A, I want to reiterate that the future is very bright for KORU Medical. We're the market leader in subcutaneous home-use iG therapy due to simplicity, reliability and safety of our Freedom Infusion System.

Based on published market data, we believe subcu iG sales have turned the corner and we begin to accelerate. And we expect to grow at or above the underlying therapy sales growth rate. In addition, our strategic plan focused on driving growth and penetration of subcu iG therapy, increasing our pharmaceutical pipeline and innovation will accelerate overall top line growth.

We're excited to continue our focused execution, bringing increased value to our customers, patients and shareholders.

I'll now turn the call back over to the operator for Q&A.

(Operator Instructions) Our first question is from Matt O'Brien with Piper Sandler.

This is Korinne on for Matt. Congrats on the quarter. So starting off, with COVID cases on the rise and especially with Delta and other variants, it has been a pretty hot topic this earnings season. Just curious your thoughts on how this will -- how this has impacted your outlook for the remainder of the year. We know you don't guide, but if you can just share some of your internal expectations and assumptions on how the market may perform here and how you may perform versus the market, factoring in all these COVID uncertainties?

Yes. So I would say that we're looking at overall vaccination rate versus the impact of the Delta variant. And I would expect that overall, the market, as we saw it perform in quarter 2, which was about 8% overall, about 6% year-to-date, we're modeling about the same impact in the back half.

Awesome. And then you touched on a little bit your initiatives in Europe. Can you just expand a little bit more on how that's going along with respect to distribution and reimbursement and how we should be thinking about contribution from these geographies over the coming years?

So I'm going to start upfront by saying the majority of our focus in the last quarter has really been on the larger opportunity here in the U.S. market and on accelerating our pipeline for pharma. However, the work we've done to date in Europe is focused in the 2 largest markets, Germany and France.

Germany, we have made really good progress, narrowed to a distributor. We're in the final stages of signing the agreement with them. And we should expect a couple of hundred thousand dollars by the end of the year in terms of stocking opportunity.

Great. And then just last one for us, on margins. Gross margin, I believe, went to about 58% this quarter. Is that a run rate we should base off of for the remainder of the year? Or how should we be thinking about that gross margin line in the back half? And then when should we expect that to bump back up to that 60% range?

So provided the volume that we discussed earlier, we would anticipate by the end of the year being back in the 59% range. And then the outsourcing agreements that I referenced earlier will kick in, in the early part of 2022. So think about, through 2022, getting to the 62% range.

Our next question is from Alex Nowak with Craig-Hallum Group.

Linda, thanks for all the details on the pipeline. Can you expand on the 5 agreements you have signed, the 7 IN feasibility? Are these deals where KORU is the key pump written into protocol during the clinical trials and is ultimately expected to be the key pump during commercialization? And then also, can you quantify the market opportunity around the 3 seeking FDA approval by year-end?

Yes. So of the 5 that we have signed today, yes, there are agreements that either, a, they would be the commercial opportunity with KORU or would be the pump used in the trials. Two of those are with -- in SCIg today, either for geographic expansion opportunities or reformulation opportunities. And then the other 3 are in new therapies.

I can't really expand beyond that, but there are new therapy classes. Some, as you would imagine, with Apellis with expanded indications and then another in the respiratory field.

The other 7 are what I would call earlier-stage feasibility, meaning we're at a stage where we've defined an opportunity. And we're working to see either is there a particular customization to our system that we need to make for an on-market application or can we go directly into early-stage clinical trials with them.

Got it. That makes sense, helpful. And expanding the penetration of subcu iG, can you maybe talk to how KORU can directly influence that market? It seems like some of it is having enough drug, which requires enough plasma in order to increase the penetration. But you're also seeing the newer [non-Hizentra] subcu iG drugs come onto the market, too. So just expand on how KORU can directly influence that penetration rate.

Yes. So I think, first of all, what you've talked about, which is new drugs coming into the class, is certainly going to help. But I think there are 3 pieces of data that we'll rely on heavily, working with the KOL group to really increase our presence at overall shows and then focus primarily with our specialty pharmacies and trying to make that switch.

So we're working with several of them today that identify patient pools that are on IV today that could go to subcu and are working with us to try and convert patient base. So we're going to start this on a trial basis.

So the data exists today. We have, first of all, clinical data that shows improved patient outcomes, several published papers out there. Second is the overall cost to the health care system. United has done a study that shows a difference -- a 50% difference in costs over a 6-month period in hospital versus home and then finally as the obvious improved outcomes for the patients.

So we don't think we can do this alone at the physician level. Certainly, we'll need to work in conjunction with our pharma partners. But all of those tools in conjunction, working with our pharma partners and then working with our specialty pharmacy partners, we don't see -- the biggest challenge is obviously the change in clinical practice with prescribers that have written IVs for several years. But we see the market naturally turning because of the improvement in overall drugs in the space. And over time, our commercial activities we think will get us there.

Okay. That makes sense. And then just last question, just maybe on the R&D pipeline with regards to the Freedom line of pumps. You've obviously joined the company just a couple of months ago, had some more time to study the devices.

How do you -- what sort of features do you think the Freedom system is lacking? And I guess how would you want to expand on the Freedom system but also go into maybe a pass pump? Or what other sorts of devices could you add on here?

Yes. So first, I'll just talk about stage 1 of the strategy is clearly focused on the pump we have today. I'll focus there and then I'll talk a little bit about Phase II.

So in Phase I, clearly, we've identified, I would say, 10 to 15, what I would call minor improvements that we can make to the pump that make meaningful difference either to the patients or the nurses that help train on the therapy. Most of these are focused on patient comfort and convenience and deal with the overall size of the pump, getting that smaller and, as I said, I'm not going to get into more detail but patient comfort and convenience. That's first stage.

Second stage, obviously, do we add electronics to the pump to give the caregiver the signal that something has been delivered?

And then third phase is, as you talked about, what do we look at in our portfolio -- our patent portfolio to say what can we do in terms of a smaller pump that is either an on-body or an off-body pump using our infusion set?

So you'll see all of this kick up over the course of the next 6 months. And I think innovation is critical to commercialize with a lot of the pharmaceutical targets that we see today.

We have reached the end of our question-and-answer session. So this does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.