KORU Medical Systems, Inc. (NASDAQ:KRMD) Q2 2022 Earnings Conference Call August 3, 2022 4:30 PM ET
Company Participants
Gregory Chodaczek – Gilmartin Group
Linda Tharby – President, CEO & Director
Tom Adams – Interim CFO and VP, Financial Planning & Analysis
Conference Call Participants
Connor Stevenson – Craig-Hallum
Gibran Ahmed – Canaccord
Jason Bednar – Piper Sandler & Co.
Operator
Greetings, and welcome to KORU Medical Systems Second Quarter 2022 Earnings Conference Call. [Operator Instructions].
I would now like to turn the conference over to your host, Greg Chodaczek of Gilmartin Group. Please go ahead, sir.
Gregory Chodaczek
Thank you, Ryan, and good afternoon, everyone. Earlier today, KORU Medical Systems released financial results for the second quarter ended June 30, 2022. 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.
We 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 matters 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 3, 2022, at approximately 4:30 p.m. Eastern Time. Since then, the company may have made additional comments related to 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 Tom Adams, KORU 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. To start, I want to emphasize the hard work and dedication of the entire KORU Medical team in delivering another strong quarter. Their efforts are instrumental in delivering on our mission to improve the quality of life for patients self-administering infusion therapy in the home.
During today’s call, we will use slides to support our commentary. I will begin with the business update of the second quarter. I will then turn the call over to Tom to discuss the quarterly financials before ending with updates to our 2022 guidance. After concluding our prepared remarks, Tom and I will then be happy to open the call up for Q&A.
Before diving into our quarterly results, a few comments on our progress and vision as a leading drug delivery provider. The company holds a leading share position in the growing large volume subcu drug therapy market with over 25,000 patients on our FREEDOM Infusion system. Our current market for subcu home infusion primarily serves patients suffering from the chronic conditions of PIDD and CIDP, a market with substantial opportunity, with less than 20% of patients on subcu therapy. Currently, we have 12 commercialized drug indications on the KORU Medical FREEDOM Infusion System, having doubled our number with 6 new label expansions in the past year.
As the overall market for subcu drugs in development continues to expand, we continue to build our new drug pipeline with several new clinical trials and development agreements over the last 12 months that are increasing our total addressable market potential to over $1 billion.
Now turning to our results for the quarter. We are very pleased with our results this quarter on several fronts. Q2 ’22 marked our third consecutive quarter of double-digit growth. Leading this growth was our novel therapies business, which grew nicely for the second quarter in a row. This revenue growth is indicative of our prior closed deals and momentum with 2 new deals this quarter.
Our KORU U.S. business also performed ahead of a rebounding U.S. subcu Ig market. We continue to solidify our foundation, completing the first phase of our move to our new corporate headquarters in Mahwah, New Jersey, enabling new R&D and operations capabilities and a great environment for our employees and customers to collaborate in. In addition, we further progressed our outsourced manufacturing plant. This plant is intended to create a dual source of manufacturing and reduced cost of goods and is expected to be completed in Q1 of ’23.
And finally, we further solidified our executive team, hiring a new VP of Operations, promoting Chris Pazdan to the SVP of Operations role, encompassing quality, regulatory and operations, and eliminating the role of Chief Operating Officer.
All of the above progress gives us confidence to raise our revenue guidance to a range of $27 million to $27.5 million.
Now turning to our quarterly sales results. We reported net sales of $6.5 million for the second quarter of 2022. This represented an 18.4% increase year-over-year, marking the third consecutive quarter of double-digit growth for the company and with strong growth in all 3 parts of our business.
Novel therapies led our Q2 growth with continued momentum from prior deals and contributions from both engineering services revenues and clinical pipeline orders. Domestic core sales were up 8.7%, with growth outpacing a rebounding U.S. SCIg market due to label expansion and growth from prefills.
Domestic core revenues in Q2 did not include $300,000 arising from supply chain issues that led to a back order in our consumables business. We have prioritized an action plan to get back to the high service levels our customers and patients expect from KORU and expect the back order to clear in Q3.
Our international business, where we continue to put increasing focus, was up 10.7% year-on-year as we saw strength in multiple European markets due to expanded label indications and key tender wins. The second quarter represented another strong quarter of sales performance for the company.
I now want to share progress made this quarter towards our strategic initiatives that we rolled out in December of 2021. The first area relates to increasing KORU subcu penetration, which is under 20% of the broader Ig market. This represents a $300 million U.S. total addressable market opportunity. There are 3 growth drivers associated with this strategy, which include winning new patient starts, capturing SCIG prebuild growth and geographic expansion.
New subcutaneous patients start, the leading pillar of increasing our core SCIg penetration, was up 6.9% in the quarter, with our U.S. business outperforming this with 8.7% growth in the quarter and with FREEDOM pumps as a leading indicator, up 21% year-to-date.
A key driver of our new patient starts is our on-label indications. Label expansion is critical as it begins with the company working prelaunch to commercial with our pharmaceutical partners to provide an FDA clear platform with the FREEDOM Infusion System. This FDA clearance with the drug makes it easier for our specialty pharma accounts to select KORU Medical as a partner of choice. In the past few quarters, we have reported 5 new indications. Each new clearance adds a new patient population to our pump and represents an opportunity to increase share. Overall, we see positive trends as our on-label indications start to generate growth, and we will continue to pursue new indications.
Prefills continued to increase penetration post our Q4 label indication and now represent 10.3% of the overall market, growing over 400% this quarter. Prefills are a tremendous and growing area of opportunity for the company, and I will expand upon these in a moment. And in the past few quarters, we have put increasing focus on our international business, and we saw a 10.7% increase in the quarter driven by label expansions and tender wins. We’ve hired a new international sales leader with strong experience in managing international distributors. We look forward to continued progress in these markets.
Now turning towards a deeper dive into the prefilled syringe market. As we have communicated, the prefilled syringe market for Ig is an early-stage, fast-growing market that represents a significant growth opportunity. Prefilled syringes continue to capture market share as our pharmaceutical partners focus on their adoption and care providers and patients recognize the advantages they provide. Since our Q4 label indication, we have seen the market grow to 5% of the market in Q1 and double to 10% of the market in Q2.
We remain uniquely positioned to capture market share within prefilled syringes as we have the only pump specifically 510(k) cleared for use with the market share leader, CSL’s Hizentra 20 mL format. We anticipate that prefilled syringes will continue to capture market share, and we remain focused on increasing new patient adoption and conversion, working with our specialty pharmacy partners. Additionally, we are putting increased generation efforts behind the prefilled format, and we plan to remain the partner of choice for commercialization.
Moving to our novel therapies business. The primary driver here is our pipeline expansion, which includes continuously evaluating and monitoring new label indications, geographic expansion, IV to subcu opportunities and new therapeutics. Our goal is to close new agreements across multiple drug categories in clinical phases from early feasibility to commercialization and extend our leadership position in high-volume subcu drug delivery in the home. The second quarter showed another strong quarter of growth in our pipeline from both engineering service revenue on previously signed deals and from clinical product sales from an expanded pipeline.
In the second quarter, we closed 2 new deals, one in immunology for a new indication that we expect to commercialize in 2023 and the second for a Phase II new indication in nephrology. In addition, we expanded the scope of our previously signed innovation agreement based on our successful execution of earlier milestones. We now have 9 total closed agreements across 6 different drug categories and are pursuing over 10 additional new opportunities.
The majority of our novel therapies work is for Phase III studies with anticipated commercialization in 2023 to 2025. We continue to prioritize investment in novel therapies expansion as a key growth driver.
I will now turn the call over to Tom for a discussion of our Q2 financials.
Tom Adams
Thank you, Linda, and good afternoon, everyone. I’m excited to report our third consecutive quarter of double-digit net sales growth, ending the second quarter with net sales of $6.5 million, an 18.4% increase from $5.5 million for the same period last year. Novel therapies sales were approximately $600,000 for the quarter, an increase of $528,000 over prior year or a 747% increase. The growth in novel therapies included the completion of a milestone for our previously announced agreement for a large pharmaceutical customer. Also contributing to novel therapies growth were clinical trial revenues related to our pipeline expansion.
Our domestic KORU business grew by 8.7% or approximately $400,000. The business was impacted by supply chain issues and labor shortages, which created back orders of approximately $300,000 that are not included in the reported net sales number. The increase in domestic KORU demand, inclusive of back orders, was attributed to volume growth driven by SCIg market growth, label expansions, including prefills, and a nominal increase in average selling prices for our products. International KORU was up 10.7% year-over-year due to growth in several European markets driven by key tender wins.
The following slide shows a bridge of our gross margin and related impacts that we saw in the quarter. Starting with Q2 2021 and walking through the margin bridge from left to right, our total gross margin for the core business was 56.2% and was lower than prior year by 192 basis points due to amortization of manufacturing variances from the supply issues we experienced in Q1 2022, partially offset by a nominal increase in average selling prices. Continuing with this bridge, our gross margin, inclusive of our novel therapies engineering services revenue, was 54.9% driven by the impact of service revenue mix.
Finally, our total reported gross margin for the quarter was 51.1%, with the largest impact on gross margin of 380 basis points related to an accounting treatment caused by accelerated amortization of manufacturing variances in the quarter. And this was due to lower levels of finished goods inventory from supply issues and labor shortages. We believe this accounting treatment to be a nonrecurring event, and we expect gross margin improvement in the second half of the year.
Total cash used in the first half of the year was approximately $7 million and was driven primarily by net losses and investments in our new headquarters of approximately $2 million, which will not be repeated, and also increases in raw material and work-in-process inventory. We expect in the second half of the year to reduce the cash usage by planning for lower net losses due to higher sales and gross margin improvements in line with our guidance; in addition, lower working capital, driven by raw materials and work-in-process reductions as we continue to transition our manufacturing to Command.
Finally, we expect incoming cash from state-filed employee retention credits, preapproved equipment financing and leasehold improvement reimbursements. As a result of our second half projections, we expect our ending cash to be a minimum of $16 million.
Finally, as indicated in the appendix, our net loss for the second quarter of 2022 was $2.92 million or a loss of $0.07 per diluted share compared to a net loss of $1.12 million or a loss of $0.03 per diluted share for the same period in 2021. Net loss included a tax benefit of $710,000 for the second quarter of 2022. On a non-GAAP basis, adjusted diluted earnings per share was a loss of $0.06 compared to a loss of $0.02 in the same period of 2021.
I will now turn the call back over to Linda for guidance and closing comments.
Linda Tharby
Thank you, Tom. Turning to our expectations for fiscal 2022. As a reminder, our outlook is rooted in several key drivers: SCIg market growth rate in the high single digits; plasma supply, clinical trial activity and expansion on the novel therapies pipeline; inflationary impacts, including labor and supply price increases; supply chain and labor shortage impacts; timely receipt of equipment financing and credit; and planned inventory reductions by year-end 2022.
For full year ’22, we are raising our revenue guidance to $27 million to $27.5 million, previously $26.5 million to $27 million, based primarily on the strength of our novel therapies pipeline. We are guiding to a 55% to 60% gross margin to exit the year, updated from a 60% exit rate. Q2 ’22 supply chain disruption impacts have resulted in unfavorable manufacturing variances in the first half of the year, which are expected to improve. Additionally, we now expect the transfer to our outsourced manufacturer to be completed in Q1 of 2023. We anticipate steady gross margin improvement beginning in Q3 and for the remainder of 2022.
We reiterate our operating expense range in support of our strategic plan. We anticipate expenses to be in line sequentially for Q3. And finally, we expect our cash position to reflect the year-end balance of a minimum of $16 million. We anticipate improvement from first half year burn rate where we had significant onetime investing activities for our headquarter relocation and experienced lower gross margins. In addition to higher sales and improved gross margin per our forecast, we expect cash to come in from our filed ERC preapproved equipment financing and tenant reimbursements.
In closing, we are making significant progress in advancing our strategic priorities. We have met our third quarter double-digit growth, are making continued progress within the novel therapies pipeline and new deal advancements and our core domestic business is outpacing a rebounding U.S. SCIg market. We have a plan to remedy the supply chain challenges we have faced, and we continue to build a stronger KORU foundation. We are seeing evidence of our results in our strong quarterly results.
We are excited by our progress to date in executing against our strategic plan and look forward to continuing to build our position as a leading drug delivery player. Thank you again to the KORU team.
And I will now turn the call over for Q&A.
Question-and-Answer Session
Operator
[Operator Instructions]. Our first question comes from the line of Connor Stevenson from Craig-Hallum Capital.
Connor Stevenson
This is Connor on for Alex this afternoon. I guess, first off, could you just speak to kind of how volumes trended out of June and into July? And are we continuing to see a recovery in new patient starts?
Linda Tharby
Yes. Connor, thanks for the question. We are seeing, as we reported, about a 7% growth, 6.9% overall, in the quarter for new patient starts, and we continue to see the recovery with growth from month to month.
Connor Stevenson
And then I guess just on the cost side, obviously, first half had an investment in the new headquarters. Thinking about second half, what kind of investments should we expect to see you make just kind of in the second half, just kind of some puts and takes there?
Linda Tharby
Yes. Thanks, Connor. I’ll let Tom handle that.
Tom Adams
So Connor, the investments that we have in the second half of the year is the completion of the manufacturing transfer. So we do have some additional equipment and some items of that capital equipment of that nature, but it will be less significant than the first half.
Operator
Our next question is from the line of Kyle Rose from Canaccord.
Gibran Ahmed
This is Gibran on for Kyle. Congrats on a strong quarter. I guess maybe just to start on gross margins, appreciate there were some unfavorable headwinds in the Q2 and appreciate the quarterly sort of margin walk you provided. Maybe just to dig in a little bit more, what gives you confidence in a stronger second half on the gross margin side? And maybe if we could just walk through some of those operational efficiencies that you’re looking to realize.
Linda Tharby
Thanks, Gibran. So I’m going to let Tom walk you through it. And I think what’s most important to recall here is that we started with the 54.9%. So the explanation in accounting treatment is really important, and then we’ll talk you through some of the efficiencies that we’ve already realized and what we will see in the quarter three.
Tom Adams
Yes, Gibran, thanks for the question. So we anticipate the issue that we had in the second quarter of labor shortages to be remediated as we continue to hire and restaff our production lines. This will generate further productivity and output, which will help improve our margins here in the third quarter. We also anticipate better performance from a supplier perspective, from the raw materials perspective, on the shipments we have received. Linda?
Linda Tharby
Yes. In addition, I would say, we had some equipment downtime, which has since been remedied in the quarter. And as Tom talked about, we have staffed the production appropriately now, added a third shift. So with all of this, we anticipate getting back up to our full production efficiencies during the third quarter.
Gibran Ahmed
Understood. That’s helpful. And then maybe just on the innovation side and product pipeline side. Any sort of color you can give on the next-generation system you’re developing? I think previously, you had mentioned it will improve upon convenience and have some enhanced connectivity. Just wondering how you’re thinking about the innovation pipeline now with Brian having been in the CTO seat for a few months now?
Linda Tharby
Yes. So first, maybe let me talk about prefills, which is a significant area of focus for us. You see the market expanding, KORU taking advantage of that overall position with our label indication. So prefills is our first area of focus of our innovation efforts.
Second, and I’d like to talk about this in terms of the 3 Cs, right, so comfort, convenience, connected. So on the convenience side, we’re really working a lot on our consumables and making that the most comfortable experience for our patients. On the convenience side, we’re really looking at reducing the overall number of steps required for the platform and then making it a smaller platform overall that can be utilized universally across a range of 10 ml all the way up to 50 mls plus for that platform.
Anticipate that from us. You’ll hear more at the end of the fiscal year as Brian gets his feet under him. We’re really working now with our pharma partners to really define what that system looks like, and we’ll have more to say towards the end of the year. But comfort, convenience, connected are the 3 key themes.
Operator
Our next question comes from the line of Jason Bednar from Piper Sandler.
Jason Bednar
Congrats on the revenue performance here. Linda, if I could actually start there. Could you help us with the sustainability of this really nice revenue growth you’ve been putting up? It seems like it actually would have been even better if not for the back orders you mentioned. But the comps do start to get a little bit more challenging here over the coming quarters. So as you’re updating the revenue guide, maybe help us with how you’re thinking about the inputs around maybe a sustained acceleration in the growth rate and what you’re assuming as far as the trajectory of end market growth and share gains for KORU as well as contributions maybe from novel therapies.
Linda Tharby
Sure. So thanks, Jason. So three primary areas that we look at to really drive that performance and what gave us the confidence to improve our revenue outlook and raise the overall guidance. So first is novel therapies. So you saw us come out in the latter half of last year and by the end of quarter 1, we announced 7 new agreements overall in the past 6 to 9 months. So those agreements now are starting to produce revenue for us. They are progressing products through clinical trials. Some of them resulting in new innovations to our current FREEDOM system. So all of those in conjunction, as we look at that pipeline of what we’ve already signed, is what we see. And then with the expansion of deals that I just announced this quarter, we see additional deals in our pipeline and then as we see new opportunities coming in. So that would be the first. You’re starting to really see that novel therapies pipeline kick in.
Second is a U.S. business that we’ve been out there saying to market we’re looking at about 8% growth overall in the year. It’s been nice to see that 7% growth for the first 2 quarters and us outperforming that market a little bit more than what we anticipated. And that’s primarily due to prefills, which are doing much better than our internal expectations. And when we have the only pump associated with prefills, as they do better, we do better. So that would be second.
And third is, we’ve begun to put some additional efforts into our international business. So although it’s earlier days in that whole effort for international, we’re starting to see some initial paybacks there as well. So it’s nice, and hopefully, you picked this up in the call, that we now have several different areas where we can look to for growth for the company, and we’re starting to see each one of those contribute in different ways and with opportunities to outperform our expectations.
Jason Bednar
That’s really helpful. And then Tom and Linda, I really appreciate the gross margin bridge. Maybe if I can just follow up on a prior question. I just want to better understand the gross margin guidance reset. And also as we think ahead to 2023, I mean, do the issues here in 2022 that are pulling that gross margin a little bit here in this year and then the push out of the outsourcing, I guess, does all of that adjust how you’re thinking about 2023 gross margin potential? And again, not looking for guidance, but if you’re sitting here today relative to where you might have been 3 months ago, has your intermediate to long-term gross margin view for the business changed?
Linda Tharby
Yes. So fundamentally, no, our outlook to get to a 60% gross margin has not changed. And I think the most important part for everyone to understand on our gross margin in the second quarter was the acceleration of the variances, which was really an accounting treatment where typically those variances would have gone into the quarter 3. And they were all accelerated. So we took 2 quarters of variances. So that 54.9% number is really important for us to remember and look at. And then it was impacted in the quarter by a supply chain shortage we had with 1 of our vendors, which prevented us from really getting the full production out that we intended to. So those are things that we now have a handle on, working very closely with supplier where we anticipate getting out of all of that.
And that brings us back to that mid-50% range. Bringing us then in the 55% to 60% range is just really the increased efficiencies we’re seeing in quarter 3 and quarter 4 as we get to full production levels. And then getting to 60% is completing the transition to our outsource manufacturer. That move is near completion and we anticipate happening. We just pushed it out by a few months, so we can really focus on ensuring that we get this back order cleared and get back to where we need to be. So no change at all in our guidance overall on gross margin, just a little bit of a pushout, and we still see a clear headway for us to get to that 60% range when we get the transition to Command complete.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session. And now I would like to turn the call back to Ms. Linda Tharby, CEO, for closing remarks.
Linda Tharby
So in closing, I just want to say thanks again to the KORU team, to all of our customers and patients, for their incredible support for another great quarter. Thank you so much.
Operator
Thank you. The conference of KORU Medical Systems has now concluded. Thank you for your participation. You may now disconnect your lines.
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