KORU Medical Systems Q2 2024 Earnings Call Transcript

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August 7, 2024

There are 8 speakers on the call.

Operator

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Louisa Smith.

Operator

Thank you. You may begin.

Speaker 1

Good afternoon, everyone. Joining me on the call today are Linda Thorby, President and CEO of Coru Medical Systems and Tom Adams, Chief Financial Officer. Earlier today, Coru Medical Systems released financial results for the Q2 ended June 30, 2024. A copy of the press release is available on the company's website. I encourage listeners to have our press release in front of you, which includes our financial results as well as commentary on the quarter.

Speaker 1

Additionally, we will use slides to support commentary in today's call, which are also available on the Investor Relations section of our 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.

Speaker 1

During the call, management will also discuss certain non GAAP financial measures. You will find additional disclosures, including reconciliations of these non GAAP measures with comparable GAAP measures in our press release, the accompanying investor presentation and SEC filings. For the benefit of those listening to the replay, this call was held and recorded on Wednesday, August 7, 2024 at approximately 4:30 p. M. Eastern Time.

Speaker 1

Since then, the company may have made additional comments related to the topics discussed. Linda, please go ahead.

Speaker 2

Thank you, Louisa. Good afternoon, everyone, and thank you for joining us today. I will begin with our Q2 results and key business updates, followed by Tom, who will review our financials and 2024 guidance, before turning it back to me for closing comments. Following the prepared remarks, we will open the line for questions. In quarter 2, we continued our strong momentum and delivered another quarter of record revenues as we executed on our 2024 milestones and progressed towards Vision 2026.

Speaker 2

2nd quarter revenues were $8,400,000 a 22% growth over the same period in 2023. Core business revenues grew 20% driven by SCIG market growth, share gains and geographic expansion. Our Novel Therapies business, which serves as a business development pipeline for new drugs on our Freedom platform also had a strong quarter as we progressed several of our collaborations closer to commercialization. This included successful feasibility results for an oncologybiologic collaboration that we announced in Q1 and the entry into a Phase 3 trial for an expanded nephrology indication for an existing drug. Additionally, in June, we received the long awaited regulatory clearance for our Freedom Edge infusion system for use in Japan, an important milestone in our international core business that will further expand our global reach and growth.

Speaker 2

From an operations standpoint, we continued our focused efforts on cash flow breakeven with progress on multiple fronts. Higher revenues combined with gross margins above 60% and further improvement in our operating efficiencies and working capital led to an overall reduction in net loss and brought us closer to our projected 4th quarter cash flow breakeven. Progress against all of these milestones gives us confidence to raise our 2024 full year revenue and gross margin guidance ranges and reaffirm our cash guidance. Before moving on to additional highlights, I'd also like to provide an update on the recent announcement about how we are refining our corporate organization structure. This past month, we announced the promotion of Chris Paxton, our SVP of Operations to the role of Chief Operating Officer.

Speaker 2

This new role brings together all of our key functions under one leader, providing the focus and alignment needed to drive delivery on our pivotal product and program growth and operational targets. In his 3 years with Qoru, Chris has proven himself as a transformative business leader, has consistently delivered results, and I am confident he will continue to have tremendous impact on our success. Moving on to our key business results, I'll review highlights from each of our strategic growth pillars. Protecting and growing our core domestic SCIG business, expanding internationally and broadening our relevance with the addition of new drugs on our label, our novel therapies business. Within domestic core, we saw strong double digit revenue growth of 14% over the prior year and continue to outpace a healthy SCIG market that's growing mid to high single digits.

Speaker 2

We accomplished this through increased penetration in new and existing accounts with both pumps and consumables. We also saw double digit end user sales growth, an indication of strong customer demand for our products. The underlying IG market recorded a 6th quarter of sequential growth indicating an increase in new patient starts. We continue to see our pharma partners drive prefilled syringe adoption, a more convenient option for patients and the fastest growing segment within SCIG. We expect to continue our momentum with the new product 510 submission in Q4 aimed at improving comfort and convenience for our patient base.

Speaker 2

Moving to international, we had a very strong quarter finishing at 46% year over year growth. Excluding distributor stocking, which Tom will elaborate further on during his remarks, we saw growth in the plus 20% range. Strong performance was driven by underlying IG market growth, increased penetration in current markets and new indications and expansion into new markets. As Pryor mentioned, we also received regulatory clearance for Freedom Edge in Japan that will provide further upside in 2025 and beyond as we see continued subcutaneous market development. In our novel therapy business development efforts, we are focused on growing the number of drugs on our Freedom infusion platform.

Speaker 2

We currently have 16 pipeline collaborations to date, including 3 signed this year. This quarter, we successfully passed feasibility for a prior announced commercialized oncology biologic. This is exciting as we anticipate that we will file a 510 for this product in 2025. In addition, we progressed to Phase III trials for a new nephrology indication for a currently marketed drug and we have a rare disease biologic, which is in development phase and remains on track for a 510 submission by the end of the year. This will enable our first entry into infusion clinics, a prime new market for core growth.

Speaker 2

And finally, we also announced during the quarter agreement with Schott Pharma, the world leader in large volume prefilled syringes to optimize and grow the market for large volume drug delivery. I wanted to take a few moments to dive deeper into the U. S. FCIG market, our largest market where we hold a leadership position and discuss what we see as continued future growth drivers. The graph illustrates the overall patient growth in IG combining both IV and subcu as well as the growth in SCIG.

Speaker 2

A few notes to highlight. Overall SCIG growth is projected in the mid to high single digits and is expected to increase in penetration with SCIG growth outpacing the overall IG market growth. We have a recurring patient base of just over 30,000 patients in the U. S. Most of these patients have a chronic disease and will be on our pump for their life time, creating a large recurring revenue race through the sale of consumables.

Speaker 2

In addition, there are multiple near term catalysts that have the ability to expand our U. S. Patient base. 1 of the primary opportunities we see is the market wide shift towards SGIG as a preferred therapy. The IG pharmaceutical companies are making investments in their subcutaneous portfolios.

Speaker 2

A recent highlight from the quarter was the FDA approval of an expanded label for an SCIG drug, zembify, to include treatment naive patients with primary immunodeficiency. The significance of this is that to date the FDA had required the start of IV therapy prior to the start of subcutaneous therapy. This approval means the healthcare provider can put the patient directly on SCIG. In addition, the CIDP market, which counts for about 10% of our overall patient base continues to grow with new diagnosis and a new delivery option PFS, which makes it more convenient for this high volume dexterity challenged patient to move to FCIG therapy. Quora's emphasis on our key accounts and partnerships focus on leadership and clinical practice and innovation in SCIG devices will continue to ensure we remain a preferred partner for customers and patients.

Speaker 2

Moving on to international, we are pleased with our 40% growth this quarter and wanted to provide some insight into what we see as a continued geographic expansion opportunity ahead of us. There's approximately $60,000,000 of SCIG TAM in markets outside of the U. S, altogether representing a larger TAM than the U. S. Market alone.

Speaker 2

We are currently marketed in 25 countries worldwide. But as you see in the graphic, our overall penetration into these markets has been relatively low. Our strategy is to continue to work with pharmaceutical companies and distribution partners on tailored device and patient programs to both increase our penetration in current markets and drive increased penetration into new SCIG markets. Our recent entry to Japan is one of these examples. We look forward to continuing our geographic expansion efforts and believe it represents an attractive opportunity for growth.

Speaker 2

The next slide represents our novel therapies pipeline. 16 collaborations in total, each one an opportunity to place a new drug on our label or expand existing drugs or innovations into new indications, which in total is a 2,100,000 2,100,000 global patient population opportunity. The outlook highlights indicate the prior mentioned progress within the quarter, including the first clearance of Freedom Edge and Japan, progression of our oncology asset collaboration and our expanded nephrology indication moving into a Phase 3 trial. In total, we now have 6 opportunities for new drugs to be cleared for use with the core platform by 2026, creating a path to $10,000,000 to $20,000,000 of annualized commercial revenue potential at the end of 2026. We are very pleased with our progress we made this quarter on multiple fronts double digit growth in our core business, continued progress in our novel therapies pipeline and increased operating leverage through focused execution from our team.

Speaker 2

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

Speaker 3

Thank you, Linda, and thanks to everyone joining us this afternoon. We are very pleased with our Q2 results as we saw another quarter of double digit top line growth and a record revenue setting quarter. Net revenues for the Q2 were $8,400,000 a 22% increase compared to the prior year period. Our domestic core revenue grew 14% with net revenues of $6,200,000 driven by higher consumable volumes as a result of new patient starts and share gains. Our international core business grew 46% year over year with revenues of $1,600,000 driven by an improved IG supply versus the prior year, increased penetration in CIDP and SID approved indications and continued geographic expansion.

Speaker 3

The 46% growth rate for international core included about 300,000 of accelerated shipments as a result of residual effects from the BSI appeal that we discussed last quarter. Normalized growth excluding these orders was approximately 20 percent. Our novel therapies revenue, which we consider to be Koru pre commercial launch collaboration revenue for services and clinical trial products was $600,000 a 50% improvement compared to prior year, driven by the completion of 3 clinical trial orders for our pipeline collaborations. We continue to diversify our customer base and pipeline collaborations as we work on additional agreements that will bolster our future core commercial business. Our first quarter gross margin improved to 65% and 890 basis point increase compared to the prior year as indicated on the bar graph on the right.

Speaker 3

The strong improvement was largely due to manufacturing efficiencies driven by the consolidation of our U. S. Manufacturing sites. This marks the 4th consecutive quarter that we have achieved margins greater than 60% and we continue to leverage operational excellence to identify and realize manufacturing improvements and efficiencies across our operations. Additionally, we have seen improved gross margins in novel therapies from our sales mix with higher levels of clinical trial orders and in the U.

Speaker 3

S. Core business we recognize year over year increases in average selling price. I'd like to note that in the quarter gross margin was positively impacted by $140,000 inventory valuation adjustment that resulted in about 160 basis points of margin improvement that we do not expect to recur in the second half of the year. Moving on to cash, as of June 30, we had an ending cash balance of $10,500,000 representing cash usage of $300,000 in the quarter. The overall level of cash usage in the quarter was partially driven by net losses of $200,000 which excludes non cash items of stock compensation, depreciation and amortization.

Speaker 3

This was an improvement of $1,900,000 over the prior year. In addition, we used $300,000 of cash to invest in capital equipment for our new production lines and we paid for our financing line for our D and O insurance. Partially offsetting these uses of cash flow improvements in working capital of $300,000 with respect to our inventory levels and we also brought down by a strong revenue quarter, which was partially offset by accounts receivable, driven by the same strength in the quarter. As we look ahead, our cash and cash flow targets remain on track and we are substantially reducing our cash burden since last year. In the first half of the year, we had cash usage of $1,000,000 We expect the second half cash usage to be higher than our first half with peak spending coming in Q3, driven by the majority of our capital investment outlay for our new production line and the related R and D project spending on innovation to bring new products to market.

Speaker 3

We remain confident that we will end the year with a greater than $8,000,000 cash balance as well as being cash flow breakeven in the Q4. I would also like to remind everyone that the ending cash balance of at least $8,000,000 is exclusive of our undrawn $10,000,000 credit facility that is being reserved for strategic growth capital. Moving on to 2024 guidance. When we originally set our guidance, we noted some key growth drivers that would enable our success. Those being mid to high single digit SCIG market growth, 3 new novel therapy collaborations and underlying prefilled syringe penetration of 20% to 25%.

Speaker 3

Now that we have 2 quarters behind us, we have delivered against our novel therapies milestones and are seeing a very healthy SCIG market with increasing prefilled syringe demand. We are raising our revenue and gross margin guidance. We expect the following for the remainder of the year. Revenues of $32,000,000 to $32,500,000 up from the prior range of $31,200,000 to $30,200,000 and representing 12% to 14% growth over prior year. And please note, we mentioned in our commentary on international sales that we saw growth levels in the Q2 that we do not anticipate to be recurring.

Speaker 3

Our updated guidance accounts for international sales normalizing for the rest of the year. As for gross margins, we now expect the full year gross margin between 61% 62%. While we anticipate more pressure on margin from expanding into lower ASP regions, we continue to face inflationary pressure with our supply chain. We have managed to hold and improve our margin internally with additional manufacturing efficiencies and improved sales mix margin in novel therapies. Lastly, I mentioned before we expect to finish with an ending cash balance of more than $8,000,000 which includes approximately $23,500,000 to $24,000,000 in operating expense.

Speaker 3

This ending balance is exclusive of stock compensation and includes the expectation that we will reach cash flow breakeven in the Q4 of 2024. Our credit facility reserve remains available to us for strategic growth opportunities, but is not included in our estimates for 2024 ending cash balance. With that, I will now turn the call back to Linda for closing remarks.

Speaker 2

Thanks, Tom. This quarter, we continue to execute on our business strategy, saw strong results as we did so, and we'll continue this focus in the back half. We grew double digits, outperforming a growing U. S. SCIG market and expanded our international reach.

Speaker 2

Our Novel Therapies business development efforts are becoming increasingly relevant as multiple pipeline drugs approach approval for use on our platform, a critical inflection point for the business. We expect that we will see continued differentiation of Koru in our Freedom infusion platform with a submission for a new product and a new drug by the end of 2024. We also made meaningful progress in our operating leverage towards our goal of cash flow breakeven by end of year. This strength across each of our strategic business areas generated record revenues and gives us the confidence to reiterate each of our 2024 milestones highlighted. These milestones are indicators of our progress towards our longer term Vision 2026 goals.

Speaker 2

Our first half momentum is encouraging as we continue in our journey to transform the company to a global leader in large volume subcutaneous drug delivery. In closing, I'd like to thank everyone on the Coram Medical team for the hard work they do every day to create a superior patient experience and drive value for each of our stakeholders. Operator, I will now turn the call over for Q and A.

Operator

Thank you. First question we have is from Caitlin Cronin of Canaccord Genuity. Please go ahead.

Speaker 4

Hi, congrats on the great quarter and thanks for taking the questions. Just to start, you mentioned prefilled syringe penetration being a driver of revenue guidance. Given you raised the revenue guidance, where is prefilled syringe penetration at this point? And jumping off of that, how is the progress on the 50 ml prefilled syringe launch earlier this year?

Speaker 2

So thanks for the congrats. We're excited by the progress this quarter. Specifically related to prefilled syringes, as you are aware, the leader in the U. S. Market, which is CSL, has launched now their entire prefilled syringe platform, which is compatible with our core devices.

Speaker 2

The market uptake is getting stronger through Q2 as their intention is to move their entire platform over to prefilled syringes by the end of the year. So we anticipate again for us, this is a 1 on 1 driver from vials to prefills where we're seeing that conversion. We think that the longer term potential around prefilled syringes is the opportunity to bring more patients into the category as it's an easier format for the patient to use versus vials. So excited overall by our continued progress in the U. S.

Speaker 2

Market and, pre filled syringes is a format change for us.

Speaker 4

Got it. Okay. And congrats on the Japan clearance. Do you plan to pursue Cubic 2 clearance in other geographies as well?

Speaker 2

I'm sorry, I missed the back end of that question.

Speaker 4

You plan to pursue Q2 clearance in other geographies other than Japan, because I believe that that's the first clearance you've had for that drug.

Speaker 2

For Cubitru specifically? Or is it just more expanded geographies? Okay. I was asking about Sorry, Caitlin, go ahead.

Speaker 4

No, no, no. I mean, I was asking just about QBICTRU specifically since I don't believe you are cleared in other regions for that drug. But I mean, if you want to talk about the broader QVAC expansion as well that would be great.

Speaker 2

Yes. We are cleared for Cubitru usage today, which is a KEDA drug. We are cleared for that drug, specifically in the U. S. Market and broadly internationally for that drug.

Speaker 2

So the significance overall for the Japan is just the entry into the Japan market. Yes, we did receive clearance with Cubitru. We also received clearance though with CSL's Hizentra drug in that market, which compose about 95% of the overall Japanese market. So, the significance for us obviously is Japan is a top 10 overall IG market, and we would anticipate that, we will look for more significant approvals specifically in Latin America and Asia Pac for Cubitru in the future.

Speaker 4

Great. Thanks for taking the questions.

Operator

The next question we have is from Frank Tuckonen of Lake Street Capital. Please go ahead.

Speaker 5

Hey, this is Nelson Cox on for Frank. Thanks for taking the questions and great to see all the progress. I wanted to start with the expanded label for ZEMBIFY allowing patients to go straight to SCIG. I heard you mentioned it in the prepared remarks, but can you just walk us through that a bit more and how we should think about this impacting your business in the market overall?

Speaker 2

Sure, sure. Great question and thank you for the note of congratulations. So all of the existing subcutaneous IG labels today call for the healthcare provider to start the patient on an initial dose of IV therapy before progressing to SCIG therapy. Those labels have been in existence for well over a decade now. And so the significance of this is Grifols with their ZEMBAFI label was the 1st drug manufacturer practice, it certainly was off label usage.

Speaker 2

So we anticipate that this will just make it a much easier progression to go directly to SCIG. If I had a crystal ball, I'd love to give you an idea of what that might look like. But I think we're just going to have to see what happens in the coming quarters relative to healthcare practitioner use and we will be sure to update you on that.

Speaker 5

Perfect. And then maybe just following up on Japan. Can you kind of talk about the strategy there and following the approval in July, how should we think about you guys entering that geography? And do you intend to go direct or will you need to do any other work to ensure access?

Speaker 2

Yes. So this will be we are still working to set up both our distributor and pharmaceutical company programs. So do have an existing distributor relationship, but, all of the details, we're still working through. We see Japan as a significant market. We believe it will be over time one of our top 10 markets for IG.

Speaker 2

We believe that it will largely be a consumables play initially and this is largely an electronic pump market. So we will be focusing on the use of our consumables in that market. And don't see a big number in 2024, but see it adding about 5% to our overall growth number in 2025 for international.

Speaker 5

Great. Thanks guys and congrats again.

Speaker 2

Thank you.

Operator

The next question we have is from Chase Knickerbocker of Craig Hallum Capital Group. Please go ahead.

Speaker 6

Good afternoon. Thanks for taking the questions and I just want to pass along my congratulations as well. Maybe just first from me. Linda, if you had to say what's driving predominantly the outperformance here in the first half of the year, would you say it's more new patient starts or subcu conversions from IV? Thanks.

Speaker 2

So I would say it's a combination. I mean the performance of the overall subcutaneous IG market is driving new patient starts. But certainly the growth in the front half, the performance in our international and our domestic core businesses are doing incredibly well as well as our business development efforts in novel therapies. So strength in all three is what we see driving the front half growth.

Speaker 6

And maybe just on kind of the prefilled benefit that we could get from CSL blend the vials. Do you think we've seen some of that benefit already as part of the kind of outperformance in the first half, maybe a benefit from some increased kind of pre filled conversion or maybe just some thoughts there? Thanks.

Speaker 2

Yes. I think the prefilled launches is going per our internal plans to date. I think we will see more upside as we get into some of our new product innovations that one of them I mentioned coming towards the back half of the year and the other one coming in 2025, which are tailored to benefit the prefilled users. So I think we'll see more then, and I think the first half is performing as per our expectations.

Speaker 6

Yes. So it sounds like overall SG and A market growth expectations are kind of unchanged. Things are going as you expected. Maybe just speak to guidance implying a little bit of a step down sequentially from here in revenue from the first half of the year into the second half. Should we think of this as kind of conservatism?

Speaker 6

Or is there some seasonality we should think about this year?

Speaker 2

Yes. So, thank you. Great question. So yes, Q3, traditionally, we see a bit of a slowdown, both here in the U. S.

Speaker 2

And internationally as vacations tend to slow down overall new patient starts, both from the healthcare provider perspective and from the patient perspective. The second thing is, as Tom mentioned to you, we had this $300,000 that was pulled into quarter 2 accelerated due to the prior issue with the BSI regulatory clearance, which we've since cleared. And then finally, we always have to consider timing of novel therapies revenues that is our intention to complete earlier, but working together with our pharmaceutical collaborations sometimes takes longer than we expected. So I think we look at all three of those things. And of course, I wouldn't call it conservative, but I would say that we certainly hope that we have opportunities to outperform in the back half with both further international penetration and NT collaboration time.

Speaker 6

Got it. And then just last for me, Linda. That was helpful. Maybe speak to kind of any plans that you have from a commercialization perspective on these new novel therapies that are going to be launching into you guys are going to be launching into the infusion clinics here that deliver those patient administered novel therapies, the oncology asset and rare disease. Maybe just speak to kind of how you guys expect to kind of target that market, maybe early commercial plans?

Speaker 6

Thanks.

Speaker 2

Yes. So sure. With any of our launches on our label, the most important early partnership we have is with the pharmaceutical company itself. So we work closely with them on their launch plans and ensuring that we understand their targeted messaging and we work with them to figure out where the right target and call points, whether that's a country or a specific clinic. So that's first and, we'll continue those efforts on those new drugs we talked about.

Speaker 2

2nd, we many of the specialty pharmacies that we work with today service the rare disease drug that I referenced, which we'll plan to file by the end of Q4. And then for oncology, we expect that we will work with a distributor who focuses and specializes in oncology clinics for that market. But we're in the process of finalizing our commercialization plans for that drug launch for our launch with that drug. Great. Thank you.

Operator

The next question we have is from Anderson Skok of B. Riley Securities. Please go ahead.

Speaker 7

Hi, this is Anderson on for Kyle. Congratulations on the great quarter and thank you for taking our questions. So first, do you have any updates on the potential expansion in Canada? I know there were some delays initially, but how is that study progressing and when should we expect to see approval here?

Speaker 2

Yes. So, we continue in our discussions with the pharmaceutical partners in those markets. So that is progressing extremely well. And the launch is really contingent upon our launch of a couple of new products and we expect those to be completed in early 2025. So likely see a launch into Canada occur in that 2025

Speaker 7

timeframe. Okay, great. Thank you. And then could you just give us some more color on the SHOT pharmaceutical collaboration? Will they be developing new therapies for use on the Freedom Pumps?

Speaker 7

And just how should we think about potential revenue contribution from this collaboration?

Speaker 2

So, first, I'll just reiterate that SHOT is the world's largest pre filled device manufacturer in the world. So quite excited to announce this partnership. The partnership will focus on the use of our Freedom system platform with their prefilled syringes. We will focus on pipelines and looking at who we're working with jointly to ensure that the end customer, which is the pharmaceutical customer is getting the best service of a combined device, which includes our Freedom platform and their prefilled device. We think there will be many advantages to the convenience and time required to infuse with prefilled syringes with this platform.

Speaker 2

We intend to do this at joint conferences, joint business calls, etcetera with between the two companies. So too early to talk about commercial potential. We're just at the start of the collaboration, but I would expect to have more of an update on that in 2025.

Speaker 7

Okay, great. Thank you. That's all from us.

Operator

Ladies and gentlemen, we have reached the end of the question and answer session. And with that, we conclude today's conference call. Thank you for joining us. You may now disconnect your

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