KORU Medical Systems Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Coru Medical Systems Second Quarter 2023 Financial Results Conference Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would like now to turn the conference over to your host, Hannah of the Gilmartin Group.

Operator

Please go ahead, Hannah.

Speaker 1

Thank you, and good afternoon, everyone. Earlier today, Kogra Medical Systems released financial results for the Q2 ended June 30, 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.

Speaker 1

Actual events or results could differ materially due to many risks and uncertainties, including those mentioned in the associated press release 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.

Speaker 1

For the benefit of those listening to the replay, this call was held and recorded on Wednesday, August 9, at approximately 4:30 pm Eastern Time. Since then, the company may have made additional comments related to these topics discussed. And please reference the company's most recent press release and filings with the SEC. Joining us on today's call is Linda Tharby, President and CEO of Cover Medical Systems and Tom Adams, Cover Medical's Chief Financial Officer. Linda, please go ahead.

Speaker 2

Thank you, Hannah. Good afternoon, everyone, and thank you for joining us today. During today's call, we will use slides to support our commentary. I will begin by walking through key business updates for the Q2. Tom will then review our financials and updated 2023 guidance.

Speaker 2

I will then close with a milestone progress update against Vision 2026. Following our prepared remarks, we'll be happy to open the call for Q and A. We are very pleased with the progress and milestones achieved in our second as we continue to make important advancements towards Vision 26. A few key highlights on the quarter that I will dive into further in today's presentation. 1st, in our core business, we saw growth of about 8%, which continue to outpace the U.

Speaker 2

S. Subcutaneous immunoglobulin or SCIG script market, which contracted in the quarter. In our international business, our efforts over the past year continued to progress as we had another quarter of double digit growth. We signed another novel therapies collaboration for use of our Freedom system in a Phase 3 trial and we submitted ahead of schedule of 510 for the Freedom60 Infusion System with ISEDENTRA 50 ml prefilled syringes. Finally, we are updating the company's full year 2023 outlook to reflect the QT decline in the U.

Speaker 2

S. SCIG market and a change in timing of Novel Therapies deal signings and subsequent revenue. Before jumping into the details of the quarter, I would like Take a moment to welcome Tom to his new role as our CFO. Tom has been integral to the company, achieving many of the milestones I discussed, as well as building out our finance team, processes and systems. I'm excited for him to continue to grow and add value as he steps into his new role.

Speaker 2

I want us to begin today by taking a moment to remind everyone what we do. Our mission at Koru continues to be making subcutaneous drug treatment a reality at home. Our Freedom infusion systems has more than 35,000 patients and new ones being added every day, many of them chronic that self infuse their drug in the comfort of their homes. Our Freedom system can be customized for drug and infusion volumes from 5 to 100 ml, supports multiple therapies and disease states and has established regulatory approval in over 25 countries. Our Novel Therapies business supports biopharmaceutical Once a drug has completed clinical requirements and receives regulatory approval, we become an approved drug delivery provider and it becomes a part of our core business.

Speaker 2

The core business includes our domestic and international commercialization of our Freedom system to specialty pharmacies and home care organizations. We have a broad label of indication predominantly in the SCIG market with less than 20% of that market penetrated. Majority of our patients suffer chronic illnesses and are lifetime users of the system, offering a valuable source of recurring revenues. Our business model has both a recurring revenue core business and future revenue with our NT business with 15 total collaborations to date, offering the potential for several new drugs on the Corus system. Moving to a deeper dive in our Vision 26 strategy and our 3 growth drivers.

Speaker 2

Starting with the first growing our leadership position in SCIG, today Coru has over 35,000 patients in of the U. S. And strong relationships with our specialty pharmacy partners to transition the patient to drug therapy in the home. During the quarter, we saw a larger than normal Q2 seasonal fluctuation in overall SCIG reported scripts, down 13% on the quarter. Our conversations with specialty pharmacies, pharmaceutical partners, industry researchers and reimbursement specialists saw no concern over these growth levels, returning to historic levels of high single digit and low double digit growth over the coming quarters as they continue to focus efforts on supporting the movement of healthcare to the home.

Speaker 2

Many saw this as a blip due to lower infection rates versus the prior year, which is generally a preceding event to an immune deficiency diagnosis. We remain confident in our ability as we have shown we can outperform. Our growth again outpaced the underlying market. The growth was led by our recurring consumables revenue and we had double digit new pump sales growth. A key driver of our U.

Speaker 2

S. Core business is continued strength in prefilled syringes and the 2nd quarter was no different from recent trends. The overall convenience and patient preference continued to drive pre filled adoption and overall pre filled syringe penetration increased to about 12.5% for the Q2. During the quarter, the company submitted a 510 to the FDA for the use of our Freedom 60 infusion system with Hizentra 50 ml prefilled syringes. This submission marks another milestone in of Corametical's mission to simplify subcu therapy for patients.

Speaker 2

The FDA approved the 50 ml Hizentra for prefilled syringe in April of 2023. Hizentra is the most prescribed subcu immunoglobulin and the first to be available in prefilled syringes, Currently offering 5, 10 and 20 ml formats to satisfy further 2 thirds and the 50 ml when available in 2024 will satisfy an additional 2 thirds of the patient market. The conversion to prefilled syringes is an important growth driver for us as it drives share and we believe over time increase new starts and conversions to of Optiotherapy. As a reminder, our Freedom Edge system remains the only pump with FDA clearance for use with prefilled syringes. Moving to our NT business, where we are focused on new biopharmaceutical collaborations for clearance of our Freedom system for at home use.

Speaker 2

We announced a few weeks ago the signing of another Novel Therapies collaboration. This agreement is with a biopharmaceutical company to validate the Freedom infusion system for use with a novel endocrinology biologic. The drug developer is expected to begin Phase 3 studies by the end of 2023 for treatment of a rare genetic disease with global preference of roughly 10,000 that currently has no pharmaceutical treatment. The closing of this collaboration in July, we brought our year to date new collaborations to 2 and we remain on track for 6 new collaborations in 2023. In total, we have 15 signed collaborations and we also have a pipeline of 15 additional high potential opportunities.

Speaker 2

And finally, we're excited about our growth opportunities geographically. We ended the quarter with growth across several key markets, representing growth of over 17% year over year. New patient starts fueled by the increase in IG supply in the EU continue to drive growth and we're well positioned to benefit from our distribution, which is now in over 18 countries. International has become a vital key third growth strategy for the company. I will now dive a bit further into our NT business and this slide, which shows our total pipeline of NT opportunities.

Speaker 2

We now have 15 collaborations to date, including over 2,000,000 potential patients and a TAM of roughly 2,500,000,000. Our IG base at the top of our pipeline becomes an important source of recurring revenue as we support the work of the IG manufacturers in increasing subcu penetration, lifecycle management strategies and on growing their label indications. The bottom of this pipeline represents 9 additional candidates outside of IG across 6 additional drug categories with potential to launch 5 new drugs in the next 5 years. We know that not all of these will likely succeed, but with 2 of these with patient populations over 100 1,003 with patient bases up to 50,000, any combination has the potential to double Qoroo's current patient base. I have bolded our newest entry.

Speaker 2

We are excited to add late stage pharmaceutical collaboration as it's the shot on goal closer to launch to solve a major unmet patient need. We are excited by our Novel Therapies business as we continue to progress our relationships to help drive greater knowledge and adoption around the benefits of subcu delivery for patients in the home. This next slide brings both our core and NT business together to show you our growth potential over the coming 5 years. Our core business with multiple commercialized drugs gives us strong recurring revenue today. Further, with 90 plus percent of those drugs being in IG, which is less than 20% penetrated on subcu treatment today, we see a lot of growth ahead.

Speaker 2

As we build our NT pipeline based on projected drug launch timing, We see multiple revenue opportunities over the next 1 to 5 plus year timeframe. As we look to the remainder of 2023, we are Confident that we will continue making important additions to our Novel Therapies collaboration and are excited to provide ongoing updates. In addition to the progress in our businesses, progressing new products and innovation is also key to drive Cora to the next phase. This slide lays out both our product and expected new commercial label milestones over the next few years. Our product strategy is centered on comfort, convenience and connected.

Speaker 2

During the Q2, we completed 2 milestones in our 5 10 ks submission for a 50 ml prefilled syringe label expansion with the Freedom 60 pump line extension. For the remainder of 2023, we anticipate another 510 filing for our consumables. Looking further ahead, we are extremely excited about the next generation pump platform for IG and novel therapies and multiple new drugs on the Freedom system. Another very good quarter of strategic progress across both core and T and Innovation. I will now turn the call over to Tom to review our financials.

Speaker 3

Thank you, Linda, and good afternoon, everyone. While we saw a challenging quarter and a decline in U. S. SCIG market, I am excited to report a solid quarter of 6% growth with total net sales of 6,900,000 Domestic core growth of 8% was primarily driven by increased growth in consumables and pumps, new accounts and increased prefilled syringe adoption. International core growth of 17% was driven by strength across several EU markets and growing global IG volume availability.

Speaker 3

Novel Therapy's net revenue declined by 28% in the Q2 of 2023, primarily related to strong NRE revenues in the comparable quarter last Sure, as well as timing of some of the 20 23 pipeline wins. Gross margins increased to 6.1% compared to 51.1% in the Q2 of 2022. The increase in gross margin was primarily driven by increased Efficiencies in Manufacturing. We completed the first half of the year with gross margins in the midpoint range of our guidance. As we look at the second half of the year, we expect significant improvements in gross margin driven by 2 full quarters lower outsourced products, which as we reported in Q1 is fully completed.

Speaker 3

We also see lower overall labor costs, overhead and improved efficiencies as we have now consolidated our U. S. Manufacturing from 2 sites to 1. The outsourcing and reduction of the manufacturing site contributes about 400 basis points to our gross margin increase and combined with a 100 basis points improvement in pricing will lead to increased back half gross margins of 500 basis points improvements. We project to exit the year between 60% and Cash balance at the end of Q2 was $11,700,000 and represented a $500,000 cash burn from the prior quarter.

Speaker 3

Our biggest driver of cash burn was our net cash operating loss of $2,100,000 excluding non cash items for stock compensation and depreciation. We also invested $300,000 in CapEx for equipment for our next generation products. Offsetting these cash flows, these cash outflows were working capital improvements of $1,900,000 driven by DSO improvements worth 500,000 and executing on our planned reduction of inventory of $1,400,000 as we draw down finished goods and raw material inventories from our outsourced manufacturing transition. We continue to control and plan our cash according to our revenue, gross margin and expense guidance and reaffirm our end of year guidance of having a cash balance greater than 10,000,000 which I will get into more as I discuss guidance. We are updating our guidance for full year 2023 to reflect the Q2 decline in the U.

Speaker 3

S. Script market, resulting in a change of our outlook on underlining U. S. Core market growth assumption from 10% to the mid single digit range. In addition, we are updating our guidance to reflect a change in timing of Novel Therapies revenues.

Speaker 3

Full year of 2023 revenue is now expected to be between $31,000,000 to 32 point versus 12% that was delivered in the first half. Some key drivers that will get us there include SCIG drug market returning to growth and the execution on our current and future NT Novel Therapies pipeline deals as well as the continued double digit international growth. Gross margin guidance remains between 58% to 60% for the full year and to exit the year between 60% to 62%. With the completion of the manufacturing transition behind us and the first half gross margin on plan, we We expect to see a progressive step change in our second half gross margins as we continue to see 2 full quarters of the lower cost of goods benefit from our outsourced manufacturing initiatives and improvements in average selling prices. We expect our cash balance at year end 2023 to be greater than $10,000,000 We expect our operating expenses to be approximately $29,500,000 versus $30,000,000 reported prior with phasing that will vary between quarters driven by our R and D program spend.

Speaker 3

And we expect to invest in capital equipment for our innovation projects and we continue to improve working capital, including lowering inventory by a further $1,000,000 during the second half of the year. It's also important to note we will see lower cash burn in the second half driven by improvements in net losses from stronger second half revenue, our gross margin improvements and the working capital improvements. While we may look to increase the cash on our balance sheet through non dilutive debt financing, we are not I will now turn the call back to Linda for closing comments.

Speaker 2

Thanks, Tom. In December of 2021, about 18 months ago, we launched Vision 26 to transform the company over 5 years from an IG company to a leading drug delivery provider and revenue of $60,000,000 This laid out a series of key milestones and I want to take a moment to review our progress. Our first milestone were Phase 3 trials, the final phase before drug launch. We projected 5 Phase 3 trials by the end of of which we now have 2 in progress. We projected 1 significant new commercial drug indication for our patient population of over 100,000.

Speaker 2

We have launched 1 with a patient population of 15,000 and have 5 further potential drug candidates by 2026. We projected 8 new products and indications, which drive our core revenue, of which we have 4 completed, one further expected with 50 ml prefilled syringe clearance by the end of this year and we remain confident in 3 further. Our revenue projections to $60,000,000 is now supported by 5 of our core business and current approved products and increased subcu penetration into that base is our largest driver, followed by our N2 revenues, further share gains driven by innovation and the final major opportunity being OUS expansion. We're excited to look back and see our advancements to date and we look forward to further update. In closing, I'm encouraged by our 2nd quarter progress across all of our businesses and on the innovation front.

Speaker 2

We continue to have exciting work ahead that will evolve the company strategically as a leader in drug delivery in the home and add continued value to patients, customers and shareholders. Finally, in closing, I want to thank the entire Coru team for exceptional efforts on another great quarter. Operator, I will now turn it over to you for Q and A.

Operator

Thank you. We will now begin the question and answer session. The first question comes with Alex Nowak with Craig Hallum Capital. Please go ahead.

Speaker 4

Okay, great. Good afternoon, everyone. Linda, just curious, what theories are you hearing out there to kind of This first half slump in the SCIG market. Just you mentioned you spoke with pharmacies, the drug companies, I'm sure patients as well. Just what are you hearing out there that would explain the weakness?

Speaker 4

And then ultimately, how is the FEIG market evolving so far in Q3?

Speaker 2

Hi, Alex. Thanks for the question. I figured it might be the first one that we received. So, as we know, we had a very strong Q4 of 2022 in the overall market with the market A bit of a decline in the overall market, but this one was bigger than what we've seen in prior. So our review and discussions with pharmaceutical companies, specialty pharmacies, Reimbursements, you can imagine we spoke to a lot of different people on this one.

Speaker 2

The one thing that came back was That overall diagnosis of immune deficiency disorders are driven by Infections. People get infections, they go to the doctor and generally that's where you see the diagnosis occur. Given that we had lower overall reported infections in the last quarter of 2022, we think we may have Seeing some lag of that impact into 2023. That is the most consistent factor that we heard. Other than that, everybody, we saw Takeda reported publicly as did Grifols.

Speaker 2

I was encouraged to see both of them have strong IG franchises and both of them mentioned subcutaneous IG therapy as a big growth driver for them moving forward.

Speaker 4

Very helpful. And then maybe expand on how CSL is getting positioned here for the 50 milliliter prefilled launch. What are I guess what are they saying on what this can do to their business about the IV subcu conversion and also with regards to their market share for Hizentra?

Speaker 2

And maybe I'll speak more broadly about how we feel at Qoru, which is informed by all of our discussions, Because any conversations we have would be confidential unless it's public. But Across now, I think you have CSL, obviously, is out there and then you have Grifols publicly talking about their pre fill launch as well as Octapharma. So we're pretty excited now that 3 of the 4 major pharmaceutical IG providers are working towards prefills. Why are they doing this? Obviously, the comfort and convenience that is offered with prefilled fringes that reduces the number of steps by over 25 and in some cases as much as 60% to 70% for a particular user.

Speaker 2

And the preference for these is well in the 85% to 95% range for prefills. So what we see is, as we look out over the coming 5 years, we project as much as On the low end 50% and on the high end 75% of the market will be converted to pre fills. So obviously with that kind of conversion, We believe it will drive significant share in revenue for Koru as well as We believe over time we'll bring new patients into the therapy as doctors see that at home therapy becomes that much easier to perform with prefills. So an exciting short term as we get 50 ml Out here over the next year, a really exciting midterm as we see the penetration rates. And What can it do to overall subcu penetration is what we're most excited by.

Speaker 4

Yes, absolutely. Last question and a little multipart one here. It's with regards to the Novel Therapies pipeline. I think it was In the pipeline last quarter, you added 1 during the quarter, ended the quarter at 15. So I just want to confirm, did one of the drugs drop off?

Speaker 4

Any details there? And then the funnel beyond the 15 is another 15. Maybe expand on if these are Phase 3 studies and any reformulations, Any detail there? Thank you.

Speaker 2

Yes. Thanks, Alex. Yes, you are correct. You did the math well. We had one dropout, which was an oncology candidate.

Speaker 2

The actual program was canceled At the pharmaceutical company, it was a opportunity for oncology therapy in the home. So that one was canceled, which brought our 2016 back down to 15. So we know that will happen over time And that's why, 15 overall feels like a great number to us. And as I'm showing, in our further projections, We're not counting on all 15 of those to make it through. We also have and I would say over the last quarter have seen a tremendous up check-in the overall numbers of new opportunities that we see in our pipeline.

Speaker 2

So those would range in everything from Further oncology targets in there, autoimmune disorders in there, but across Many of the existing drug therapy classes I've talked about and also many new ones. So we have lots of work to keep us busy. I wish that we could get all the paperwork signed sooner so that we could ink the deals faster and get the work done, But we're working hard to do that.

Speaker 4

All right. Appreciate the update. Thank you. No, that's great. Thanks, Linda.

Speaker 4

Thanks, Tom.

Operator

The next question comes with Kyle Rose with Canaccord Genuity. Sorry, please go ahead.

Speaker 5

Hi, everyone. How's it going? It's Caitlin on for Kyle. So OUS growth was strong this quarter. Where is the growth largely being driven from?

Speaker 5

And Can we think about this growth rate as sustainable moving forward? And then on the electronic pump comparison trial, where are you with progress on that. Thanks.

Speaker 2

Great. Hi, Caitlin. So OUS growth, yes, we are excited by the uptick in the growth. The growth is really coming from a couple of areas. First of all, if you recall last year, the IG drug supply still We had some shortages internationally.

Speaker 2

So now that drug supply is back, we're seeing growth across several markets. So it's not in any one market, which we're quite excited about. That's everywhere from the Nordics to the UK to Saudi Arabia. So that's great news for us. We see lots of potential opportunity and we see higher levels of penetration of subcu therapy In international markets, governments have really driven the movement of healthcare into the home.

Speaker 2

On the Sustainability part, that is what we are planning for. However, we will see, last year, we had a new drug launch in the second half of the year, which was the Aspavelli product with Sobei that we launched in Europe. So we project that in the second half, We've got a tough compare, so maybe not as quite as high the growth that we saw in the front half projected for the back half for OUS. So 23% growth through the front half of the year for us. We'll see some toughness in the back half given that drug launch.

Speaker 5

Great. And then I think I got a part 2 question.

Speaker 1

Yes. No. Yes. I apologize.

Speaker 2

Thank you, Tom. So the trial we are continuing to enroll patients in that trial, which is a trial just for everyone's benefit on the phone is comparing our Coru Mechanical Pump System to the electronic pump systems available in Europe. We expect to have the first reported outcomes from that trial in the latter part of this year in the December timeframe.

Speaker 5

Great. And then could you provide a little more color on the novel therapy Deal signing cadence that caused you to change your guidance

Speaker 1

a little bit, that would be great. Thanks.

Speaker 2

Yes. So coming into the year, we would have anticipated year to date we signed 2 deals and how it works is once we get the deal We've got work that we need to complete in order to recognize revenues. So we anticipated having A few more deals signed in the first half of the year. We now see those deals are lagging into the back half of our year. So not major cause for concern.

Speaker 2

We still feel very confident in the 6 number overall, but caused us to push out the overall revenues. And again, with that business, what we have to think about is the total shots on goal. The real prize comes with the commercial launch, but obviously all of these deals we sign lead to some pre commercial revenues, which we count on for in our revenue projections. So just some slippage by a couple of months affects our year.

Speaker 1

Thank you.

Operator

The next question comes with Jason Bednar with Piper Sandler. Please go ahead.

Speaker 6

Hey, Linda and Tom. This is John for Jason. Can you frame your level of confidence that the U. S. Market will not take a And then one on the longer term, what does the U.

Speaker 6

S. Market need to grow at in order for the company to hit its 2026 revenue target?

Speaker 2

Excellent question. Thanks, Sean. So if I could show you the number of sheets we projected on what we think the U. S. Market can do.

Speaker 2

And I guess, your best projection of future is looking back, right? So we have not seen a quarter like that happen in Any prior history except through COVID. So unless we think COVID is coming back, I don't think we're going to see a continued phase of this. We saw and that's why I reported in the earlier question that I got where we saw the overall Subcutaneous therapy grow significantly in the Q4 of 2022 and in the 1st 2 months of 2023. So I really think this was a blip due to some overhang, really an Omnicom, probably overhang where we saw increased infections drive Greater Q222 Prescriptions.

Speaker 2

I really think it's an overhang from that. So again, I'll end where I started, which is I believe that the overall market, given the past, We'll definitely see it come back. Now, will we see it come back right away? Our July month was strong. So we think that's a precursor that the overall market is coming back.

Speaker 2

And also we look at our end user demand and our end user demand, which is our sales to specialty pharmacies rather than to wholesalers, which is what we report. Our End user demand to pharmacies was very strong in quarter 2 and outperformed our GL numbers. As for what will it take to hit our longer term numbers, obviously, I'm pretty excited that our U. S. Business grew 11% in the first half of the year with basically a flat script market.

Speaker 2

So that's great news. We are projecting though to hit these numbers. We're going to need to see that market come back anywhere between an 8% and 12% growth range, depending on the year. Obviously, we start off a little around an 8% or 9% and we grow it to a 10% to 12% overall projected market as we think see things like pre fill start to kick in.

Speaker 6

Great. Thanks, Linda. And then can you speak to any feedback you received thus far from the FDA on the 510 submission for the 50 milliliter PFS for AZENTRA?

Speaker 2

So the good news is, as it's past the first stage, it's in formal review now. It's in substantive review. That's great news for us. So the file was accepted. There was no rejection of the file for any technical reasons.

Speaker 2

Substantive review phase, we have not had any questions to date, which I'm going to take as a good thing. And we hope to have a clearance on that in the November timeframe, which would have us be ready for CSL has not publicly announced their launch timing of that. They just got this clearance and we project It will be sometime in the first half of twenty twenty four, but nothing's public on that. So we project that we will get our clearance in the back half of the quarter of the Q4, which will put us in a great position to be able to either pre Chip, either late, late in Q4 or more likely Q1 of 'twenty four will get off to a great start.

Operator

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Linda Thorby, President and CEO of the company for any closing remarks. Please go ahead.

Speaker 2

Thank you, everyone,

Operator

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a good

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KORU Medical Systems Q2 2023
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