Q2 2022 KORU Medical Systems Inc Earnings Call
Greetings and welcome to <unk> medical systems second quarter, 2022 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference. So what's your host Greg Joe that checks all the Gilmartin group. Please go ahead Sir.
Thank you Ryan and good afternoon, everyone.
Earlier today <unk> Medical systems released financial results for the second quarter ended June 32022, 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 moving those matches and the associated press release and our most recent filings with the SEC.
We assume no obligation to update any forward looking statements.
Courage 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 3rd 2022 on approximately 430 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 Elizabeth Harvey President and CEO of Cobra Medical systems, and Tom out of Robotics interim Chief Financial Officer. Please go ahead.
Thank you Greg.
Good afternoon, everyone and thank you for joining us today.
To start I want to emphasize.
Art work and dedication of the entire core of 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 a 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 sub Q drop therapy market.
With over 25000 patients on our freedom infusion system.
Our current market for sub Q home infusion, primarily first patient suffering from the current conditions.
D and CIB.
Market with substantial opportunity with less than 20% of patients on <unk> therapy.
Currently we have 12 commercialized drugs.
Indications on the core medical freedom infusion system.
Having doubled our number with six new label expansion in the past year.
And the overall market for soft Q drops and development continues to expand we continue to build our new drive pipeline with.
With several new clinical trials and development agreements over the last 12 months.
And 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, 'twenty two marked our third consecutive quarter of double digit growth.
Leading this growth with 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 two new deals this quarter.
Our core U S business also performed ahead of a rebounding U S <unk> market.
We continued to solidify our foundation.
I'm pleased in the first phase of our move to our new corporate headquarters in Mahwah, New Jersey.
Enabling new R&D and operations capabilities.
Great environment for our employees and customers to collaborate now.
In addition, we further progressed our outsource manufacturing plant.
This plan is intended to create a dual source of manufacturing and reduced cost of goods and is expected to be completed in Q1 of 'twenty three.
And finally, we further solidified our executive team.
Hiring a new VP of operations.
Chris Patten, the SVP of operations role encompassing quality regulatory and operations.
And eliminating the role of Chief operating officer.
All of you about progress gives us confidence to raise our revenue guidance to a range of 27 to 27 and a half million dollars.
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 percent increase year over year.
Marking the third consecutive quarter of double digit growth for the company and with strong growth in all three parts of our business.
Novel therapies, let our Q2 growth.
With continued momentum from prior deals with contributions from both engineering services revenues and clinical pipeline orders.
Domestic core sales were up eight 7%.
With growth outpacing a rebounding U S <unk> market due to the label expansion and growth from pre belts.
Domestic core revenues in Q2 did not include $300000 arising from supply chain issues.
Led to a backwater and our consumables business.
We have prioritized and action plans to get back to the high service levels, our customers and patients expect from core.
And expect the back order to clear in Q3.
Our international business, where we continue to put increasing focus without 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 sales performance for the company.
I'd now like to share progress made this quarter toward our strategic initiatives that we rolled out in December of 2021.
The first area relates to increase in core sub acute penetration.
Which is under 20% of the broader market.
This represents a $300 million U S total addressable market opportunity.
There are three growth drivers associated with this strategy.
Which include winning new patient starts capturing SCID pre cell growth and geographic expansion.
New subcutaneous patients start the leading pillar of increasing our core <unk> penetration was up six 9% in the quarter.
With our U S business outperforming them with eight 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 start is our on label indications.
Label expansion as critical as it begins with the company working prelaunch to commercial with our pharmaceutical partners to.
To provide an FDA clear path platform with a freedom infusion system.
This FDA clearance with the drought makes it easier for our specialty pharma accounts to select core room medical as a partner of choice.
In the past few quarters, we have reported five 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 indication and start to generate growth.
And we will continue to pursue new indications.
Pre sales continued to increase penetration post our Q4 label indication and now represent 10, 3% of the hour.
Overall market growing over 400% this quarter.
Pre sales are tremendous and growing area of opportunity for the company.
I will expand upon these in a moment.
And then the past few quarters, we have put increasing focus on our international business and we saw a 10, 7% increase in the quarter.
By label expansion 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 pre filled syringe market as we have communicated the pre filled syringe market. Brian G is an early stage fast growing market that represents a significant growth opportunity.
Pre filled syringe as 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 two 5% of the market in Q1 and doubled to 10% of the market in Q2.
We remain uniquely positioned to capture market share within pre filled syringes.
As we have the only pump specifically 500 10-K cleared for use with the market share leader.
<unk> had been trumped 20 ml format.
We anticipate that pre filled 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 innovation efforts behind the presale format and we plan to remain the partner of choice for commercialization.
Moving to our novel therapies business.
Primary driver here is our pipeline expansion.
Which includes continuously evaluating and monitoring new label indications.
Geographic expansion IV to sub two opportunities and new therapeutics. Our goal is to close new create agreements across multiple drug categories and clinical phases.
From early feasibility to commercialization and extend our leadership position.
In high volume sub acute 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 deal.
And from a clinical product sales from an expanding pipeline.
In the second quarter, we closed two new deals one in immunology for a new indication that we expect to commercialize in 2023 and the second for a phase II, a new indication in neurology.
In addition, we expanded the scope of a previously signed innovation agreement based on our successful execution of earlier milestones.
We now have nine total closed agreements across six 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.
Thank you Linda and good afternoon, or good afternoon, everyone I'm excited to report our third consecutive quarter of double digit net sales growth and in the second quarter with net sales of six 5 million and 18, 4% increase from $5 5 million for the same period last year.
Novel therapy sales were approximately 600000 for the quarter, an increase of 528000 versus prior year, we're at 747% increase.
The growth in novel therapies included the completion of a milestone for our previously announced agreement where a large pharmaceutical customer.
Also contributing to novel therapies growth, where clinical trial revenues related to our pipeline extension.
Our domestic core business grew by eight 7% or approximately $400000. The business was impacted by supply chain issues and labor shortages, which created back orders of approximately 300000 that are not included in the reported sales net sales number.
The increase in domestic quarter demands inclusive of that was attributed to volume growth driven by <unk>.
<unk> market growth label.
The label expansions, including pre bills.
On a nominal increase in average selling prices for our products.
International <unk> 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 for.
For the core business was 56, 2%.
And was lower than prior year.
By 192 basis points due to the 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, 5% 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.
This was due to lower levels of finished goods inventory 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 commence.
Finally, we expect incoming cash from state filed employee retention credits prudent improved equipment financing and lease hold improvement reimbursements.
As a result of our second half projections, we expect our ending cash to be a minimum of $60 million.
Finally as indicated in the appendix our net loss for the second quarter of 2022 was $2 nine 2 million or a loss of <unk> <unk> per diluted share compared to a net loss of $1, one 2 million or a loss of three cents per diluted share for the same period.
In 2021.
Net loss included a tax benefit of 710000 for the second quarter of 2022.
On a non-GAAP basis adjusted diluted earnings per share was a loss of <unk>.
Compared to a loss of <unk>.
In the same period of 2021.
I will now turn the call back over to Linda for guidance and closing comments. Thank.
Thank you Tom.
Turning to our expectations for fiscal 2022 as a reminder, our outlook is rooted in several key drivers.
<unk> market growth rate in the high single digits plasma supply clinical.
Clinical trial activity and expansion of the novel therapies pipeline inflationary impacts, including labor and supply price increases supply chain and labor shortage impacts timely receipt of equipment financing and credits and planned inventory reductions by year end 2022.
For full year 2002, we are raising our revenue guidance to 27% to $27 5 million.
Previously in 2006 $5 million to $27 million based primarily on the strength of our novel therapy pipeline.
We are guiding to a 55% to 60% gross margin to exit the year updated from our 60% exit rate.
Q2, 'twenty two 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.
Two our outsource 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 on that and balance of a minimum of $16 million we.
We anticipate improvement from first half of the year burn rate are we had significant onetime investing activities of our headquarter relocation.
And experienced lower gross margins.
In addition to higher sales and improved gross margin per our forecast, we expect cash come in from our filed ERC preapproved equipment financing and tenant reimbursements.
In closing we.
We are making significant progress in advancing our strategic priorities we.
We have met our third quarter of double digit growth.
We're making continued progress within the novel therapies pipeline and new deal on advancements.
In our core domestic business is outpacing a rebounding U S <unk> market.
We have a plan.
To remedy the supply chain challenges we have faced.
And we continue to build a stronger foundation.
We are seeing evidence of our results and our strong quarterly results we.
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 core of the team.
And I will now turn the call over for Q&A.
Thank you.
Ladies and gentlemen.
Hi, David.
A question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing desktop Keith.
One moment, please while we poll for questions.
Our first question comes from the line of Kona Stevenson from Craig Hallum Capital. Please go ahead.
Great and good afternoon, everyone. This is connor on for Alex This afternoon.
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.
Yeah, Hi, Connor. Thanks for the question we are seeing.
As we reported about a 7% growth six 9% overall in the quarter for new patient starts and we continue to see the recovery.
With growth from month to month.
Sure and then I guess just on the cost side, you know obviously first half.
And the new headquarters thinking.
Thinking about second half and what kind of investments should we expect a few make.
Kind of in the second half just kind of some puts and takes there.
Yes.
Thanks, Conor I'll, let Tom handle that yes, hi, Cotter, so kind of 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.
Some items of that capital equipment of that nature, but it will be.
Less significant in the first half.
Sure. Okay. Thank you for your questions.
Thank you.
Our next question is from the line of Kyle Rose from Canaccord. Please go ahead.
Great. Good afternoon. This is Brian on for Kyle Congrats on the strong quarter I guess, maybe just to start on gross margins I. Appreciate there was some unfavorable headwinds into Q2 and I. 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 you could just walk through some of those operational efficiencies that you are looking to realize.
Thanks to Ron.
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 a 54 nine so the explanation of the accounting treatment is really important and then we will talk you through some of the efficiencies that we've already realized and what we continue we'll see in quarter three.
Yeah sure Brian 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 re staff our production lines. This will generate further productivity and output, which will help improve our margins here in the third quarter.
We also we also anticipate we also anticipate better performance from a supplier perspective from.
From a raw materials perspective on the on the.
On the shipments we received.
Okay.
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.
It stopped the production appropriately now, adding a third shift so with all of this we anticipate getting back up to our full production efficiencies.
During the third quarter.
Understood. That's helpful. Thank you both and then maybe just on the innovation side and product pipeline side.
Any sort of color you can give on the next generation system Youre developing I think previously you had mentioned it'll improve upon convenience and have some enhanced connectivity, maybe just thinking about just wondering how youre thinking about the innovation pipeline that with Brian having been in the CTO seat for a few months now.
Yes so.
So first maybe let me talk about pre sales which is.
A significant area of focus for US you see the market expanding chorus, taking advantage of that overall position with our label indication. So pre sales as our first area of.
Our focus our innovation efforts.
And I would like to talk about this in terms of the three seats right. So comfort convenience connected so on the convenience side, our railing 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 overall, making at a smaller platform overall that can be utilized universally.
Across a range of 10 ml, all the way up to 50 ml plus for that platform.
Anticipate that from US you'll hear more at the end of the ended the fiscal year as Brian gets his feet under him starts that were 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 three key themes.
Great. Thanks, Linda.
Thank you.
Our next question comes from the line of Jason Bednar.
From Piper Sandler. Please go ahead.
Hey, good afternoon, congrats on the revenue performance here Linda.
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.
And what you're assuming as far as the trajectory of end market growth and share gains for Peru, as well as contributions maybe for novel therapies.
Sure.
Thanks, Jason.
So three primary areas that we look at to really drive that that performance and what gave us the confidence to.
Improve.
Our revenue outlook and raised the overall guidance. So first is novel therapies. So you saw us come out in the latter half of last year and announced by the end of.
Of.
Quarter, one we announced seven new agreements overall in the past six to nine months. So those agreements now are starting to produce revenue for us.
<unk>.
<unk> products through clinical trials.
They are some of them, resulting in new innovation to our current freedom system. So all of those in conjunction as we look at that pipeline of what we've already signed as what we see and then with the expansion of deals that I just announced this quarter we.
We see additional deals in our pipeline and then as we see new opportunities coming in so that would be the first is you are starting to really see that novel therapy pipeline kicked in.
Second is our U S business that.
Hi.
We've been we've been out there, saying the market, we're looking at about 8% growth.
Overall on the year, it's been nice to see.
That that 7% growth for the first two quarters and as outperforming that market a little bit more than what we anticipated.
And that's primarily due to pre sales, which are doing much better than our internal expectations and when we have the only pump associated with pre sales as they do better.
We do battery so that would be second and third is we've begun to put some additional effort into our international business. So although it's earlier earlier.
Days in that whole effort for international we're starting to see some initial payback Sarah as well so it's nice to have.
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.
Alright got it that's really helpful. Thanks, so much for that and then.
And then Linda you really appreciate the gross margin bridge, maybe if I can just follow up on a prior question.
I just wanted to better understand the gross margin guidance reset.
Also as we think ahead to 2023, I mean due to the issues here in 2022 that are pulling that gross margin a little bit here in the.
This year.
And then the pushout of the outsourcing.
Dissolve.
There's all of that.
Just how you're thinking about 2023 gross margin potential and again not looking for guidance, but.
If you are sitting here today.
Relative to where you might have been three months ago.
Has your intermediate to long term gross margin view for the business changed.
Yeah.
Yeah. So.
Fundamentally know 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 those variances, which was really an accounting treatment.
We're typically does variances would've gone into.
The quarter three and they were all accelerated so we took two quarters of their answers. So that 54, 9% number is really important for us to remember and look at and then it was impacted in the quarter by.
Supply chain shortage, we had with one 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.
We anticipate getting out of all of that and that brings us back to that mid 50% 50% range.
Bringing has been to the 55% to 60% range. It's just really the increased efficiencies we're seeing in.
Quarter, three and quarter four as we get to full production levels and then getting to 60% is completing the transition to our outsource manufacturer.
That.
That move is near completion, and we anticipate happening we just 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 <unk>.
On gross margin.
Just a little bit of a push out and we still see a clear headway for us to get to that 60% range. When we get the transition to command complete.
Great very helpful. Thanks, so much.
Thank you.
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 Tabi CEO for closing remarks.
So in closing I just wanted to say, thanks again to the core protein to all of our customers and patients for their incredible support.
Another great quarter. Thank you so much.
Thank you.
Conference of Cornell Medical assistance has now concluded. Thank you for your participation you may now disconnect your lines.
Yeah.
[music].
Okay.
[music].
[music].
Okay.