KORU Medical Systems, Inc.

Greetings and welcome to the Coral Medical System 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. Please go ahead, Hannah.

Thank you and good afternoon everyone. Earlier today, Cobra Medical Systems released financial results for the second quarter and in June 30th, 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. Actual events or results could differ materially due to many risks and uncertainties, including those mentioned in the associated press release and our most recent filings with the SEC. We assume no obligation to update any forward-looking statements. I encourage listeners to have our press release in front of you, which includes our financial results as well as commentary on the quarter. During the call, Management will discuss certain non-GAAP financial measures in our press release and 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. For the benefit of those listening to the replay, this call was held and recorded on Wednesday, August 9, 2023, at approximately 4.30 p.m. 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 Thurby, President and CEO of Cobra Medical Systems, and Tom Adams, Cobra Medical's Chief Financial Officer. Linda, please go ahead.

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 second quarter. Tom will then review our financials and updated 23 guidance. I will then close with the milestone progress update against Vision 2026. Following our prepared remarks, we'll be happy to open the call for Q&A. We are very pleased with the progress and milestones achieved in our second quarter 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. First, in our core business, we saw growth of about 8%, which continued to outpace the U.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 three trial, and we submitted ahead of schedule a 510K for the Freedom 60 infusion system with Isentra 50ml pre-filled syringes. Finally, we're updating the company's full year 23 outlook. to reflect the QT decline in the U.S. SCIG market and a change in timing of novel therapies deal signing and subsequent revenue. Before jumping into the details of the quarter, I would like to 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. 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 system 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 mLs supports multiple therapies in disease states, and has established regulatory approval in over 25 countries. Our novel therapies business supports biopharmaceutical companies with products and non-recurring engineering, innovation, and services on our freedom system to support their clinical efforts towards their drug launch. 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. 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 SEIG market with less than 20% of that market penetrated. The majority of our patients suffer chronic illnesses and are lifetime users of the system, offering a valuable source of recurring revenue. 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 CORU system. Moving to a deeper dive in our Vision 26 strategy and our three growth drivers. Starting with the first, growing our leadership position in SCIG. Today, CORU has over 35,000 patients in the U.S. and strong relationships with our specialty pharmacy partners who 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. Many saw this as a blip due to lower infection rates versus the prior year, which is generally a proceeding 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 a recurring consumer's revenue, and we had double-digit new pump sales growth. A key driver of our U.S. core business is continued strength in prefilled syringes. and the second 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 second quarter. During the quarter, the company submitted a 510K to the FDA for the use of our Freedom 60 infusion system with Hyzentra 50ml pre-filled syringes. This submission marks another milestone in Coro Medical's mission to simplify sub-Q therapy for patients. The FDA approved the 50mL Hyzentra pre-filled syringe in April of 2023. Hyzentra is the most prescribed sub-Q immunoglobulin and the first to be available in pre-filled syringes, currently offering 5, 10, and 20mL formats that satisfy a further two-thirds And the 50 ml when available in 2024 will satisfy an additional two-thirds of the patient market. The conversion to pre-filled syringes is an important growth driver for us as it drives share and we believe over time increased new starts and conversions to sub-Q therapy. As a reminder, our Freedom Edge system remains the only pump with FDA clearance for use with pre-filled syringes. Moving to our NT business, where we are focused on new biopharmaceutical collaborations for clearance of our freedom system for at-home use. 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 three 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 two and remain on track for six new collaborations in 2023. In total, we have 15 signed collaborations and we also have a pipeline of 15 additional high potential opportunities. 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. We now have 15 collaborations to date, including over 2 million potential patients and a TAM of roughly 2.5 billion. 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 sub-Q penetration, lifecycle management strategies, and on growing their label indications. The bottom of this pipeline represents nine additional candidates outside of IG across six additional drug categories with potential to launch five new drugs in the next five years. We know that not all of these will likely succeed, but with two of these with patient populations over 100,000 and three with patient bases up to 50,000, any combination has the potential to double Quora's current patient base. I have bolded our newest entry. We are excited to add late-stage pharmaceutical collaboration as it's a shot-on goal closer to launch that solves 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 sub-Q 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 five 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 sub-Q treatment today, we see a lot of growth ahead. As we build our NT pipeline based on projected drug launch timing, we see multiple revenue opportunities over the next one to five plus year timeframe. As we look to the remainder of 23, 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 quarter 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 . During the second quarter, we completed two milestones with our 510K submission for a 50 ml prefilled syringe label expansion with a Freedom 60 pump line extension. For the remainder of 23, we anticipate another 510K filing for our consumables. Looking further ahead, we're extremely excited about a next generation pump platform for IG and novel therapy and multiple new drugs on the freedom system. Another very good quarter of strategic progress across both core, NT, and innovation. I will now turn the call over to Tom to review our financials.

Thank you, Linda. And good afternoon, everyone. While we saw a challenging quarter in a declining U.S. SCIG market, I am excited to report a solid quarter of 6% growth with total net sales of 6.9 million. Domestic quarter growth of 8% was primarily driven by increased growth in consumables and pumps, new accounts, and increased prefilled syringe adoption. International quarter growth of 17% was driven by strength across several EU markets and growing global IG volume availability. Novel therapies net revenue declined by 28% in the second quarter of 2023 primarily related to strong NRE revenues in the comparable quarter last year as well as timing some of the 2023 type 1 winds. Gross margins increased to 56.1% compared to 51.1% in the second quarter 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 two full quarters lower outsourced products, which as we reported in Q1 is fully completed. We also see lower overall labor costs, overhead, and improved efficiencies as we have now consolidated our U.S. manufacturing from two sites to one. 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 62% and a full year gross margin of 58 to 60%. Cash balance at the end of Q2 was 11.7 and represented a 500,000 cash burn from the prior quarter. Our biggest driver of cash burden was our net cash operating loss of 2.1 million, 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 $1.9 million driven by DSO improvements worth $500,000 and executing on our plan reduction of inventory of $1.4 million 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 million, 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.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. Full year 2023 revenue is now expected to be between $31 million to $32.5 million, representing growth in the range of 11% to 17%. This implies a growth rate of 15% in the back half of the year at the midpoint versus 12% that was delivered in the first half. Some key drivers that will get us there include SCIG drug market return 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 expect to see a progressive step change in our second half gross margins as we continue to see two 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 million. We expect our operating expenses to be approximately $29.5 million versus $30 million reported prior with phasing that will vary between quarters driven by our R&D program spend. 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 million during the second half of the year. It's also important to note we will see lower cash burden 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 anticipating or planning any equity raises at this time. I will now turn the call back to Linda for closing comments.

Thanks, Tom.

In December of 2021, about 18 months ago, we launched Vision 26 to transform the company over five years from an IG company to a leading drug delivery provider and revenue of $60 million. This laid out a series of key milestones, and I want to take a moment to review our progress. Our first milestone were phase three trials, the final phase before a drug launch. We projected five phase three trials by the end of 26, of which we now have two in progress. We projected one significant new commercial drug indication for a patient population of over 100,000. We have launched one with a patient population of 15,000 and have five further potential drug candidates by 2026. We've projected eight new products and indications which drive our core revenue, of which we have four completed, one further expected with 50 ml pre-filled syringe clearance by the end of this year, and we remain confident in three further. Our revenue projection to $60 million is now supported by five key strategic areas. Our core business and current approved products and increased sub-Q 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 updates. In closing, I'm encouraged by our second quarter progress across all of our businesses and on the innovation front. 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 Quora team for exceptional efforts on another great quarter. Operator, I will now turn it over to you for Q&A.

Thank you. We'll now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to collect the questions. The first question comes with Alex Nowak with Craig Halloum Capital. Please go ahead.

Okay, great. Good afternoon, everyone. Linda, just curious, what theories are you hearing out there to kind of explain this first half slump in the SCIG market? You mentioned you spoke of pharmacies, the drug companies, I'm sure patients as well. Just what are you hearing out there that would explain the weakness? And then ultimately, how is the FDIG market evolving so far in Q3?

Hi, Alex. Thanks for the question.

Figured it might be the first one that we received. So as we know, we had a very strong fourth quarter of 2022 in the overall market with the market growing somewhere between 7 and 10%. And then January and February also very strong with January high single digits and February double digits. And then we started to see this decline, which we typically see a quarter to 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, You can imagine we spoke to a lot of different people on this one. 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 seen some lag of that impact into 2023. That is the most consistent factor that we heard. Other than that, everybody, you know, we saw Takeda reported publicly as did Griffles. 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.

Very helpful. And then maybe expand on how CSL is getting positioned here for the 50 milliliter pre-filled launch. You know, what are they saying on what this can do to their business about the IV sub-Q conversion? and also with regards to their market share for Hyzentra.

And maybe I'll speak more broadly about how we feel at KORU, 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 Griffles publicly talking about their pre-fill launch as well as OctoPharma. So we're pretty excited now that three of the four major pharmaceutical IG providers are working towards pre-fills. Why are they doing this? Obviously, the comfort and convenience that is offered with pre-filled syringes, it reduces the number of steps by over 25, and in some cases, as much as 60 to 70% for a particular user. And the preference for these is well in the 85 to 95% range for pre-fills. So what we see is we look out over the coming five years, we project as much as on a low-end 50 and on a 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 will bring new patients into the therapy as doctors see that at-home therapy becomes that much easier to perform with pre-fills. 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 then, you know, what can it do to overall sub-Q penetration is what we're most excited by.

Yes, absolutely. Last question, a little multi-part one here. It's with regards to the novel therapies pipeline. I think it was 15 in the pipeline last quarter. You added one during the quarter, end of the quarter at 15. So I just want to confirm, did one of the drugs drop off? Any details there? And then the funnel beyond the 15 is another 15. Maybe expand on if these are phase three studies and any reformulations, any detail there. Thank you. Yeah.

Thanks, Alex. Yes, you are correct. You did the math well. We had one dropout, which was an oncology candidate. The actual program was canceled at the pharmaceutical company. It was an opportunity for oncology therapy in the home. So that one was canceled, which brought our 16 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, you know, we're not counting on all 15 of those to make it through. We also have, and I would say over this last quarter have seen a tremendous uptick in the overall numbers of new opportunities. that we see in our pipeline. 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 deal faster and get the work done. But we're working hard to do that. All right.

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

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

Hi, everyone. How's it going? It's Caitlin on for Kyle. So, OES growth was strong this quarter. You know, where is the growth largely being driven from? And can we think about this growth rate as, you know, sustainable moving forward? And then on the electronic pump comparison trial, where are you with progress on that? Thanks.

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. So now that that drug supply is back, we're seeing growth across several markets. So it's not in any one particular 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 sub-Q therapy in international markets. Governments have really driven the movement of healthcare into the home. 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 Sobe 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.

I think I got part two of the question.

Yeah, no, I apologize. 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 core room 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.

Great. And then could you put a little more color on the novel therapy, you know, deal signing cadence that, you know, caused you to change your guidance a little bit? That would be great. Thanks.

Yes. So coming into the year, we would have anticipated year to date we signed two deals. And how it works is once we get the deal signed, 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. We still feel very confident in the sixth 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 in our revenue projections.

So just some slippage by a couple of months affects our year.

Thanks, Caitlin.

Thank you. The next question comes with Jason Bednar with Piper Sandler.

Please go ahead.

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 further step backwards? And then, one in the longer term, what does the U.S. market need to grow at in order for the company to hit its 2026 revenue target?

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, and I guess, you know, 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 fourth quarter of 22 and in the first two months of 23. So, I really think this was a blip due to some overhang really an Omicron probably overhang where we saw increased infections drive greater Q2 22 prescriptions. 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, you know, right away? Our July month was strong, so we think that's a precursor that the overall market is coming back. 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 two and outperformed our 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. 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 a 12% growth range. depending on the year. Obviously, we start off a little around an 8% or a 9%, and we grow it to a 10% to 12% overall projected market as we see things like pre-fills start to kick in.

Great. Thanks, Linda.

And then can you speak to any feedback you've received thus far from the FDA and the 510 case submission for the 50-milliliter PFS for isentra?

So, the good news is, is past the first stage, you know, 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. 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, You know, be ready for, CFL has not publicly announced their launch timing of that. You know, they just got the clearance and we project it will be sometime in the first half of 24, but nothing's public on that. So, we project that we will get our clearance in the back half of the quarter, of the fourth quarter, which will put us in a great position. to be able to either pre-ship, either late, late in Q4, or more likely Q1 of 24, we'll get off to a great start.

Great. Thanks, Linda.

Thank you.

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

Please go ahead.

Thank you, everyone, for joining us for the Q2 call. I'll just say thanks again to the CORU team and wish everyone a wonderful rest of your day.

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