KORU Medical Systems, Inc. (KRMD) Q3 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the KORU Medical Systems Reports Third Quarter 2019 Financial Results Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Devin Sullivan, Senior Vice President of The Equity Group. Thank you. You may begin.

Thank you, Donna. Good morning everyone and thank you for joining us for KORU Medical Systems third quarter 2019 financial results conference call. Speakers for today's call are Don Pettigrew, President and Chief Executive Officer and Karen Fisher, our Chief Financial Officer. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to several risks and uncertainties, including those mentioned in the associated slide presentation and our most recent filings with the SEC, along with the associated press releases. We assume no obligation to update any forward-looking statements. The associated slide presentation will be posted to the Investor Relations section of our website www.korumedical.com. 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, we'll discuss certain non-GAAP financial measures in our press release and slide presentation, accompanying this webcast and our filings with the SEC. Each of which is posted on our website. You will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Our strategic plan and goals incorporate the trends we've seen today and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and maybe materially affected by many factors, including the introduction of competitive products, availability of insurance reimbursement, success of our research and development efforts, acceptance of and demand for new and existing products, expanded market acceptance of the Freedom system, the cost, duration and ultimate outcomes of litigation, general economic and business conditions in the United States and abroad, and other factors described in our filings with the SEC. Therefore, our actual results could differ materially from the goals, set forth in the strategic plan. For the benefit of those of you listening to the replay, this call was held and recorded on Wednesday, November 6, 2019 at approximately 9 AM Eastern Time. Since then, the company may have made additional comments related to the topics discussed. Please reference the company's most recent press releases and filings with the SEC. With that said, I'd now like to turn the call over to Don Pettigrew, President and CEO of the KORU Medical Systems. Don, please go ahead.

Thank you, Devin, and thanks all of you for joining today's call. This is our first conference call as KORU Medical Systems. I'd like to ask all of you to note the slides addressing Safe Harbor and the non-GAAP measures we'll refer to on today's call. As you'll see on Slide 3, we will be discussing several things on today's call including our results for the third quarter of 2019, our strengthened financial position and a number of encouraging industry tailwinds. But, first and foremost, we've had two recent significant advances in October. One, we are proud to be listed on the NASDAQ. And two, we've gone through a corporate rebranding initiative. So, if you go to Slide 4, we're incredibly excited to rebrand the company to KORU Medical Systems, as it reflects the great strides, we've made in evolving our corporate culture, mission and patient-centric focus. The rebranding is inspired by the koru, a widely recognized symbol of a spiral-shaped unfurling fern that represents new life and new beginnings. KORU Medical's focus on providing patients new beginnings with our at-home infusion systems is at the heart of our brand. The following core values will drive everything that we do at KORU medical. First is the patient experience; we're committed to patient safety and product efficacy, with enhanced patient outcomes as our top priority. Integrity, we want to form transparent, trusting relationships with all of our stakeholders, including patients, employees, customers, industry partners and investors. Teamwork, we've assembled a strong management team and a Board that we believe will lead our continuing development and drive us towards our long-term operational and financial goals. We made the rebranding announcement on the eve of this year's Immunoglobulin National Society Conference in Las Vegas, whereas honored to be joined by our management team and our Board of Directors. I can tell you that the response from the attendees with respect to the rebranding was very positive and folks there really embraced our message and the positive light we are casting in our industry. Since we're on the topic of IgNS, we did make some news with respect to our new HIgH-Flo Super26 Needle Sets. A recently completed study, conducted with the support of Santa Barbara Specialty Pharmacy, evaluated the performance of HIgH-Flo Super26 Needle Sets against that of the company's standard HIgH-Flo 26 Gauge Needle Sets in the areas including patient infusion time, tolerability, comfort and overall satisfaction. The study found that the use of the Super26 Set decreased infusion time, improved patient comfort and overall satisfaction, and registered no changes in pain, site swelling, or leakage. The poster from this conference is available on our website. While this was a small study, it was a significant one, as we believe it validates our product development strategy and reinforces our position that the Super26 may be a valuable tool to decrease infusion time and improve the overall patient experience. We expect to commence a limited launch of Super26, which is already received FDA clearance in Q1 2020, and we'll keep everyone posted. Now, on to our performance for the third quarter. You'll see on Slide 5, Q3 2019 net sales reached a quarterly record of $6.6 million, which is a 45% increase of net sales, $4.5 million in the third quarter of 2018. This is the third consecutive quarter that we've reported record net sales. We reported a nearly 52% improvement in gross profit in the quarter and expanded gross margins to 66.2% from 63.6% in last year's third quarter. We are profitable on a GAAP basis, with net income of $700,000 or $0.02 per diluted share, compared to $400,000 or $0.01 per diluted share last year. We achieved GAAP profitability despite incurring nearly $900,000 in litigation expenses during the quarter. Adjusted EBITDA increased 89% to $2.1 million and our adjusted EBITDA margin rose to 35.1% from 24.3% in last year's third quarter, reflecting the inherent leverage in our income statement. We also ended the third quarter in a strong financial position, with $5.1 million in cash and cash equivalents and we remain debt-free. Karen will walk you through the results in greater detail shortly. On Slide 6, you'll see our net sales growth 22% over the last 10 years, from $2.4 million in 2008 to $17.4 million in 2018. Of note, our net sales for the nine months ended September 30th, 2019, totaled $16.9 million, approximating total net sales for all of 2018. On a trailing 12 month basis, at September 30th, 2019, net sales were $21.2 million. We believe that this growth will continue as we elevate our industry profile, further penetrate our primary end markets and expand our product and geographic footprint. We remain focused on generating 20% plus annual organic revenue growth through 2022, which is consistent with our previously announced strategic plan. On Slide 7, in September we announced the appointment of John Fletcher as our new Chairman of the Board. John joined KORU Medical's Board in May of this year, bringing more than 35 years of healthcare and medical device experience for the company. John was named 2018 Director of the Year by the National Association of Corporate Directors, for his work as Chairman of Spectranetics, which was acquired by Royal Philips in 2017 for $2.2 billion. As a member of our Board, we have benefited from John's vision, perspective, deep industry experience and informed counsel. In his new role, we expect to continue to draw on John's leadership to help KORU Medical grow and evolve as a preferred provider of innovative home and specialty infusion products. We are very fortunate to have assembled over the last 18 months a Board and leadership team that I would put up against any in our industry, the caliber and experience of these individuals, along with their drive and work ethic, gives me great confidence in KORU Medical's ability to achieve our long-term operating and financial objectives. I also want to take this time to thank Dan Goldberger, whom John succeeded as Chairman of the Board. Dan was recently appointed CEO of a Biomedical Device Company. While we certainly wish Dan well in his new endeavor, we are very fortunate to have Dan continue as a valuable member of our Board of Directors. Slide 8 brings us to our two primary disease state end-markets, PIDD and CIDP, currently the two largest markets for sub-Q therapy, which in aggregate comprises a total US addressable market of approximately $300 million. Our addressable market is comprised of our Freedom syringe drivers, consumable needle sets and tubing. Of the 270,000 people estimated to have PIDD, just 70,000 are receiving IG therapy and of that figure just 20,000 are receiving sub-QIG therapy with the Freedom system. This means that 50,000 patients at minimum could potentially convert to using the Freedom system. These are chronic conditions, so patients are lifelong users of IG therapy and potentially our products. This is an important point because we estimate that each patient using the Freedom system generates average recurring revenue to KORU Medical of about $750 annually. Revenue per patient could be higher for CIDP patients as compared to PIDD, because CIDP therapy requires more frequent doses of Hizentra. We are the market leader in supply and IG infusion delivery devices for PIDD and CIDP. Beyond that, I'm confident stating that the efficacy, durability and ease of use of our Freedom integrated infusion system, in conjunction with our industry and physician education initiatives, is actually helping to drive the continued growth of these markets. On the right side of the slide, you'll see the names of five Sub-QIG drugs approved for the US market. Hizentra by CSL Behring represents a significant portion of our current business. Although the products aren't technically on label for Hizentra, our Freedom system is the preferred method of delivery and the system is prominently featured in Hizentra's marketing. In July, Grifols announced the clearance of Xembify by the FDA to treat PIDD, making it the latest drug approved for this condition. We understand it's Grifols plan to launch Xembify by the end of this year and we've been working very closely with Grifols and plan to support their launch. We view this as very good news, as we believe it validates the efficacy of sub-Q and treating PADD, elevates awareness of the condition and should positively impact the IG supply, which continues to significantly lag demand. It is our expectation that more patients will be diagnosed and begin IG therapy as a result of this increasing supply. Importantly, we do not believe the Xembify will cannibalize Hizentra or other sub-Q therapies, because in our view, Xembify would be prescribed primarily to newly diagnosed patients, that would not be used as a replacement for patients currently undergoing treatment with Hizentra or other sub-QIG drugs. These drugs have and should continue to be delivered with our Freedom infusion system. Slide 9; the IG market is growing, as is our total available market. This growth reflects the competitive nature of our industry, as well as the significant opportunities we are presented with. IG therapies are successfully treating neurological conditions, blood disorders and immune disorders, among others. Major pharma companies, including those on this slide, have identified this opportunity and are manufacturing IG with a focus on developing new drugs and expanding applications. They have a vested interest in driving the continued growth of our industry and we are well positioned to support their efforts from preclinical to post approval. Grifols, which manufactures Xembify is indicative of the shift. Prior to the approval of Xembify as a sub-Q therapy, Grifols was focused on developing IVIG therapy. We believe that the approval of Xembify marks a shift in their strategy towards sub-Q that will continue for the foreseeable future. On an industry basis, there are 10 IVIG drugs with the US clearance. However, sub-Q is generally more preferred by patients and more frequently prescribed. Our medical affairs and growth and innovation teams are continuing to collaborate with pharma companies that are developing sub-Q indications for large molecule drugs, using the Freedom system as the method of delivery in the clinical trial space. In Q3 2019, our net sales associated with clinical trials increased significantly. Clinical trial involving continues to be a key component of our strategic plan, on which we continue to execute. The next few slides highlight some of the significant macro tailwinds that we believe support the tenants of our strategic growth plan. Beginning on Slide 10, you will see a chart that summarizes the benefits of sub-QIG therapy, as compared to IVIG therapy. Sub-QIG eliminates the need for venous access, which can be troublesome for those with low blood pressure, poor veins or other difficulty with venous access, such as the very young and frail. The ability to infuse at home provides a sense of autonomy, as patients are not required to travel to their doctor's office or medical center, or require a caregiver at home for their infusion. These patients can self-infuse on their own schedules and even do so during their day-to-day activities. Sub-QIG absorption is gradual and the therapeutic peaks and troughs associated with IVIG are eliminated with sub-QIG, as the level of drug stays at a constant level in the body for a much longer period. This can produce a more consistent and sustained healthy feeling for patients. This phenomenon is illustrated on the chart on the right. Pharmaceutical companies benefit because sub-QIG must be administered weekly, while IVIG is administered every three to four weeks. This higher revenue-per-patient model provides a compelling motive for drug companies to continue to pursue the development and commercialization of sub-QIG therapies. Moving to Slide 11; our 2017 report from the Jeffrey Modell Foundation found the annual treatment cost for patients with primary immunodeficiency declined nearly $86,000 after receiving the diagnosis. Even after accounting for cost of IG therapy, the study estimates total cost savings per patient post-diagnosis to be nearly $56,000. We believe this is a very positive tailwind for payer reimbursement. The study used, the IMS database containing medical and pharmaceutical claims for more than 60 million patients from 90 US health plans. The study identified 1388 patients undiagnosed with PI for at least five years. By comparison, these patients had a mean 39% increase in pneumonia, 20% in sinusitis, 20% and bronchitis and 14% in otitis, in the 10 years before diagnosis. In addition, there was a 29% average annual increase in hospitalizations, 10% in outpatient visits, and 5% in outpatient drug utilization. Although not depicted here, other studies highlight the cost of other conditions for which IG is used. One such study, which was referenced in the Modell article analyzed over 30,000 medical records and estimated the cost of hospitalizations for CIDP, between 2010 and 2012, at $2.1 billion. Each CIDP hospitalization costs an average of $68,000 and patients with CIDP also had lengths of stay 50% longer than controls. The Modell study reinforces one of our primary operating phrases, when professionally prescribed and monitored, the use of IG therapy to treat and PADD and CIDP is the very definition of value-based care. Cost decline, the use of healthcare assets fall, and the patient quality of life improved. Primary immunodeficiencies remain significantly under-diagnosed. Remember, in the PADD market just 26% of the estimated 270,000 patient population are receiving IG therapy today. This represents a significant market opportunity. On Slide 12, healthcare spending in the United States is expected to reach $6 trillion by 2027, according to the Centers for Medicare and Medicaid Services. Specialty Pharmaceuticals are a large component of the spend. In fact, since 2013 annual growth in per capita spending on administered specialty drugs has averaged 14%. The study, which was conducted by United Healthcare Group, found that infusing Immune Deficiency drugs at home, as opposed to the hospital, can result in $32,000 of savings per patient, per six months period. Based on this data, we estimate the annual savings can be over $60,000 per patient, per year. In addition, treatment at home can improve patients' physical and mental well-being, allowed them to manage their work and family responsibilities and reduce adverse side effects. As we discuss the last slide, we believe the report validates the move towards at-home infusion as an important component of value-based care. Moving on to Slide 13. Any industry with as much recorded growth and growth potential has competition and ours is no different. While there are many types of infusion pumps on the market, mechanical pumps are the most commonly used for sub-QIG therapy. The Freedom system is cleared by the FDA and the system aspect of the product allows us to operate using the razor-razorblade model, which helps drive recurring revenue. Our mechanical system utilizes Dynamic Equilibrium, which immediately response to increase in infusion pressure by slowing down and maintaining a constant or consistent pressure of 13.5 PSI throughout the infusion. By way of comparison, pumps designed for constant flow, such as electronic pumps, respond in tissue saturation by increasing pumping pressure to maintain their programmed flow rate. This increase can cause high pressures within the infusion side, which can lead to discomfort, potential site reactions, and possible leakage of drug. For the patient, when compared to competing products, our system is very easy to use, just three easy steps. For the provider, it's very easy to train patients to use our products in the home setting, it's highly accurate and the drug waste is kept to a minimum, an important point when considering the high cost of these drugs. Most importantly, we believe the Freedom infusion system is very well positioned to support the growing adoption of sub-QIG therapy. Before turning things over to Karen, on Slide 14, you'll see our roadmap to becoming the preferred delivery partner for specific infusion therapies in select markets. As you can see, this multi-year, multifaceted approach involves our entire team at KORU Medical. Right now, we're in Phase I and we are on plan to execute these objectives with the focus on growing the baseline business, further penetrating PADD and CIDP, developing and launching new products, and pursuing collaboration with pharma companies for clinical trial usage. As we enter the year 2020, we will continue to execute our Phase I strategy and commence a plan focused on the expansion and innovation of our products, indications, market and geographies. We continue to manage the business towards our goal of a $50 million run rate by the year-end 2022, improving our operating efficiencies to drive us towards our 70% margin goal and generating 20% organic revenue growth year-over-year. I'll now turn things over to Karen for a discussion of the quarter. Karen?

Thanks Don, and good morning everyone. Beginning on Slide 15, net sales rose 45.5% to $6.6 million in Q3 2019, up from $4.5 million in Q3, 2018. This growth was due to the continued expansion of our presence in the PIDD and CIDP markets, as well as large orders from a domestic distributor and a new customer in Europe, clinical trial activity, and to a lesser extent, price increases in the quarter. We cannot predict whether such large distributor orders or volume generally will continue in the future. The large domestic distributor orders followed the acquisition of Medical Specialties Distributors by McKesson Medical-Surgical, as they move forward with our integration. We ended the third quarter with approximately 800,000 open orders, which have since been fulfilled. Excluding the two large orders, clinical trials and adjusting for the open orders for the quarter, net sales grew in excess of 25% year-over-year. Gross profit in Q3 2019 rose to $4.4 million or 66.2% of net sales, up from $2.9 million or 63.6% of net sales in Q3 2018, driven by the increase in net sales and to a lesser extent, the price increases. Total operating expenses for Q3 2019 rose to $3.6 million, up from $2.4 million in Q3 2018. Of these, SG&A expenses rose to $2.4 million from $1.9 million in Q3 2018, primarily due to higher salary and related benefits, including 300,000 of stock option expense, all resulting from the executive management changes and the addition of senior leadership in key roles. SG&A expenses decreased as a percentage of net sales to 36.9% of net sales in Q3 2019, as compared to 42.2% of net sales in Q3 2018. Litigation costs increased to approximately $900,000 from $300,000 in Q3, 2018, reflecting the ongoing litigation with the competitor. While litigation continues, the company has recently announced two favorable court rulings and is pursuing recovery of court costs on attorney's fees, that in aggregate total approximately $3.4 million for these two closed cases. The competitor has appealed our motion and there can be no assurance that these costs will be recovered. Net income for Q3 2019 rose $700,000 or $0.02 per diluted share, up from net income of $400,000 or $0.01 per diluted share in Q3 2018. On this slide, we have also presented our results on a trailing 12 month basis for the period ended September 30th, 2019. Moving to our balance sheet, we ended the quarter with $5 million of cash. We continue to be debt free with $1.5 million line of credit, with no outstanding amounts against us. Our nine month cash flow statement at September 30th, 2019 reflected a $2.1 million increase in accounts receivable, due to a change in payment terms by a large distributor of our products, from net 30 to net 60, and $600,000 increase in inventory to keep pace with anticipated sales growth. These increases were partially offset by $1.5 million in proceeds realized from the maturation of the certificate of deposit in Q2, 2019, and $500,000 associated with the exercise of warrants and options during the quarter or during the period. We believe our cash on hand and that cash expected to be generated from operating activities will be sufficient to fund our operations. We continue to maintain a clean capital structure. We ended the quarter with 39.5 million basic shares outstanding, up from 38.3 million basic shares outstanding at June 30th, which reflected the August 2019 exercise of [indiscernible], prior to their expiration that month. We also had at the end of the quarter, $4.9 million options outstanding with a weighted average exercise price of $1.47, bringing our total diluted share count to $44.4 million. Here on Slide 17, you can see the reconciliation of net income to adjusted EBITDA for the relevant periods, along with the metrics that comprises calculation. Adjusted EBITDA is $4.5 million through the first nine months of this year, an increase of 58% compared to the period in 2018. Trailing 12 months adjusted EBITDA is $5.3 million. Thank you for your attention. And I'll turn the conversation back over to Don.

Thank you, Karen. So all in all, exciting times here at KORU Medical, I want to thank you all for your participation today. And I'd like to open things up for questions. Donna, we are ready, whenever you are.

Thank you. [Operator Instructions] Our first question is coming from Alex Nowak of Craig-Hallum. Please go ahead.

Good morning, everyone, and congrats on the results here. Just want to clarify some of the sales dynamics in the quarter. There was a large order, but then you also had some back order in about $800,000. So, when you back out all the sales, is it fair to say the sales in the quarter should have been closer to about $5.6 million? What we should be using for modeling here going forward, assume Q3 was about a 25% standardized growth rate?

I'll let you do the math on the modeling, but it's safe to say with a large distributor order and a transition that some of the sales came in a little heavy for Q3, but if you look at Q4 expectations, your range is somewhat accurate.

Okay, understood. And then just on gross - did you want to continue, Don?

No, go ahead.

Okay. Just on gross margins; obviously, those have come in pretty nicely here over the last couple of quarters. What would you say the new gross margin run rate is here, is 65%, 66% kind of the correct range? Is there any ability to continue to improve this over the next 12 months?

Yes, I would say that range is correct and there is some opportunity to improve right now. It's largely driven by our leverage right now, our income statement, but new sales and price increases is certainly pull that up. The opportunity is really with some manufacturing cost reduction initiatives that have the ability to impact that positively as well.

Okay, understood. And then just on legal spend, it's about $1 million per quarter. You won two of the cases here. I know those are still ongoing within the courts, but you seem to have won those. When should we expect a final third case to be ultimately decided here and until then, what should the legal spend be here for the next couple of quarters?

A popular question. I wish I knew the answer to when it would end. I'm really happy about the progress we've made in the favorable rulings. We're hoping the remaining ruling come sooner than later but we're committed to getting this behind us. We continue on a similar spend run rate for the remainder of the year and right now, we're expecting a bit of a drop off for the following year, but can't comment on the specifics for what we don't know.

Okay, understood. And then, you mentioned a number of different indications that are under research for IG drugs, obviously PIDD and CIDP are already on the labels for sub-Q drugs today. What are the next indications coming for sub-QIG drugs that you're closely watching?

Another popular question, I appreciate you asking. So right now, as I highlighted earlier in the presentation, the biggest opportunity for us is to execute on the current PIDD and CIDP opportunity. You see the potential there, and there's a huge runway in those two markets. With that said, there is expansion into new markets. There is the opportunity with new products, as well as expanded indications in terms of new drug development. We are focused in the areas of neurology, hematology and oncology right now, in the addition to the PIDD market.

Okay, understood. And then just maybe one last question on the IG market. You mentioned the supply out there for IG, specifically sub-QIG, has been fairly constrained. With Xembify coming online here at the end of this quarter, is there any way or anything you're hearing to help quantify the pent-up demand of people wanting to get on a sub-Q drug, or doctors wanting to prescribe a sub-Q drug to the patients but just today cannot get access to it?

Yes, we hear quite a bit of that, we're fresh out of the IgNS meeting in Las Vegas. This was a hot topic. And, I think you have two growth engines or opportunities here, one, patients that are currently on IVIG and Grifols, as the market leader in IVIG, so for them coming to market with the sub-Q drug is very telling. But it shows the strong preference, I believe, of patients wanting to switch over from IVIG to sub-QIG based on a lot of things that I covered earlier. It's also my belief that the additional supply will free up some pent-up demand, talked with several immunologist that have many patients that could benefit from the use of IG, but limited supply doesn't allow them to get up and running with them.

Okay, got it. And then switching over to OUS [ph], you mentioned you are shipping some products here to a distributor outside the US in the quarter. On Slide 14, you said it's more of a 2020, 2021 plan. But can you explain what you're seeing outside the US? Clearly this is moving forward a little bit faster than I think you thought. How big is that market outside the US and should we be expecting to see some increasing orders outside the US over the next couple of quarters, or was this more of a stocking order in this quarter?

All right. So, a lot of questions in that question. Let me do my best to answer that. As communicated in our strategic plan and Phase II, we are planning a European expansion. One of the benefits of us being close to our pharma partners is we can work with them, as they expand into new markets including outside the US. The outside the US market, we estimate to be two to three fold that of the US market, and this order is part of the predicted expansion into the European market. One interesting thing to note, Alex, is the IG supply in the US can be exported. So, right now pharma companies are managing their supply accordingly and part of their focus is to get into the European market in the near future.

Okay, I understood. Thanks again, appreciate it.

I appreciate the question Alex.

[Operator Instructions] At this time, I'd like to turn the floor back over to management for any additional or closing comments.

All right. I will take that as a complement that we answered most of the questions. I want to sincerely thank all of you for your continued interest in now KORU Medical. We have very strong tailwinds right now and continue to advance towards our stated operational financial goals, and we are focused on improving the quality of life for patients around the world and delivering continued value to our shareholders. With that said, we have several events on the calendar for November and December, including the Craig Hallum, Alpha Select Conference and Canaccord Medical Technologies and Diagnostics Forum, both in New York City later this month, and the LD Micro Main Event in Los Angeles in December. We hope to see some of you at those conferences. Thank you again for your time and attention and interest and I hope everybody has a wonderful day.

Ladies and gentlemen, thank you for your participation, this concludes today's event. You may disconnect your lines or log off the webcast at this time. Thank you.