Good day. And welcome to the KORU Medical Systems Third Quarter 2023 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this conference is being recorded. I would like now to turn the conference over to Hannah Jeffrey of Gilmartin Group. Please go ahead, Hannah.

Thank you, Jason. And good afternoon, everyone. Earlier today KORU Medical Systems released financial results for the third quarter ended September 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. 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 presentations 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, November 8, 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 are Linda Tharby, President and CEO of KORU Medical Systems and Tom Adams, KORU 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 for our commentary. I’ll begin by reviewing key financial and business highlights for the third quarter. Tom will then review our financials and updated ‘23 guidance. Following our prepared remarks, we will open the call up for Q&A. While a challenging quarter from a revenue perspective, I want to start today's call by emphasizing KORU’s commitment to improving the quality of life for patients and caregivers with our Freedom Subcutaneous Infusion System with the twofold strategy. This strategy includes penetration into an installed base of over 30,000 chronic global subcutaneous immunoglobulin infusion patients and by building a continuum of new drugs on our account . During the third quarter, we saw revenue decline roughly 10% versus the prior year. The majority of the decline was due to our novel therapies business which was impacted by a large clinical trial order in the prior year and by timing of collaborations. This is a business composed of sales of product for clinical trials and nonrecurring engineering services that are dependent on milestone completion, all of which can be subject to timing changes. The biggest value in this business is the signing of the collaborations which leads to commercial revenue when launched. In addition, our Domestic Core business was impacted by slower than anticipated SCIg market growth. Script volumes were down year-on-year, and overall drug volume was down versus our expected growth. While a difficult quarter from a revenue standpoint, we make progress in several key initiatives and continued momentum with our growth strategy. We have a solid U.S. core business which continues to outpace the underlying market and includes strong recurring revenues with over 27,000 patients. We remain the broadest label for…

Thank you, Linda and good afternoon, everyone. In the third quarter we reported to revenues of $7 million, a decline of 10% or $800,000 from prior year. The majority of this decline was due to our novel therapies business, which declined by 78% or $600,000 in the Quarter. This decline was driven by a large clinical trial order of about $500,000 record in the prior year. And by timing of our NRE milestone completion. Our Domestic Core reported revenues of $5.8 million, a 2% decrease versus prior year, driven by lower consumable volumes, as the prior year included a backorder of $300,000 for consumables that were cleared during the period. Partially offsetting the decline was a 40% increase in pump nits sold that are leading indicators of future patients driving consumables revenue. Despite the year-over-year decline in the quarter, our domestic core has grown 6% year-to-date, as we continue to outpace the underlying market growth driven by new account wins and prefills. International Core decline of 3% was caused by lower volume as a result of a country specific tender order in the period partially offset by growth in new markets. On a year-to-date basis, International Core continues to perform well with 12% growth over prior year. Gross margins increased by over 600 basis points in the quarter to 62%, compared to 56% in the third quarter of 2022. The increase in gross margin was primarily driven by our exit from the Chester site in Q1 of this year, as well as increase efficiencies from our outsource production initiative. With this performance, we achieved the high end of our second half gross margin guidance. As we look forward, toward the end of the year, we expect to hold these levels of gross margins between 60% and 62% in Q4 and…

Thanks, Tom. In closing, while we always want to see significant revenue growth. I'm encouraged by our third quarter progress across all of our businesses. And on the innovation side. 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. As we look ahead, we're excited about our upcoming milestones including our 50 ML prefilled launch, progressing our novel therapies collaboration milestones and signing, our innovation agenda and continued global expansion. I'm also excited to share that we'll be hosting an Analyst Day on December 5, at our headquarters in Mahwah, New Jersey. We'll be sharing additional updates and progress to our plan. And finally, in closing, I want to thank the entire KORU team for their exceptional efforts on the quarter. Operator, I will now turn it over to you for Q&A.

[Operator Instructions] Our first question comes from Alex Nowak from Craig-Hallum.

Hey, good afternoon. This is Connor on for Alex, thanks for taking my questions. So can I ask what is CSL saying about 50 milliliter prefilled cartridge. I have the introduction and then maybe speak to what this could do for IV do SubQ convergence in the market, whether it's in terms of market share, just get some commentary on that, please.

So, first, what CSL has said publicly is that they plan on launching the product. Of course, they announced their approval back in April, the extended delay to launch the product into the market was due to the time that it takes them to fill that overall prefill with their drug and bring it to the marketplace. So they are planning on launching that product in early 2024. And they have also released some pre-market studies that indicate the overall preference for prefills. Regarding overall IV to SubQ. I don't think they've been public about that. I think what we know is what factors are the biggest drivers to subcutaneous therapy use are generally the overall convenience and ease of use for a patient in the home. And given the considerable improvements in both of those areas. We project that about 50% of the market will be prefilled over the course of the next three years. And that it will in turn drive increased penetration.

And that 50% is of the subcutaneous market.

Correct.

Okay, got you. And then maybe what are your views on the slump for this SubQ market? Is there any reason this isn't going to be a longer term correction or issue?

Yes, I would say so. We've already seen, we look at one primary source of data which is the same data that pharmaceutical IG companies use. And with that data source and looking through all of their public releases, here's what we see. So first of all, I think, two encouraging signs, quarter-on- quarter, we saw that overall drug market improved by about 2.3 percentage points versus the prior quarter. And what really drives the diagnosis, immunodeficiencies and primary immunodeficiencies are about 85% of the market are increasing infection rate. So people get infections, they go to the hospital, they get more infections, and you get recurring infections, which brings you there. So given the fact that we saw ’22, ‘23 was the big, single biggest flu season we've seen, and this flu season is off to another roaring start, we expect that 2.3% increase, we saw from quarter one to quarter two, we expect that to continue, we don't have the quarter three data yet. But we expect that to continue. Another driver that we're excited about is CIDP usage. So that's a neurology indication. And those patients tend to use about twice as much drugs, they tend to use to do about twice as many injections. And these patients are our prime candidates for prefills, because they use so much drugs, it's just a much simpler process. We also see that being a buoyant factor for the overall market. And then although we don't subscribe to the script data, I know it's out there publicly. We also saw the overall script data begin to flatten out in terms of we don't see the continued negative quarter- on-quarter. So I think those are all great indicators for what we feel where we're already beginning to see stabilization, and certainly in the overall drug market improvement versus where we happen.

Yes. And then just one last one here. So you mentioned some new pipeline opportunities for additional collaborations. Can you give any maybe color on how far launch some of these opportunities are? In terms of what [inaudible]

Yes. Okay, so the 15 and 5 collaboration we did this quarter, you'll see that the signed collaborations, which means we have a signed deal, we are actively exchanging elements of value, whether that be the drug, whether that be dollars, in order to get the product approved on our pump. In addition to that we have 18 open opportunities that we have in our funnel. The biggest focus that we've seen of late is that a number of new indications are being approved for subcutaneous use in the clinic. There, those usages for us, and there was one such drug that was just approved a few months back a drug called UCB [inaudible], and given the fact that we are the largest subcutaneous product being used in the home, nurses are very familiar that also worked in those infusion clinics. So we're seeing a lot of demand for what I would call launch market products in late stage three, which is what we're very excited about, because obviously a Phase 3 is much closer to market and some of the fine collaborations we have there today. And many of them that we see are concentrated in the oncology clinic. Specifically, I spoke briefly in my script about Europe, where in Europe we're seeing a lot of adoption of our platform in infusion clinics. So looking to learn from our experience in Europe and bring some of those into the US. Little bit of time, some time to get those on our label, but very excited.

The next question comes from Caitlin Cronin from Canaccord Genuity.

Hey, thanks for taking the questions. Just a quick one on cash flow breakeven. I know you said Q4 ’24 when you are planning for this. How do you really expect to drive this towards possibility?

I’ll Adam that one.

Hi, Caitlin, thanks for the question. So as Linda mentions so the number one thing is the excitement that we see with the increased diagnosis and what we're starting to finally start to see in the market. And really what that means Caitlin is getting back to a double digit growth, right. So you have to believe that we get back to that double digit growth rate. You have to also believe that we continue to maintain our margin expansion that we've demonstrated here in the third quarter. And you have to also believe that we continue with our operating expense discipline with increased leverage and an operating leverage on our OpEx. And then finally, with that is our choice well decisions in our CapEx deployment. So if we can manage all those things, we could certainly get back to that cash flow breakeven by Q4 of ’24.

And maybe the only other thing that I would say is that certainly our outlook does not look at ‘22, we had a 19% growth level, we're not looking at those levels to get to that cash flow breakeven level, but very confident in those four areas that Tom just talked to.

Got it, okay. And then just on novel therapies, I think your goal earlier in the year was for I think, six in 2023, so two in the first half and another now, what's your confidence in really reaching this goal for the full year?

Yes, so we have said that our confidence level now is four to five. Of course, there's always opportunities to us, for us to exceed the six. But we've gotten a lot smarter, Caitlin, relative to how long lawyers take to markup a red line agreement. So we're setting our expectations in that four to five level, of course, we're excited by the new one that we just announced aftermarket today. And what I would say about our novel therapies business may be different than where we were six months ago, or even a year ago at this time, is that we have a backlog now of revenues and of deals relative to the close collaborations we've already done that we're taking into 2024. So that's also [inaudible]

The next question comes from Joseph Downing from Piper Sandler.

Sorry. I was on mute there. Hey Linda and Tom. How is it going? Appreciate you taking the question. I'm picking up off the first question there. So congrats on the 510-K clearance. Can you just talk through how you're thinking about the uptick and the 50 ML once it's launched next year? Wondering does it track with the prefilled uptick trajectory we've seen? Or does it move faster or slower for some reason?

Yes, so we think it will move much faster. Today, if I were to look at the total PID or the total patient population out there, about 30% of those are on doses of 20 ml, and lighter, and about 70% are on doses of 50, ml and greater. So what that allows for is obviously with the 50 ML, it opens up that 70% of the market that we could not reach before. In addition, what we had in the past is patients that were between, let's say 20 ML and 50 ML or more than 50 ML that nurses were just reluctant, because they had to use both vials and prefill to switch a patient. So patients might have to use a prefilled syringe and vial in the past. And now with this approval, they can satisfy a lot more of the market. So they're more able to switch patients. So we see where we saw the market basically get to about 12% penetration and then kind of stabilized there, we see the 50 ML really being able to go after 70% of that market. So a much faster uptick than what we thought with 20 ML.

Okay, thanks. And then I'm curious, any margin implications we should have in mind as that long shots unfold.

Yes, so the, of course, with being the only pump out there for use with prefills, we are certainly looking to take price wherever we can. But we're also conscious that the real game is consumable. And so connecting a specific consumable to that prefilled product is also what we're looking to do with this launch. So we should see some appreciation in our overall ASP as well related to prefills.

Great, thanks, Linda. And then just one on the US market dynamics. So curious, what's changed in the last few months has led to such a shift in outlook here, and how does this influence revenue growth assumptions embedded in your long term plans?

So I would say, why did we come down? We really expected that with the drug market. We saw a little bit of an uptick between Q1 and Q2. We expected that continued uptick. And we thought we'd see a couple of points of growth quarter on quarter on quarter. And that just has not happened. It's been a little bit of a slower uptick than what we thought. And again, I'll come back to we're seeing what gets diagnosis going is increased infections, we're seeing, we saw a very strong flu season last year, pneumococcal infections are at pre-pandemic levels. So although I hate to say it when people get sick, we see more diagnosis, which is fantastic. And I'm sorry, the second part of your question.

Yes, just how that outlook, just about the revenue growth assumptions embedded in your longer term plans for 2024 and I guess into ‘26.

So as I said, our revenue, sorry, our market growth assumptions are in that 3% to 4% range in the fourth quarter of this year, we would expect next year we're setting the overall market growth somewhere in that 5% to 6% growth range for the overall market. We're not yet discussing our ‘24 guidance numbers. But obviously, let's hope for a strong Q4 and the overall underlying market, we're beginning to as I said earlier, from one of the earlier questions to see signs of that recovery, relative to both script, script declined flattening out, and also seeing some rise quarter-on-quarter in overall drug market growth.

The next question comes from Frank Takkinen from Lake Street Capital.

Great. Thanks for taking the questions. I wanted to start with one on the pump growth, you guys referenced 40% in the quarter, I assume this means that the consumables were a primary advocate of the number coming up a little bit shorter, obviously, that dovetails well with where prescriptions came in and whatnot. But I was hoping you could talk a little bit more about why you think those consumables may have come in a little lower. My understanding is maybe these patients were more chronic in nature, and they would stay on SubQ. So did these patients potentially switch back to IV? Or was there something else that was occurring, specifically related to consumables in the quarter?

Yes. So first, maybe let me start. Hi, Frank, great to have you on the call. So our consumables revenues tend to lag our pump revenues by a couple of months. So we did see a bit of softer pump growth in Q2. And then last year, we had a significant one time impact, which was we saw greater than backorder that we basically cleared the backorder in our Q3 of last year and also rebuild the channel with inventory. So we had a difficult compare to last year, specifically on our consumables because that's where our volume was. Regarding any switch back to IV, we do not see 99% of patients when they go to SubQ therapy will stay on SubQ therapy given the benefits, both in their time savings and the associated side effects of IV versus SubQ. So we see very little switch back, the IV market and any strength that we would have seen there as being driven by increased diagnosis of CIDP. They are typically IV patients, only 15% of CIDP patients are on SubQ therapy. And they are typically IV users, mostly because of the volume of drugs. That's why we see the opportunity with prefilled. Given now patients that were say on 400 ML would have been inaccessible with a prefills now it's actually a shorter infusion time. That can be done with prefills with CIDP. So that is a major market that we believe CSL will go after now, as they're the only company able to service those patients with the CIDP indication with prefills.

Got it, that’s helpful color. And then maybe one of the new collaboration you guys announced today seems like you're looking to develop a one size fits all and I assume there's a cascade of positives that come with that specifically in the financials, economies of scale and things like that, but maybe we just do a catch all of the significance of that collaboration, when we could see that progress, what this could do to margin impact over a long period of time, and any other strategic benefits that may be missing.

Yes. So first, let me just start with the value prop right that we have obviously the pharma partner saw an increasingly as we begin to show this in very confidential discussions with some of our pharmacy partners, the biggest dilemma right now is as you call the simplicity rules, so we can supply a pump that is able to satisfy the needs of all prefills and bio patients, that's a big game changer for them. So obviously, with our partner that we're working with, they saw the advantage of that. And I would also say that three of the four major IG companies have made the decision to go prefills and they've been public about that. So we see a lot of legroom in this area. And without getting into any further specifics, relative to the total infusion experience we intend to have for our patients, I would say that we believe this product both from a pump and a consumables program will be add significant convenience for patients, save a lot of time. Save a lot of really importantly, value added time for pharmacists and for caregivers that train on the product. So all the way around, we think it will be a significant game changer for us.

There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Linda Tharby for any closing remarks.

Thank you all for joining us today. I look forward to updating you at our upcoming Investor Day. And we look forward to seeing you here.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.