KORU Medical Systems, Inc. (KRMD) Earnings Call Transcript & Summary

Good afternoon, everybody, and thank you for joining us at the 40th Annual Canaccord Genuity Global Growth Conference. My name is Kyle Rose, I'm one of the medical technology analysts here at Canaccord Genuity. And with us this afternoon, we're very excited to have KORU Medical presenting. KORU is focused on the subcutaneous drug delivery via its Freedom Infusion System. We are very excited to have on behalf of KORU Medical, CEO, Don Pettigrew; as well as CFO, Karen Fisher. Thank you both for joining us today. Before I hand it over to you to start the presentation, I just want to remind everybody of any relevant disclosures, if and where applicable, those can be found on the conference and the firm website. And with that, I'll hand it over to Don to start the presentation.

Excellent. Can you hear me okay, Kyle?

I can.

All right. Wonderful. Well, thanks, everybody, for joining this call. I'm excited to share the story of KORU Medical. It's been quite a journey so far. And hopefully, everybody can hear me just fine. So I know we have some tight time, so I'm going to do my very best to hit the key points. And hopefully, I'll do my best to hit the mark here. So for those of you that are new to the KORU story, we're essentially a medical device company that manufactures and sells what's called the Freedom Integrated Infusion System. And what that system does is it allows chronically-ill patients to self-administer their own therapy subcutaneously or under the skin in the home setting. So quite revolutionary and the road has really been paved by this market in immunoglobulin, which I'll get to in a second. So staying on Slide 3 here. We are part -- we like to think we're part of the bigger solution, but we're supporting the migration that everyone's aware of from acute care to home care. We're also pursuing multiple growth pathways that I'll get into here shortly. We have a unique value proposition and that we are actively involved in clinical trials, and it's a huge part of our strategy going forward. We are benefiting from secular or macro growth trends right now in terms of movement of patients to home, more product being available in the space that we're delivering, movement of patients. Because of COVID-19 they can't get into a care setting or a hospital or an in-center infusion center, supporting that movement to the home setting. And at the same time, we're helping be part of the solution by lowering cost of health care while improving patient outcomes. And with that backdrop, we've had some very consistent and strong financial performance. And most recently, we announced our 2Q earnings which, time permitting, we'll get into the financials or those are available on our website as well. So Kyle, next slide, Slide 4. So during times of -- adverse times like we've experienced with COVID-19, it's really driven home the importance, if not the necessity of home health care really to protect the most vulnerable among us. And sometimes, I use an analogy of telemedicine. But sometimes the obvious solutions are right there in front of us. But conventional thinking prevents people from moving in those directions. So I feel very strongly that home infusion is the best answer for these chronically-ill patients and they require therapy but may or may not be willing or able to visit a doctor's office, a clinic or a hospital. So when I mentioned the telehealth analogy, rewind back to a year ago, and there was a report by McKinsey & Company that stated just 11% of patients use telehealth. And then more recently, that number is closer to 50% are using telehealth. So I'd like to draw that analogy with the solution that our company brings to health care. Sometimes things just make too much sense, especially when they're good for health care economics as well as patient outcomes. So on the right side of the slide, you'll see a picture of our device, the Freedom Integrated Infusion System. It's a simple, mechanical, easy to use, easy to train system that includes a capital component, which is the syringe driver you see there and a razor-razorblade bottle, where we have a disposable tubing set and a disposable needle set that accompanies it. You'll also see the list of 4 different subcutaneous indicated drugs for the areas of primary immunodeficiency and then one of them, Hizentra, has expanded an indication into the neurological space, which again, I will get into here shortly. So if you could advance to Slide 5. So really, our positioning now is to leverage our core strengths today to drive growth tomorrow. So right now, we're experiencing significant market share, but we also have very large growth potential. We have a differentiated technology, and we're unique in that we go to market in collaboration with drug companies, so having strong pharma relationships is paramount for our company. We also have premium customer retention. We work directly with specialty pharmacies who we consider our end customer. And at the end of the day, we have a unique value proposition across the entire care continuum. On the right side of the slide is what I'm most excited about. And that is we really have 4 growth engines to this business. The first one, which has an enormous runway to it is the growing adoption in the current space that we're in, which is delivering subcutaneous immunoglobulin. Immunoglobulin simply put is the antibodies in your blood, a biologic that can be delivered subcutaneously. So we've experienced tremendous growth in this space. We're seeing more players come into the space in terms of drug companies, and we have -- and I'll show you here shortly, a huge opportunity. Beyond this current space and these current drugs is the opportunity for these to expand their indications. So the life cycle of a drug is quite long typically. And then our success has really been around the U.S. market and as have our pharma partners. So what you see is a big opportunity to expand outside the U.S. as well for both the drugs and for us. And probably most exciting is we've demonstrated that we can deliver a simple and easy-to-use platform that's widely adopted with the first-mover advantage. But it's a simple delivery platform that a patient can use that could deliver other drugs as well. So the exciting part of our story and if there's one key takeaway for the audience here, it's one thing is what we have right now but the potential for other drug delivery is enormous. And I'll leave you with one note. The majority of drugs being developed right now are biologics. And biologics are the drugs that are delivered subcutaneously. All right. Slide 6. So this kind of encompasses the first box I talked about of growing adoption in our current space. So what you see here is a fairly noisy slide with some really good points on it. The main one is that we are in an addressable market just in the U.S. of almost $430 million, so about 20x of our current revenues. And we're delivering a drug that treats 2 disease states, primary immunodeficiency and a neurological disorder called CIDP. What I want to bring your eyes to is the huge opportunity with total -- with the total undiagnosed patient population in the U.S. There's an estimated 500,000 patients that have not been diagnosed. And when they are diagnosed, they are put on Ig therapy. Right now, only 70,000 patients are, we estimate, are on Ig therapy. And of those 70,000 patients on Ig therapy, about 24,000 are receiving subcutaneous infusion with our products. So roll that all up and what you have is a market penetration rate that's tip of the iceberg at 5%. You have potential immediate conversions of 46,000 patients that can convert over from the other modality, and that's intravenous, IV, which I'll talk about in the slide following. And ultimately, we have an enormous patient capture opportunity of 546,000 patients, okay? And then I mentioned briefly on the previous slide that this expanded indication into neurology creates additional revenue opportunities for us. From a revenue per patient per year standpoint, each PIDD patient is worth about $750 annually to us. Where a CIDP patient is worth about $1,500 annually to us. And that has to do with frequency of administration, which is typically once a week for PIDD patient and 2 to 3x a week for a CIDP patient. Okay. Next slide. I'll touch very briefly on this one. Right now, patients that suffer these disorders have 2 options. They can be treated in the vein or intravenously or they can be treated under the skin or subcutaneously. And the first question I'd like to ask is, if you were in the patient's shoes and had this diagnosis, what therapy would you choose? And this is just a few key points of why the direction is moving very heavily towards the latter option. Subcutaneous infusion of Ig allows a patient to administer on their own without the need of a caregiver, first and foremost. Second of all, if you're infusing under the skin and you're chronically ill, you're not compromising the bloodstream and risking of infections. So adverse events are, in scale, a lot smaller. They give to the patient complete freedom to go about their daily activities with minimal interruption. And I think most importantly is what makes the patient feel better. With weekly administration subcutaneously, what you see on the graph on the right is more of a level set of your serum Ig level, so which essentially means the patient feels better more consistently. So let me move to the next slide of the market overview. And this addresses plasma supply. So this has been in the news a lot recently, but I want to make a few notes here. Number one, the global Ig market is expected to grow from $10.8 billion in 2018 to $18.4 billion in 2025. And in terms of total available markets, the global home infusion therapy market is expected to grow with a 7% CAGR to $41.6 billion by 2027. And so there's a big tailwind behind this business in this market. One of the limiters in this space has been the ability to collect enough plasma. So the -- this is a business where the supply has not even come close to keeping up with the demand. So the chart on the right really shows the collection efforts over the last 10 years, and these are numbers of plasma collections. It's really gone from less than $20 million to more than -- to almost $54 million. And you have 3 really big players in the space from a pharmaceutical perspective. You have Grifols, who is planning to reach 370 plasma collection centers in the next several years. You have CSL Behring, who's been the market leader and the first mover in the subcu Ig space. They've already opened 20 new U.S. plasma collection centers. And then you have Takeda, which has a drug called CUVITRU, they intend to increase plasma supply and manufacturing capacity by more than 65% over the next 5 years. So the infrastructure investment is enormous in this space, and there's a lot of ships being pushed in on Ig long term. So let me take you to the next slide, which is titled Hizentra. And I'm going to make just one simple point here is there's a team sales approach and a collaborative effort where the drug companies are wanting to sell drug and they need a delivery system to sell the drug. What you see here is a clip from -- or a picture from the website, hizentra.com. And what you'll see here is a product that this girl is wearing which really promotes subcu infusion as well as the acceptability of the FREEDOM60 infusion system. And this is the #1 prescribed subcu Ig drug and also the same drug that just recently expanded its indication into neurology. The next slide is important because Grifols, who's been the largest market shareholder of IVIg product launched in December of 2019 a subcutaneous formulation. And this is very telling because these guys are a behemoth in plasma collection and manufacturing. But what it does is it really validates the therapeutic shift from IVIg to subcu Ig. So the majority of patients, as we estimate that are on Ig are currently getting it done intravenously. So we think this additional focus from their sales team, this additional supply of subcu is very telling about the future of this business. This in conjunction with COVID concerns, we think, creates a very powerful tailwind for movement from IV to subcu. So at the end of the day, you can read that as significant long-term growth potential for KORU Medical, but this is a newer drug that's yet to gain a lot of momentum but is a solution to the supply problems going forward. Okay. Next slide. So I touched briefly earlier in the presentation on the one thing you should remember about this presentation and that was the clinical trials. And one thing is executing on the business that we're in. The bigger part of the story becomes where could we go with this business. And the slide highlights 2 things. One, current development programs that KORU Medical is actively involved in that gets us into different disease states such as secondary immunodeficiency, hematology, pulmonology, nephrology and rheumatic and other autoimmune diseases. We recently announced on our earnings call a successful Phase III trial with a hematology drug that has used our product during the clinical trial process and we'll be launching sometime in 2021 with our product as a delivery system. So besides these 5 development programs, if we roll up just additional opportunities, we've identified more than 10 therapeutic areas and more than 10 high potential future candidates that we feel would be very good opportunities for our delivery system. So next slide, Slide 12. I'll just make one quick point here. At the end of the day, for some -- for a device and a drug to be successful, there has to be favorable reimbursement and payer economics. This is just one example of by not diagnosing a patient, these primary immunodeficiency patients spend in the health care system and are very costly. So it behooves the payer to get these patients diagnosed and get them on Ig therapy because it represents about an $86,000 decline in annual treatment cost per treatment. Okay. The next slide, I think, is fairly obvious. But this is coming from the UnitedHealthcare Group -- or UnitedHealth Group. This just outlines the savings for these patients by being treated in the home setting. The comparison really here is versus the acute setting. So what you see is about 44% savings for every 6 months of treatment. So again, one of the secular trends, one of the favorable tailwinds for us. All right. Coming down the home stretch here, Slide 14. KORU Medical basically improves the delivery of care. So I get a lot of questions about kind of the patient journey. And what this slide is intended to do is kind of walk you through a patient journey of presenting at a hospital or with a physician, getting a diagnosis from their caregiver, usually an immunologist for PIDD, an infusion therapy is prescribed and the drug is -- the drug order is filled by specialty pharmacies and delivered typically by distributors. So this patient would go home, a nurse from a specialty pharmacy would bring the product and the drug, show the patient how to use it. And then after that, this patient would receive infusion resupply directly, typically from a distributor. So what you see here is you have these chronic conditions in need of therapy. You see this expanding trend of physicians prescribing subcu Ig. You got to -- you're not paving a new road here, it's a proven solution. You see increasing drug development for subcu delivery. We already have the market-leading position for mechanical subcu delivery systems and we have a high-margin recurring razor-razorblade revenue stream. Okay. And then I'm going to finish on the last few slides here. The next slide is about our strategic growth initiatives. We provided some guidance and some insight into our strategic plan. And essentially, we are trying to become the preferred drug delivery partner for specific infusion therapies in select markets. Phase 1, what we've really been working on is trying to shore up our current business, getting strong contractual positions as well as secure growth with the market rate as a minimum. But at the same time, plant seeds for future opportunities. What we're doing now is expanding into Phase 2, which we call expand and innovate where we look at new products, we look at new indications. We're looking at expansion into Europe and potential new post-acute areas. So growth capital will help fund these next 2 phases. And then ultimately, we go into Phase 3, which we see as the accelerated growth driven heavily by new drugs and indications, as well as continued adoption in the spaces that we're in and then global expansion as well. Okay. So let me -- I'll just highlight this last slide, and then I'll turn it back over to you, Kyle. We announced in Q2 2020 in our earnings call, we grew net sales year-over-year of 44%. Our gross profit margin grew 41.3%. Our net income -- we reported net income loss. But adjusted for onetime noncash litigation settlement, we are positive. And at the end of the day, we had adjusted EBITDA growing at over 18%. So let me turn it back over to you, Kyle.

Great. Thank you very much, Don. So one of the questions that I wanted to ask and actually getting a similar question in the portal here. I guess, firstly, is -- do you have thoughts about moving into additional OUS territories beyond maybe the United States and Europe? Are there plans to move into Latin America and/or Asia Pacific? Is that part of -- would that be part of Phase 3?

So that would be kind of the transition in Phase 2 and Phase 3. So the short answer is we're not limiting ourselves to just the European expansion. We are looking to do something similar to how we came to the market into the U.S. and follow the expansion plans of the drug companies. So working with them in the U.S., we have good visibility into areas that they're looking to go. And Europe seems to be the biggest priority. But Asia Pacific, Latin America, other areas are also high on the radar. So we intend to look at those market dynamics specifically and try to go to areas where we think probability of success is high.

Okay. I appreciate the additional insight there. So I want to ask one more bigger picture question, just when I think about the drug delivery opportunity outside of immunoglobulin and maybe from a long-term perspective. But you've got the FREEDOM60. So obviously, that fits the 60 ml syringes. You've got the 30, which fits the smaller syringes. I guess what I'm just trying to understand is where we see the long-term subcutaneous market maybe segment over time? At what volume on the low end, does it really not make sense to even use a mechanical pump and just the patient can self-administer? And then when you move up the chain as far as volume that's going to be delivered, where does it make sense to -- or maybe you can't even use the FREEDOM. So I guess, where is the sweet spot when we think about drug delivery partnerships and the delivery of subcu drugs?

So we -- so there's kind of 3 -- I'll be brief here. There's kind of 3 areas of volumes that are -- or 3 segments, I guess, of infusions. And if you're at the very low end, 2 mls or less. What you see is simple injections or auto injectors. If you're at the high end, 1,000 mls plus, you're dealing with intravenous infusion with a whole fleet of -- or electronic pumps. We're kind of in the mid-tier space. So call it the -- we're really kind of in this 15 to 100 ml space. The trends with a lot of drugs are more concentrated formulas which means less volume to deliver. So going forward, I would expect to see a need to capture delivery systems in the 5 to 25 ml space as a sweet spot. And we're very aware of that.

Okay. That's very helpful. And then quickly, I know we walked through the slide quickly, but you've talked about the partners you're with from -- at least from a high level in the markets they're focused on. But maybe just any of those submarkets that you talked about that you think might offer more commercial value in near term versus longer term? And specifically, I know you've mentioned there's a hematology asset out there. But any other areas that we should keep an eye out for?

So we've -- as I mentioned, we're very invested in the clinical trials. The only thing we've provided info on is this hematology drug. But the disease states that you see that I highlighted in the slide with nephrology and pulmonology are areas that you could watch. But those are where we have current development programs. But right now, we've communicated the hematology successful clinical -- or clinical trial and commercialization plans, and we look forward to providing more information on that going forward. But that's additional upside to our business.

Okay. Terrific. I'd love to ask the name of those drugs and the direct market opportunity, but I know you won't give it to me anyways. But I just want to thank you very much for participating today. I appreciate you taking the time. And I appreciate everybody else on the webcast taking the time as well.

Yes. Thanks for everyone's time and attention. I appreciate your interest in our story.

Have a great day.

Thank you.