Greetings. Welcome to the KORU Medical Systems First Quarter 2023 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press Star Zero . As a reminder, this conference is being recorded today, Thursday, May 4, 2023. I would now like to turn the conference over to Gregory from the Gilmartin Group. Please go ahead.
Thank you, Grant, and good afternoon, everyone. Earlier today, KORU Medical Systems released financial results for the first quarter ended March 31st, 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 disclosures 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 Thursday, May 4, 2023 at approximately 4:30 P.M. Eastern Time. Since then, the company may have made additional comments related to topics discussed, please refer to the company's most recent press releases and find it filings with the SEC. Joining us on today's call is Linda Tharby, President and CEO of KORU Medical Systems, and Tom Adams, KORU Medical's Interim Chief Financial Officer.
Linda, please go ahead.
Thank you, Greg. Good afternoon, everyone. Thank you for joining us today. During today's call, we will use slides to support our commentary. To start, I will walk through business updates for the first quarter and provide updates on our progress thus far for 2023. Tom will discuss our financials and 2023 guidance. I will end with an innovation update and closing comments. Following our prepared remarks, the call will be opened up for Q&A. The first quarter of 2023 marked a strong start to the year for the company as our team continues to make meaningful progress towards our Vision 2026 strategy of achieving $60 million in revenue. This strategy is focused on one of the largest healthcare macro trends, movement of care from the hospital to the home.
In the quarter, we made significant progress in all three of our core business areas, delivering our sixth consecutive quarter of double-digit growth. In our U.S. core business, we saw growth accelerate to 15%, and we remain focused on increasing our leadership position in the growing subcutaneous immunoglobulin market. In the quarter, we saw growth in several key areas, most notably our pump business, indicating increases in new patient starts and continued penetration of prefilled syringes. In our international business, an increase in SCIG drug availability combined with our expansion efforts led to a strong uptick in growth in the quarter to 23%. Importantly, we continue to progress our Novel Therapies business with the goal of adding additional drugs to our KORU Freedom subcutaneous pump infusion system.
In the first quarter, we grew Novel Therapies revenue by 62% and added another pharmaceutical collaboration, bringing our total to 15. In our focus on building our foundation, I am pleased to report that we passed a significant milestone in the quarter we completed our transition to a dual-source contract manufacturer for our consumables business. We also completed the closure of our Chester, New York facility and consolidated operations in our Mahwah facility. Our operations and project management team's great efforts will pave the way for further margin improvement and inventory reduction throughout the year. With the momentum with which we started the year, we remain confident to reaffirm our guidance and expect to end the year with revenues between $32.5 million and $33.5 million , representing growth in the range of 17%-20%.
I would like to begin today with our U.S. business, where our team is focused on continuing to build our leadership position in SubQ IG therapy. Again this quarter, we saw our growth exceed the overall market as we reported 15% core U.S. domestic growth. We continued to see the number of patients on SubQ therapy rise as all IG drug suppliers have reported consistent supply and continue to focus their efforts in this area. While there are occasional fluctuations in reported monthly IG gram data, the overall SCIG drug market trends remain positive. This is evident by the fact that volumes grew 7% and 11% in the first and second half of 2022 respectively.
Volumes jumped to 12% through the first two months of 2023 but fell in March, consistent with scripts, resulting in a flat Q1 versus 2022. Based on our review and conversations with IG drug manufacturers, we remain confident of double-digit market growth for 2023. Overall, KORU's U.S. pump volumes grew by 16% for the first quarter of 2023, a strong signal of our strength in our specialty pharmacy account activity and new patient starts. We continue to see increasing penetration of prefilled syringes in the market due to their overall convenience and patient preference. The conversion to prefilled syringes is a critical business driver, as our FreedomEdge is currently the only pump with FDA clearance for use with prefilled syringes. First quarter saw over 130% prefilled syringe growth, with overall penetration increasing to 12% of the market.
The current formats available in prefilled syringes are 5, 10, and 20 ml, which address approximately 1/3 of the overall market. Last month, CSL, the leader in SCIG therapy, reported exciting news. They received FDA clearance for their Hizentra 50 ml. This approval will enable a much broader addressable prefilled market as over 60% of patients require greater than 50 ml. CSL expects the 50 ml prefilled syringe will be available in early 2024. We expect to have 510(k) approval ahead of their launch, and we will be well-positioned to capitalize on the opportunity. Overall, a great start by our U.S. team, outperforming the underlying drug market growth. Moving to our international business, we have seen increasing positive momentum. We ended the first quarter with growth across several key markets, representing 23% year-over-year growth. Expanding internationally is a key growth driver for the company.
New patient starts, fueled by the increase in IG supply in the EU, continue to drive growth, and we are well-positioned to benefit with our distribution in over 25 countries. In the first quarter, we strengthened our international distribution with sales into Canada, all contributing to our overall double-digit international pump sales year-over-year. We have also begun to focus our efforts on conversion of electronic pump patients in Europe, and I would like to provide a few updates. The early feedback on our electronic pump conversion efforts is positive, with healthcare professionals and patients appreciating the benefits of our Freedom System. The electronic pump comparison trial is expected to be delivered and completed in December of 2023. Moving to our Novel Therapies business. During the first quarter, we brought our Novel Therapies collaborations to 15.
As previously announced, we signed a development agreement with an SCIG pharmaceutical manufacturer to use the Freedom System for an upcoming SCIG prefilled syringe product. This builds on our leadership position in the SCIG prefilled market and demonstrates that our market experience, patient insights, and pharmaceutical collaborations capabilities make KORU Medical a partner of choice for SCIG device innovation. This program does not require human clinical trials. We expect it to launch commercially in the next 1-2 years. New collaborations are essential to our NT strategy. The Novel Therapies pipeline is the fuel for increased signed collaborations. Our NT team has worked hard to build a T-funnel of 10-15 additional pipeline opportunities. This funnel spans new therapy areas, indication opportunities from existing partners, geographic expansion, and phase progression.
We have seen a steady intake into the funnel, including new interest in infectious disease, increasing interest from oncology opportunities, and new geographical targets. Taking a look at our collaborations, in total, we now have 15 collaborations, including over 2.8 million potential patients and a TAM of roughly $2.5 billion, roughly 2 times our original aspirations. With the execution of our Q1 collaboration and our current pipeline of new opportunities, we are one step closer to our milestone of ending 2023 with 20 total collaborations. We feel we have a clear line of sight to our 2026 commercialization goal with multiple phase 3 opportunities. As we look to the rest of 2023, with the pace of pipeline to sign deal, we expect our collaborations to increase in the back half of 2023. Thanks to the team for a great start to 2023.
I will now turn the call over to Tom to re-review our financial results and guidance.
Thank you, Linda. Good afternoon, everyone. I'm excited to report a strong quarter of 18% growth with total net sales of $7.4 million, an increase of $1.2 million over the prior year. Domestic core led with 15% revenue growth that was driven by increases in volume for pumps and consumables from new account wins in our key specialty pharmacy accounts and continued strength in prefilled penetration. International core net revenues increased by 23% with growth across several key markets, driven by international expansion efforts and increased availability of SCIG drug. Novel Therapies net revenues grew by 62%, driven by a non-recurring engineering innovation service agreement with revenue supporting progression toward a clinical supply milestone. As we look at our gross margin, we can think about margin progression in two halves for 2023.
In the first half, we expect margins to range from 55%-57%. We are on track with the 56.1% gross margin reported in the quarter. During the quarter, we completed our manufacturing transition to a third party CMO, and we consolidated manufacturing into our new site in Mahwah, New Jersey. This consolidation allowed us to close down and exit our Chester facility. In Q2, we will be recognizing on the P&L the incremental costs incurred from Q1 during the manufacturing transition period, and therefore expect to see a similar margin profile to Q1. As we look at the second half of the year, we expect significant improvements in gross margin, with two full quarters of lower cost outsourced products, lower labor and overhead, and improved efficiency in Mahwah.
This will lead us to achieving strong second half margins and a plan to exit the year at a gross margin rate between 60% and 62%. Our cash balance at the end of Q1 was $12.2 million and represented a $5.2 million decrease from the beginning of the year. Similar to last year, we plan for a higher level of cash burn in the first half than in the second half. For instance, you might recall that our cash burn in the first half of 2022 was about $7 million, and we reduced that to under $1 million in the second half. We expect a similar cash usage pattern this year or about a 90/10 split between the first and second half.
Given this pattern, I want to spend a few minutes on first quarter cash burn, and we'll come back to outlook and expectations for the remainder of the year on the guidance slide. As we look at the usage of the $5.2 million of cash in the quarter, we saw the majority or $2.8 million coming from working capital in three major areas in the form of higher accounts receivable driven by higher March revenues, a higher level of transition inventory to avoid supply disruption as we move manufacturing locations, and a higher level of payments driven by bonus and year-end accruals. Net losses excluding non-cash items were $1.8 million, of which the biggest driver was total operating expenses for the first quarter of 2023 of $7.2 million, primarily due to innovation investments in research and development.
We expect a lower overall cash burn in 2023 and continue to prioritize our expenses and capital plans according to our revenue growth goals. We will come back to cash outlook on the next slide. We reaffirm our year-end guidance of a cash balance greater than $10 million, driven by working capital improvements, revenue growth, and gross margin expansion. We are reaffirming our outlook and expect the following for the full year 2023. Revenue to be between $32.5 million to $33.5 million, representing growth in the range of 17%-20%. As previously stated, we have identified several key milestones we will track throughout the year that will serve as the foundation for revenue growth.
These include expanded Novel Therapies pipeline with five additional new collaborations, expecting more of these in the back half, with one already signed, bringing our total collaborations to at least 20 by the end of the year. Two 510(k) filings in the second half of the year. For SCIG drug market growth greater than 10% and prefill penetration increasing to the 15% range. Our gross margins between 58% to 60% for the full year and to exit the year between 60%-62% gross margin. Key drivers behind the increase in our 2023 gross margins that were successfully completed in Q1 include completion of the manufacturing transition, including the Chester site closure and consolidation into Mahwah and ramp up of our outsourced consumables and contract manufacturing.
With this, we target 55%-57% gross margin for the first half and more than 60% margins in the second half of 2023. We expect our cash balance at year-end 2023 to be greater than $10 million. Given our revenue and gross margin guidance, the other major drivers include total operating expenses for the year inclusive of stock compensation expense of $30 million. We expect to see higher sequential level of R&D spend in Q2 as we advance several of our key product development programs into its next phase of development. An improvement of working capital, including lowering inventory by approximately $2 million throughout the course of the year, and then keeping our DSO and DPO balances in the range of 45-50 days, and finally receiving the ERC credit of $700,000.
With these assumptions, this gets us to the ending cash balance of greater than $10 million. We continue to expect to break even in the second half of 2024 with enough cash to execute our strategic plan. While we may look to increase the cash on our balance sheet through non-dilutive debt financings to fund our growth, we are not anticipating or planning any equity raises at this time. I will now turn the call back to Linda for our closing comments.
Thanks, Tom. Given our investment in R&D, I wanted to spend a few moments laying out our progress in this area. We have a product today with our Freedom Infusion System that is trusted and preferred by patients, and we are continuously looking at ways to further support our patients and customers. As we think about innovation, we consider both new products that we are launching and new label indications that we add with the ongoing work of our pharmaceutical collaborations. As a reminder today, the KORU Freedom System has the largest drug label for large volume subcutaneous drug delivery, with 9 label indications in the U.S. and 13 ex-U.S. , and participation with 5 pharmaceutical companies.
From a new product perspective, our focus is on comfort, convenience, and connected, the three Cs as it applies to our Freedom Infusion System. For 2023, we have a few exciting innovation milestones, including a FreedomEdge and Freedom60 line extension and a new 510(k) filing for our consumables, high flow needles and precision flow tubing in the fourth quarter. Looking ahead, we are working towards our next generation pump platform, which we expect to roll out before 2026. The second focus of innovation for the company is new indications for commercial use. In the near term, we expect a new core SCIG indication for prefilled syringes 50 ml in the second half of 2023. We expect multiple new drugs on the Freedom System over the course of the next 3 to 5 years.
Innovation will continue to be an important priority as we look to drive further improvements for our patients and customers and expand our leadership as a drug delivery company. In closing, another great quarter of performance of the company as we continue to demonstrate significant progress in advancing our strategic priorities. We have built strong fundamentals in our U.S. and international commercial business, strong business development capabilities in our Novel Therapies business. Our innovation efforts are beginning to yield progress. The future of the company remains bright. As we move through the remaining quarters, you can expect to see continued execution toward our milestones backed by a strong and determined team with a great vision and continued momentum. In closing, I want to thank our employees for another great quarter. Operator, I will now turn it over to you for Q&A.
Thank you. If you would like to register for a question, please press the 1 followed by the 4 on your telephone. You'll hear a 3-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment, please. The first question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question.
Hey, good afternoon, everyone. Thanks for the questions. Nice start to the year here. As we think forward to the balance of the year, you know, when with 1 Q in the books, you know, the comps do get a little bit tougher here, but you have a lot of momentum around the core business right now. How would you have us think about the cadence of revenue growth? Is there anything you would suggest, we have in mind when thinking through the model into the next few quarters, again, whether that's at a company level, or looking at the individual segments? Thank you.
Thanks for the question, Jason. Maybe I'll start, and I'll turn it over to Tom for additional commentary. First of all, if you recall from last year, our overall core business, between our core U.S. and international business grew in the range of about 11%, and we're looking to uptick that growth this year somewhere from the range of 10%-15%. We see strong fundamentals. Obviously, the U.S. core, we see the SCIG market coming back. We see continued penetration in prefilled syringes. We feel quite good, but would probably expect overall, not huge elevations until we start to see that IG market growth continue to elevate.
For our international business, again, strong performance relative to if you recall last year, we kind of had single-digit growth in the first half up to 15, now we got it above that 20% range. I would continue to expect that kind of an outlook given the return to IG supply in those markets and our increasing penetration into several different countries. Of note this quarter was Canada. We see increases in Germany. We feel good about our international business as well. Think about an overall uptick of a couple of points from where we are last year, between core, or total core between domestic and international.
Okay. Linda, thanks for that. Just maybe on a growth rate basis, like, no meaningful inflections one quarter to another, maybe staying within the full year growth rate band, as we think forward on the growth rate per quarter.
Maybe I'll hand that one over to Tom.
Yep. Yeah. Hi, Jason. Thanks for the question. Yeah, on the core business, you know, we follow obviously the market trends and we grow with the market. As you know, we lag the market generally by a quarter. You know, we saw nice growth in this past quarter, as you can see, of, you know, 15% with the market growth, you know, a nice market growth that we saw in Q4 last year. We continue to watch that market growth. When you look at, as Linda mentioned, when you look at the U.S. performance, you know, we saw nice volume performance here in the first quarter. We expect that trend to continue.
Obviously in our U.S. business, we expect to continue to increase our business on the U.S. side with our projections.
Jason, I don't know overall if you're looking for a specific number in terms of core business and its elevation. What I would say to you is that overall, you know, you saw our growth in the first quarter in core between domestic and international at about 16%. I would say within our overall guidance range for the remainder of the year is probably the right place for us to be.
Okay. Yeah, no, that's kind of exactly what I was looking for. I mean, I think there's maybe a little bit of a tough comp there in 3Q, but I think we'll probably acknowledge. No, otherwise, you know, that's exactly kind of what I was looking for. You know, maybe if-
You have it right on Q3. Yeah. Q3, given we cleared-
Okay
the backorder.
Yeah. Yep. Okay. Totally. Yep, got that. You know, the 50 mL opportunity with Hizentra, maybe that sounds like that could be pretty large. I don't wanna, you know, get too far over our skis here, though. Maybe first, you know, how are you thinking about that in terms of contributions next year? I know it's early, again, it sounds like it's gonna be pretty big. I think that's one of the two 510(k) filings that you're referencing there, Linda. Can you help us out with what the other one is? Sorry if I missed it on the call.
No. First let me just start with pre-filled syringes. Overall, we continue to see great growth. Over 100% growth again in pre-filled syringes, and you really see these dominating versus vials in what we see in the overall market performance. Pre-fills overall will continue. We expect the penetration at about 11% now to elevate to at least 15% by the end of the year. That assumes that we don't have anything on the 50 ML, which comes into 2023. Our current expectation is that we won't have that product in market with CSL until early 2024. With that, what we can see there is 65% of patients take over 50 ML of therapy. Obviously, as you note, it will be a big driver when it comes.
We see patients loving the pre-filled format. We see prescribers, and we see pharmacists continually pushing that because of the patient convenience. Certainly a lot to come in that area. Yes, one of the 510(k)s we expect is on the 50 mL clearance with pre-fill in the back half. The other one, as noted on the last slide is on our consumables business. We're pretty excited about that one and expect to see some major improvements in both comfort and convenience for our patients.
All right. Got it. Yeah, sorry. I was trying to access the deck here. Sorry if it was in there. I, again, been having a hard time getting access to that. I'll look into that a little bit later. Then maybe one final question here. You know, when it looks like, you know, the milestones here on the operational front, you know, in terms of the facility transitions and everything should get you some pretty good line of sight on gross margins. Are there any other puts or takes that we should consider? You know, kind of a similar question as I had on the revenue growth side, but more on margins.
Is there anything that might move you to the upper end or lower end of gross margin, whether it be mix or again, any other factors? Thank you.
Yeah.
Yeah.
I'll let Tom handle that one.
Yeah, Jason. Certainly as I mentioned in the script, 56% is where we're targeting for Q2. Then you'll start to see some significant improvement in the second half of the year, you know, as we start to recognize the benefits of the outsourced facility and the benefits locally with the more efficient facility. When we look at potential upsides, you know, mix is certainly one where, which could go one way or the other, depending on our unit volume. We generally have a higher mix for our pump product versus our consumables. Depending on customer demands, you could see some puts or takes on the mix side.
I would say generally, you know, we have our forecast pretty well built and, you know, as I mentioned in the script, those margins are pretty much, you know, we're pretty much on track to deliver those margins that I mentioned earlier.
Maybe the only other thing I would mention is NRE revenues, that as you know, if they're more innovation, we tend to sometimes see lower margins on innovation agreements because we trade those for longer term commercialization opportunities. If it's clinical, the margins will be higher and we can't always project the mix on that one.
The next question comes from the line of Alexander Nowak with Craig-Hallum Capital Group. Please proceed with your question.
Okay, great. Good afternoon, everyone. I was hoping to expand on the SCIG market, with regarding the weakness in March there, maybe expand on it. What are the drug companies saying out there for why March did come in flat year-over-year despite January and February being up? What are they seeing in April and even the start of May here?
Overall, I would say on the outlook for the total year from everyone that we've spoken with continues to be positive and looking for double-digit growth, which we saw in quarter four and for the first 2 months of January and February. Nobody has any real insight or explanations for that droppage in March. We're anticipating everything to come back in Q2 forward. No concerns around plasma supply, no concerns around overall patient diagnosis rates. Nothing extraordinary that would explain that. There were some consolidations that we saw. I mean, just maybe Alexander from our side and not them.
If you recall, we certainly saw CVS had sold off, a number of their pharmacies and consolidated, and that did affect our business, through fourth quarter of last year and a little bit into this year. That could be, also an explanation for some of that drop-off.
Okay. There could be some dynamics with that. Okay, understood. With the 50 mL cartridge, pre-filled cartridge coming out, do you need to do anything with pumps to make that cartridge work, or is it, is the 510(k) really just a clarity showing that your device is approved for that new cartridge?
Yeah, we did perform human factor studies with our device and the pre-filled syringe. There is one small change, an adapter that we're adding to our system. We don't see it as being anything that, given our human factor studies, will be a complication for our patients. Again, the overall reduction in steps is pretty significant now that you've got pre-filled syringes across the entire range from CSL. Great job on their part.
Okay. Understood. On Novel Therapies pipeline, again, I haven't had a chance to look at the deck either, maybe walk through the 15 deals that you now have signed? Were there anything in the quarter, whether it be some of those clinical developments moved forward, maybe it moved from phase 2 to phase 3, or we got some sort of data or any of those clinical developments where maybe it took a step back or maybe it's gonna be cut from the program? Just help us update us on the 15 that are in the pipeline.
First, a couple of key positives. I was thrilled that nothing fell out. With everything going on right now with clinical trials and biotech in general, I was really pleased that we didn't see any of our clinical trials drop out or fail. Second, I would say clearly we're pleased with having another IG indication. Third, there's probably 1 candidate that we believe will progress to phase 3, we're hoping, in this quarter. Having said that, I would say the other big, big thing that we're excited about is we have, you know, double number of opportunities on deck as we have in the pipeline, sorry, in the signed collaborations. Think about it like it took us about a year to get those 14, 15 collaborations signed.
Usually from the time we start talking to a customer until we close it is 6-12 months. You can expect most of our increases in collaborations to come in the back half of 2023. Overall, I would say good movement, good progression. We're excited. Our teams are busy. I measure that by how often I see any of our R&D people associated with that business or business development people, and they've been out of the office a lot this past quarter. That's great news for us.
No, that's good to hear. Maybe with regards to that, when you think about the funnel, does that include names where you already have a deal signed with a company and they'd like to add a second, third, fourth drug on that list, or are those considered additional on top of that? Just how do you classify it?
They're both. They could be current companies we already do business with. Best place to get new business is from your current customer base. Several of those are companies that we may already be a collaboration, but they're adding additional drugs or additional indications. That's some of what we work with. They're working geographically to expand. Many of them are, I would say 75% of them are brand new companies that are new to what we're doing today.
All right, great. Appreciate the update. Thank you.
Thank you.
There are no further questions at this time. I will now turn the presentation back to the hosts.
Thank you. Again, I'll just close by saying thank you to the KORU System, KORU Medical Systems' entire team. With that, thank you to our investors, and we'll close the call.