KORU Medical Systems, Inc.
Q4 2020 Earnings Call Transcript

Published: 23 Mar 2021

[Operator:]

Greetings and welcome to the KORU Medical Systems Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Greg Chodaczek. You may begin.

[Greg Chodaczek:]

Thank you, Alex, and good afternoon, everyone. Earlier today, KORU Medical Systems released financial results for the fourth quarter and year ended December 31, 2020. A copy of the press release is available on the Company's website.

[Jim Beck:]

Thanks Greg, and good afternoon, everyone. We appreciate you taking the time to join us today. Before reviewing our year 2020 operational highlights, I would like to thank the KORU Medical Systems team for their hard work and dedication throughout the past 12 months. Despite the many challenges that they encountered this past year, the team rose to the occasion.

[Karen Fisher:]

Thank you, Jim, and good afternoon everyone. Total net sales for the fourth quarter were 4.1 million, a decrease of 35% from the fourth quarter of 2019. This decrease in net sales is due to tighter inventory management by several large customers, after precautionary buying in the first half of 2020, a large early order placed in the third quarter, lower novel therapy sales and lower international sales. Higher allowances also unfavorably impacted the quarter. Net sales for the full year of 2020 increased 4%, over the full year of 2019. The increase is principally due to an increase in domestic core product sales volume as well as higher domestic novel therapies of 800,000. Offsetting this increase were higher allowances, which include rebates resulting from the net impact of pricing increases at our largest distributor, in the second half of 2019, and pricing decreases and growth rebates to strengthen our contractual position with several large customers in 2020.

[Jim Beck:]

In summary, again I want to thank everyone again for your time this afternoon and for your interest KORU. Over the past few months, we've had the opportunity work with KORU team. We have a talented group at KORU. We're very dedicated providing life-sustaining products to the patients we serve. The market opportunities for our infusion pumps are significant and our balance sheet is solid. It's been my pleasure to be the Interim CEO of KORU Medical and I look forward to assistant Linda when she assumes leadership of KORU Medical.

[Linda Tharby:]

We can now turn it back over to the operator for Q&A.

[Operator:]

At this time, we will be conducting a question-and-answer session. Our first question is from Alex Nowak with Craig-Hallum Capital Group. Please proceed with your question.

[Alex Nowak:]

Good evening, everyone. Jim, I want to touch on that last point you mentioned there. As Linda joins the Company next month, what are you in the Board directing her to be the primary focus over the next 12 months? And then, what are the primary goals for the next few years here?

[JimBeck:]

Well, Linda would advise that she has two mandates, growth and innovation; and you might've seen that we've referenced that we're going to spend a good deal of time with Linda to reframe the strategic plan that we laid out fully committed to achieving the same targets we had set. Just reset on in terms of the timing. We've also got a pretty comprehensive transition plan laid out with information is already flowing back and forth, introductions are occurring. So, we're out ahead of our April start date and the Board and particularly the nominating governing committee has been way out ahead of us as a very well-defined, very disciplined transition plan.

[Alex Nowak:]

That's great. Maybe go into the guidance for Q1, just given everything we saw in 2020, with the first half 2020, up and then second half coming down. As you're going into Q1, is it fair to say that all the excess inventory in the channel has been washed out? And then I guess, as you are going through 2021, what's the threat that we see a similar fact where we see lumpy sales occur in Q1 and Q2, and then all that inventory gets flushed out again in the second half of 2021? What's the -- what sort of detections are you putting into business there?

[Jim Beck:]

We think and we believe that the information we've gleaned from our customers and our largest distributor that their inventories have been returned to normal levels. I'd also add that we think that we've lapped through all of the allowance noise that happened throughout this past year. If there is going to be anything lumpy going forward, Alex, I think it all fits within the context of in the comments I made earlier about the novel therapy revenues. They're unpredictable. They could be lumpy, and they've also been impacted by trial efforts COVID-19. So, they're also going to be a bit unpredictable.

[Alex Nowak:]

Yes, that makes sense measures. Now just last question for me. The hematology drug is expected to launch sometime this year and they've already been out there doing an early access launch. Do you know how much of the KORU inventory is out there already in the channel for that drug? And then the follow-up question that is, what is the expectation for sales to start to flow to KORU, as the drugs begin selling into the market?

[Jim Beck:]

I'd have to defer to Karen, if she can help me with the how much inventory is out there, Karen do we -- if we even…

[Karen Fisher:]

Yes, we don't really know what they have sitting on the shelf at this point, Alex.

[Alex Nowak:]

Okay, got it. And just last thing, any clinical trial revenue and the Q1 guys -- from Q1 2020, not Q4 2020?

[Karen Fisher:]

Q1 is zero.

[Jim Beck:]

2021, there is, Karen's reference to the target for revenues for the first quarter does not include any clinical trial right now.

[Operator:]

Thank you. Our next question is from Kyle Rose with Canaccord. Please proceed with your question.

[Kyle Rose:]

Great, thank you for taking the question. I wanted to ask another questions kind of follow-up on Alex about how you think about guidance. When I think about the 5 million, can you help us understand how that breaks down U.S. versus O-U.S.? And I am just trying to get a baseline on the business, when we think about moving forward. If you're comfortable with where the channel inventory is, you're comfortable with the pricing dynamics, it feels like 5 million is a fair place to start moving forward. Obviously, you don't know about novel therapies, but now consider that upside but maybe up to level set. What the U.S. and O-U.S. mix should be moving forward? And is this kind of the baseline 5 million that we should think about on a go forward basis?

[Jim Beck:]

Well, let me make a run at and then you can add in Karen. We're not expecting a lot out of the international sales given the impacts of the pandemic throughout this past year and the supply constraints to our distributor group over in Europe. So, the mix is going to be an increase of what we've referred to as the domestic core. Does that help, Kyle?

[Kyle Rose:]

Yes. So, the fair way to think about it is that 5 million is reflective of the U.S. core business moving forward.

[Jim Beck:]

And relatively year over year stable international look.

[Kyle Rose:]

Okay. Okay. And then just your overall confidence with where the market is now with respect to underlying growth dynamics of the Ig market from a patient perspective. Obviously, there's a lot of disruption in 2020, just the getting into this positions, getting diagnosed for PIDD was a challenge to begin with. I'm sure it was exacerbated this year. Maybe just help us understand how you think about the market growth broadly? And then secondarily, how we should think about that translating to the core growth with the backdrop of potential Ig constraints and things of that sorts?

[Jim Beck:]

As we closed 2020 that Ig growth was in the low double digits, if you'll recall. And it's remained relatively flat over the past six months, flat at that low digit growth, the low double digit growth if you will. That's from the only external data source that we have. We also have anecdotal information from a few customers. Some that we helped them say that they're seeing fewer patients, the difficulty with leaning in on a few key customers is that you're not quite so sure whether they are losing share or it's a real true indication of the marketplace.

[Kyle Rose:]

Okay. And then I just, you know, I don't mean to put words in either of yours, your mouth, particularly given you got the new CEO joining, but I'm just trying to, we think about all the moving pieces in the business, you kind of a balance and baseline up here at about 5 million. Is it fair to think, obviously there's quarter to quarter volatility and ordering patterns, but 5 million and then you've got -- you're going to have the end market patient growth in low double digits. That's kind of how we should think about this business on an annual basis moving forward?

[Jim Beck:]

I would think so. I think the earlier comments would suggest that we novel therapy revenues are unpredictable, that the international markets have been impacted significantly by COVID-19. So we're not expecting a significant amount of growth in 2021. So, we lean heavily in terms of our domestic core the most, the largest component of our revenue stream.

[Kyle Rose:]

Okay. Thank you very much. I appreciate you taking the questions. That's all I've got.

[Operator:]

Thank you. Our final question is from Matthew O'Brien with Piper Jaffray. Please proceed with your question.

[Matthew O’Brien:]

Thanks for taking my questions. I guess, just to follow up on Kyle's question a little bit, Jim or Karen. Can the overall business growth here in 2020, it's kind of feels like we should assume it's kind of a down year from a revenue perspective? This year, unless a couple of things break elsewhere in the business.

[Jim Beck:]

We have put forth a budget that does show growth in the periods. I think the size of the domestic core business in moving at low double-digits, we've carried forward, full product sales growth for 2021.

[Matthew O’Brien:]

Got it. For a total company basis versus the 24 you did last year in total?

[Jim Beck:]

Yes.

[Matthew O’Brien:]

Got it, okay. And then, how do we think about the EBITDA line? I mean, a little bit of a loss here in Q4, which typically is pretty strong, even a quarter for you. Is this something that it can be flat again to last year to up slightly? Or is it something that you think can contract a bit versus what we saw in 2018 versus 19? Or how do we think about that metric?

[Jim Beck:]

I don't know. I'll let Karen, answer that question.

[Karen Fisher:]

Yes, we should see some improvement on that line this year. Remember, we had some anomalies in 2020, and our costs are slightly better coming into the year. So, we should see an improvement there.

[Matthew O’Brien:]

Okay. And Karen, those anomalies are they included or excluded from the adjusted EBITDA number?

[Karen Fisher:]

Yes, they're excluded.

[Matthew O’Brien:]

Okay. And then I guess, well, just curious about the tone within the business at the moment in terms of employee turnover. How stable are things? What's the enthusiasm with Linda coming in? And I guess maybe the Alex's first question, what is she really going to be tasked with right off the bat? Is it really the core business? Or is it going to be all these potential other applications for the technology?

[Jim Beck:]

Well, from a culture standpoint, first of all, it is a solid business. There are good people in this organization, and they do a nice job. As I said earlier, they've been through a whole lot, they are dedicated. So, I think one side of it, we are very fortunate to have this opportunity to work with this team. And the other side of it, when you finally -- when you get to hear from Linda, the energy is just tremendous. And she has met a few people who have had only overwhelmingly positive comments about it. So, the Board is excited, I'm excited to turn the business over to her. I think this is going to be a winning team going forward.

[Matthew O’Brien:]

Got it. And any turnover note in the organization versus traditional numbers?

[Jim Beck:]

Nothing of note, nothing of note.

[Matthew O’Brien:]

Got it. Thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation and have a great day.