KRMD - KORU Medical: Too Early To Turn Bullish

2023-09-12 07:58:24 ET

Summary

• KORU Medical's revenue came in below expectations for the past three quarters.
• But I am of the view that KRMD can still meet its goal of realizing a +20% top line CAGR for the FY 2022-2026 period.
• KORU Medical's shares are rated as a Hold, as it will take more time for KRMD to witness revenue growth acceleration again.

Elevator Pitch

My rating for KORU Medical Systems, Inc. (KRMD) stock is a Hold. I previously analyzed KRMD's financial prospects with my initiation article published on March 11, 2023.

In this latest write-up, I come to the conclusion that KORU Medical continues to warrant a Hold rating. In the near term, KRMD might witness a further revenue growth deceleration in the third quarter of this year due to the weak subcutaneous immunoglobulin (SCIg) market, so it is premature to rate the stock as a Buy. However, KORU Medical's positive medium term top line expansion outlook remains intact based on a review of key metrics like the prefilled syringe penetration rate and the company's business performance relative to the industry.

KRMD's Revenue Missed Expectations For Three Consecutive Quarters

KORU Medical's quarterly top line came in above the market's expectations for seven straight quarters running between the first quarter of 2021 and the third quarter of 2022. But KRMD's financial performance hasn't been as good in recent times. In specific terms, the company's revenue fell short of the Wall Street analysts' consensus forecasts by -0.5%, -2.3%, and -4.0% in Q4 2022, Q1 2023, and Q2 2023, respectively.

While KRMD's Q4 2022 top line was marginally (-0.5%) below expectations, it is clear that KORU Medical's revenue misses for the first half of this year (Q1 2023 and Q2 2023) were pretty meaningful. Furthermore, KORU Medical's revenue growth slowed significantly from +18.4% in Q2 2022 to +5.9% for Q2 2023. To make things worse, KRMD revised the mid-point of the company's full-year fiscal 2023 top line growth guidance downwards from +18.3% earlier to +13.8% now.

In my March 11, 2023 initiation article, I highlighted KORU Medical's "leadership position in the SCIg (immunoglobulin) market" as indicated in the company's 2022 10-K filing . It was the SCIg market that negatively affected KRMD's top line performance in 1H 2023. KORU Medical mentioned at the company's Q2 2023 earnings call that "diagnosis of immune deficiency disorders are driven by infections" and noted that there were "lower overall reported infections" for Q4 2022 which might have carried over into the current year. This provides an explanation for KRMD's below-expectations revenue in the first half of this year.

In 2023 year-to-date, KORU Medical's share price dropped by -27.3% , which underperformed the S&P 500 that went up by +16.6% over the same time period. KRMD's consensus forward next twelve months' Enterprise Value-to-Revenue multiple also compressed from 5.0 times at the start of the current year to 3.3 times now as per valuation data sourced from S&P Capital IQ .

It might be challenging for a recovery in KRMD's stock price and a positive re-rating of KORU Medical's valuations to happen anytime soon with the company's revenue growth remaining weak in the very near term. KORU Medical is expected to announce its third quarter financial results in the second week of November , but Q3 2023 is likely to be another weak quarter for the company. According to S&P Capital IQ's consensus data, KRMD's top line growth is projected to moderate further from +5.9% YoY in Q2 2023 to +2.2% YoY for Q3 2023.

KORU Medical's Medium Term Top Line Expansion Target

There is a strong correlation between KRMD's revenue growth and its valuations. Assuming that KRMD can achieve meaningful revenue growth acceleration again, it is very likely that the market will assign a higher valuation multiple to KORU Medical.

KORU Medical grew its top line by +30.3% and +33.5% in FY 2018 and FY 2019, respectively. In late 2019, KRMD was valued by the market at between 9 and 10 times (source: S&P Capital IQ ) consensus forward next twelve months' Enterprise Value-to-Revenue.

In contrast, KRMD has been trading at consensus forward Enterprise Value-to-Revenue multiples in the low-to-mid single digit range since the beginning of 2022 till now. KORU Medical's revenue expanded by +18.8% in FY 2022, and the company is currently guiding for its top line to increase by +13.8% for FY 2023. The sell side thinks that KRMD's actual full-year revenue performance won't meet the company's guidance, as the analysts' consensus FY 2023 top line growth estimate for KORU Medical is +11.3% .

But there are indicators suggesting that KORU Medical is still in a good position to realize its intermediate term goal of delivering a top line CAGR of +20% for the period between FY 2022 and FY 2026.

Firstly, the penetration rate for prefilled syringes in the US market increased significantly from 10.3% in Q2 2022 to 12.5% for Q2 2023. At the company's recent second quarter results call, KORU Medical outlined its expectations that an estimated 50%-75% "of the (US SCIg) market will be converted to prefills", which offer "comfort and convenience", in the next couple of years.

Secondly, KORU Medical has been gaining market share in its core US market, even though its revenue growth has slowed to +5.9% in the most recent quarter. KRMD emphasized at its Q2 2023 earnings briefing that its "U.S. business grew 11% In the first half of the year, with basically a flat script market."

Thirdly, KRMD has done well in foreign markets, which will become another top line growth driver for the company. Revenue for KORU Medical's international markets grew by +19.9% YoY in 1H 2023, which the company attributed to "strength across several EU markets and growing global immunoglobulin drug availability" in its Q2 2023 10-Q filing .

The above-mentioned factors imply that KORU Medical has a reasonably good chance of reigniting its top line growth in the mid term.

Concluding Thoughts

A favorable re-rating of KORU Medical's valuations is most likely going to happen later rather than sooner, so it is too early to turn bullish on the stock. KRMD's short-term top line outlook is poor, but the company still has what it takes to meet its intermediate term revenue target. As such, a Hold rating for KORU Medical is appropriate and fair.

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