2023-03-11 07:14:29 ET
Summary
- KORU Medical's 2023 revenue guidance exceeded expectations, but there are downside risks relating to its novel therapies pipeline.
- KRMD's 1H 2023 gross margin is expected to be hurt by production footprint optimization activities; while there is a risk of further fund raising in the future.
- I am awarding a Hold rating to KORU Medical in view of its mixed outlook.
Elevator Pitch
I assign a Hold investment rating to KORU Medical Systems, Inc.'s (KRMD) shares, as I think that the outlook for KRMD is mixed. On one hand, KORU Medical's revenue guidance came in better than what the market was expecting. On the other hand, KRMD's gross margins might remain weak for 1H 2023. Also, it is reasonable to expect the company to engage in some form of capital raising going forward to support its medium-term revenue growth target.
Company Description
Started in 1980 , KORU Medical refers to itself as a company that sells "subcutaneous drug delivery systems" utilized for "infusions administered in the home and alternate care settings" in its media releases . As per its most recent fiscal 2022 10-K filing , KRMD has a "leadership position in the SCIg (immunoglobulin) market."
KORU Medical's Key Products
KRMD Saw Slower Revenue Growth And Narrower Than Expected Losses In Q4
KORU Medical issued a press release announcing the company's most recent financial results for the fourth quarter of 2022 on March 8, 2023 after the market closed.
Revenue for KRMD increased by +13.2% YoY from $6.49 million for Q4 2021 to $7.34 million in the recent quarter. KORU Medical's Q4 2022 YoY top line expansion of +13.2% was much slower than the company's sales growth of +60.0% YoY and +28.5% YoY achieved for Q4 2021 and Q3 2022, respectively.
Moreover, KRMD's actual fourth quarter top line came in below the Wall Street analysts' consensus revenue forecast of $7.38 million . The top line miss for KORU Medical in the recent quarter was largely attributable to a -3.2% YoY decline in revenue for KRMD's international core business from $1.26 million in Q4 2021 to $1.22 million for Q4 2022. In its recent quarterly results press release, KRMD explained that sales for its company's international core business was negatively affected by the "prior year timing of orders from two distributors."
On the flip side, KORU Medical's operating loss and bottom line for Q4 2022 turned out to be better than what the sell-side analysts had anticipated.
KRMD registered a non-GAAP adjusted EBITDA of -$1.55 million and normalized net loss per share of -$0.04, respectively for the final quarter of the prior year. As a comparison, the sell-side had previously predicted that KORU Medical will report a wider normalized EBITDA loss of -$2.18 million and a more severe non-GAAP net loss of -$0.06 per share as per S&P Capital IQ data.
At the company's Q4 2022 investor briefing on March 8, 2023, KORU Medical noted that it had incurred "lower expenses and implemented improvements in working capital" and also benefited from "an increase in core average selling price and (a more favorable) product mix." These factors allowed KRMD to offset inflationary cost pressures and deliver narrower than expected losses in Q4 2022.
In a nutshell, KRMD's Q4 2022 performance was a mixed bag, considering both a moderation in top line growth (which also fell short of expectations) and above expectations bottom line.
Top Line Outlook For KORU Medical
KRMD's revenue guidance for full-year fiscal 2023 is reasonably good.
As mentioned in its Q4 2022 results release, KORU Medical expects its top line to increase by approximately +18.3% to $33.0 million for FY 2023 based on the mid-point of the company's financial guidance.
KRMD's expected sales growth of +18.3% for the current year is roughly on par with its actual top line expansion of +18.8% in FY 2022. This is also much better than the company's +4.4% revenue increase in FY 2020 and its revenue contraction of -2.8% for FY 2021. Furthermore, KORU Medical's 2023 top line guidance was higher than the market's consensus revenue estimate of $31 million before the company announced its Q4 2022 results.
KORU Medical's pipeline for novel therapies poses the most significant downside risk for its 2023 top line guidance. KRMD acknowledged at the company's most recent quarterly results call that "if the trials (for novel therapies) don't do well, they (clients) will order less" and noted that certain "trials are canceled" at times as well. As a reference, revenue generated from novel therapies surged by +329.8% YoY to $2.5 million in FY 2022 for KRMD. As such, it is reasonable to expect novel therapies to be a key sales growth driver for the company in the current year; but they could also be a source of disappointment if the trials don't work out.
KRMD's Expectations Relating To Profitability And Financing
KORU Medical's profitability at the gross margin level should still be depressed in the first half of this year; while there is a high probability of new fund raising sometime down the road.
KRMD's management guidance points to the company achieving gross profit margins between 55% and 57% for the first half of 2023. This is consistent with the Wall Street analysts' expectations (source: S&P Capital IQ ) that KORU Medical's gross margin will decline from 58.0% in Q1 2022 to 56.0% in Q1 2023 and increase modestly to 56.8% for Q2 2023.
In its Q4 results press release, KRMD explained that the company's move to "exit our Chester facility" and focus on "our Mahwah facility and outsourced manufacturing organization" will be a drag on its 1H 2023 gross margins.
Separately, KORU Medical highlighted at its Q4 2022 investor call that it is "not anticipating any equity raises at this time." But KRMD also admitted at its most recently quarterly results briefing that it has the option to "increase our cash on the balance sheet to take advantage of additional growth opportunities through debt or non-dilutive financing."
KORU Medical mentioned in its FY 2022 results presentation that it has a goal of delivering a faster pace of top line growth at "20% Revenue CAGR" and reaching "$60M (in sales) by 2026." This suggests that it is very likely that KRMD will require more capital to fund its ambitious growth target. In that respect, the prospects of a potential capital raising might act as an overhang for the company's shares.
Closing Thoughts
My rating for KORU Medical is a Hold. I have a Neutral opinion of the company's shares in view of its mixed outlook relating to revenue, gross profitability and financing.
For further details see:
KORU Medical Systems: Mixed Outlook