Koru Medical Systems ($KRMD) - The leader in large volume subcutaneous drug delivery

Koru Medical Systems is on the cusp of rapid growth into new markets.

Summary

Koru Medical Systems is the market leader for at home large volume subcutaneous drug delivery. Its FREEDOM pump system is a high gross margin (~60%) razor razorblade business model with the pump being the razor, the needles and tubing being the razorblades. KRMD has a net revenue CAGR of 10.4% since the FREEDOM system’s FDA approval in August 2017 even through a relatively stagnant period of poor management 2019-2020.

KRMD has sticky core revenues and is close to an inflection point with 6 drugs in Phase III trials that will use the FREEDOM system (vs. 10 approved today) and are expected to go to market in the next 1-2 years. They also benefit from several tailwinds including an expanding prefill market in which they are the only FDA approved pump and PIDD patients converting from in clinic infusions to at home infusions (20% penetration currently). KRMD is close to cash flow break-even (expected by Q4 2024) and has $9M in cash currently.

Note that Koru Medical Systems was previously named Repro Med Systems ($RMS), renamed in October 2019.

Please see mrsox977’s previous writeup of RMS here (https://www.valueinvestorsclub.com/idea/RMS_Medical_Products/9420162991#description) for more background.

Full Pitch

Why does this opportunity exist?

KRMD gained a lot of investor attention around 2019-2020 due to rapid revenue growth. This was ultimately due to a couple of recent drug approvals and label expansions (e.g. Hizentra) and management did not have any more indications or new drug approvals in the pipeline.

Simultaneously there was significant front-loading of orders in 2020 due to customer worries about Covid supply chain interruptions. This caused 2020 H1 to “grow” ~30% YoY but H2 revenue was down 5% YoY. Investors at first interpreted this as Covid accelerating adoption and patient conversion from in clinic to at home, but by Q3 it was clear that order lumpiness was the more likely explanation. In the 2020 Q3 earnings call, CEO Dan Pettigrew was quite misleading and struggling to answer simple questions like “What was core revenue for the quarter?”. In most earnings calls prior, he spent his time discussing high level industry trends and little time discussing specifics on KRMD’s operations or strategic path to capitalizing on these trends. Dan also was not on track to hit his 2022 goal of $50M revenue (2020 rev of $24M up 4% YoY).

Dan Pettigrew resigned shortly after, and Linda Tharby took over as CEO in 2021. Since 2021, Linda has created a strong strategy, built out an experienced team, and executed the strategy.

Koru’s Revamped Strategy

KRMD’s new growth strategy is threefold:

1. To increase core SCIg penetration domestically

2. Expand internationally through new distributor relationships

3. Expand to novel therapies

In addition to the above, there have been efforts to improve operational efficiency. Pump manufacturing has been outsourced, leading to gross margin expansion from 55% in 2022 to 62% today.

Cash and Dilution

The best decision Dan Pettigrew made as CEO was raising $26M through a stock offering in June 2020. This capital should ultimately be enough for KRMD to reach break-even cash flow in Q4 2024 with no need to raise further. Note that stock comp is ~3% of the market cap per year at current prices, so there is still some ongoing dilution.

KRMD revenue breaks down into domestic core product revenue, international core product revenue (FREEDOM system pumps, needles, and tubing), and non-recurring engineering support service (supporting drugs in clinical trials prior to commercial launch).

Revenue for 2024 is expected to be $33M with ~75% of that coming from domestic core, 20% international core, and 5% from novel therapy (i.e. non-recurring engineering support).

Core Business

The overall PIDD treated patient population in the US grows ~7% per year even though the total patient population grows 2% per year as PIDD is hard to diagnose but awareness is increasing. Furthermore, of the treated PIDD population, only ~20% of them are treated with SCIg vs IV. This results in the ~10% growth rate KRMD is seeing in its core business

In addition to this, the prefill market is the fastest growing SCIg market and KRMD is poised to take advantage of this trend with the only large volume 50mL prefilled syringe SCIg FDA clearance for a delivery system. This was just approved in November 2023 and was launched in January with the Hizentra prefilled syringe. In a customer survey, 78% of the FREEDOM system users preferred prefilled syringes. As the user experience of self-administration improves, we should see more conversions from IV to at home SCIg as well. Further, CSL announced on April 12th, 2024 that they would be discontinuing vials and switching entirely to prefilled syringes. CSL manufactures Hizentra which has >50% of the SCIg market share.

A key point to address here is the fact that even though the market is only 20% penetrated, Koru’s core revenue is only growing at 10% per year, only slightly higher than the PIDD treated patient population. If the product is so great, why isn’t everyone switching over? To answer, I see a few different contributing factors. One, not all SCIg drug indications are supported by Koru (but the majority by market share are). Two, some users may not be physically able to perform the setup and inject themselves or financially incentivized to. If it is covered by insurance or some other means to have the nurse do it for you, then why would you do it yourself too? Third, inertia with people’s habits of driving to the clinic once a month for an infusion.

One solution to points two and three above is prefilled syringes and to just get the clinic nurses to use the FREEDOM pump system instead of manually pushing the syringe for SCIg or administering IV. The flowrate for SCIg infusion is 50 mL/hr/site so even with several sites, you can see serious time savings for nurses if they can just set up a FREEDOM system and go do something else while it pumps. Patients will have to go into the clinic more often if they choose at clinic SCIg over at clinic IV, but they will get more normal levels across the month rather than a huge spike after monthly administration and low levels before their next monthly IV. Some will always stick to IV for this reason, but having the clinic option will convert some percentage of at clinic IV patients. In addition, as the FREEDOM system expands to other subcutaneous therapies and indications, it is more likely hospitals and clinics will want to invest in FREEDOM systems and training for the nurses to use them. i.e. if they can administer 10+ subcutaneous therapies with the FREEDOM system vs just IG, then they will be more likely to invest in and adopt the delivery system. KRMD recognizes this and has a goal to be the drug delivery leader in the clinic as well as at home. The first launch expected in 2025 will be Koru’s first entry into the infusion clinic, showing traction towards this goal.

International is further under-penetrated with electronic pumps dominating those markets and Koru only recently expanding into new geographies with new distributor agreements but estimates the current total addressable market size to be $60M out of the US vs $40M in the US.

Novel Therapies

In contrast to the uphill battle of converting SCIg from IV to subcutaneous, new drugs have a much simpler go to market strategy. Pharmaceutical companies want to get their drug into clinical trials as soon as possible and the FREEDOM system helps them do that. KRMD has made it a priority to hire operators experienced in compliance since Linda was appointed CEO to better serve this need. The growth in their novel therapies pipeline from 0 to 9 (not including the 7 candidates for Ig expansion) over 3 years speaks to that. To clarify, the clinical trials are being conducted with the FREEDOM system for some of these drugs and in some cases, the system is modified to accommodate the specific requirements of the drug. When these drugs are commercialized, KRMD will be the only pump approved to deliver that drug, and it is likely clinics and hospitals will use the system recommended by the supplier and used in the clinical studies. By helping these companies get to market faster, KRMD can be the preferred provider. Not all novel therapies fall into this category as some novel therapies are engaging with KRMD after launch or at the end of their trials, but this still massively expands Koru’s addressable market size.

By the end of 2025, two more novel therapies that have already launched their drug are expected to get FREEDOM approval, and 3 more Ig label expansions are expected.

In particular, there is increasing interest from oncology drug manufacturers to use the FREEDOM pump system. As of December 27^th, 2024, Bristol Myers’ Opdivo is FDA approved for subcutaneous injection. This makes it the first PD-1 inhibitor approved for subcutaneous infusion. The dosage amounts in the clinical trials range from 600 mg to 1200 mg. Concentrations are not listed, but the IV version of nivolumab (Opdivo) is sold at 10 mg/mL, so the dosage would be 60-120 mL subcutaneous. Koru Medical is by far the leader in the large volume subcutaneous, so it is likely this is the opportunity management is hinting at for an early 2025 launch.

To get an idea of the impact subcutaneous can have on oncology, here are some quotes from Dr. Saby George reporting on the stellar Phase III results of subcutaneous Opdivo. “The burden of treatment felt by cancer patients is tremendous. If nivolumab can be given as a subcutaneous injection instead of an intravenous infusion, patients' treatment experience will be significantly improved. Instead of one hour in an infusion chair, they will get the injection done in five minutes. One of the major problems is access to treatment. Patients who don’t live near an infusion center could get treatment closer to home, at a clinic, and that could improve access and help reduce disparities.” Opdivo is likely to be the first of many medications to transition some % of their treatments to large volume subcutaneous.

Note that at the Goldman Sachs 45th Annual Healthcare Conference, the CEO of Bristol Myers stated “we've said consistently is that we believe we can convert about 30% to 40% of this business of IV over to subcutaneous. And that's mainly going to come from a few areas. First, obviously, PD-1 monotherapy, Opdivo monotherapy is a big opportunity.” Opdivo does $9B per year in revenue. Based on $1300 per 4 mL, this is ~27M mL in volume annually. If you assume each dose is 120 mL, this is 230,000 doses. At 30% conversion to subcutaneous, this is ~90k doses per year. Assuming disposables cost of ~$15 per dose, this is an additional $1.4M in sticky, recurring revenue at ~60% gross margin. If you assume 30% of the other IV drugs supplied by Bristol Myers (Orencia and Yervoy), this is a total of $2.2M in recurring disposables revenue.

Opdivo is roughly 25% of the global PD-1 inhibitor IV market (source IQVIA MIDAS Q4 2021 report), making this a ~$9M market opportunity for Koru. Outside of PD-1 inhibitors, there are many other classes of IV oncology drugs. I estimate annual doses for Rituximab as $2.3B market size / $10k per dose = 230k doses. Trastuzumab is $2B market size / $9.6k per dose = 208k doses. Cisplatin is $14.8B / $2k per dose = 7.4M doses. Doxorubicin is $1.3B / $750 per dose = 1.7M doses. Bevacizumab is $6.7B / $9.5k per dose = 705k doses. Cetuximab is $98.5B / $4.5k per dose = 21.9M doses. I ignore CAR T-Cell therapies as the number of doses are too low to be material. The sum total of doses outside of PD-1 inhibitors is 32M. 32M doses * 30% conversion to subcutaneous * $15 per dose = $144M revenue per year in disposables for Koru.

It should be noted that large volume subcutaneous is an enabling technology for drug formulations as well. IV drugs are generally highly concentrated to reduce the injection time. These same formulations typically do not work for subcutaneous infusion as high concentrations mean high viscosity and high viscosity can cause severe injection site pain for subcutaneous. Existing formulas can usually be diluted though. For new drugs, having a system that can service large volume subcutaneous makes drug design easier for chemists. If they were limited to low volumes and low concentrations for new drugs, this would severely limit the number of viable drug candidates. This is a major long term industry tailwind for Koru.

Competitive Analysis

Electronic pumps are inferior for several reasons. The most important of which are the pressure pulses of the motor which cause discomfort during injection and the extra setup time. Having personally designed small fluid flow systems where pressure pulses make or break the product and the chemicals are harsh, I can say definitively that all electronic pumps generate significant pressure pulses and pressure dampeners do not solve the issue. Pressure dampeners and electronic motors vs spring and syringe is also a much more costly product to build and service since pump failure rates will be higher.

There are several other spring loaded and manual pressure administered prefilled syringe competitors in the market. EnFuse by Enable Injections, SelfDose by West Pharma, SmartDose by West Pharma, and Insulet by OmniPod. The latter three are for low does (< 5mL) and different label indications than what the FREEDOM system is approved for. EnFuse is approved for Empaveli which competes with Koru Medical. It can only serve up to 25 mL but suffers from several key flaws. It does not support multiple injection sites which can reduce discomfort during injection and speed up injection times. This is patented by Koru Medical. It also does not support standard size syringes, which means users must use special devices to fill it and keep those devices clean. A needle on a hard circle is not as easy to move around with as a tube too.

Management Buy in

Linda Tharby, CEO, owns 2.1M shares or 4.9% of the company and is still buying more.

Valuation

I consider the bear case being all novel therapies outside of Ig fail to materialize and KRMD only slightly outpaces the PIDD market growth even with international expansion. It isn’t hard to argue for a 10% revenue growth rate in domestic core + international with the market growing 9% YoY. With 62% gross margin and assuming 15x free cash flow multiple in 2030, this gives an 7% IRR.

The bull case would be that 66% of the novel therapies materialize (this average is calculated using historical success rates assuming 20% of phase I, 26% of phase II, 52% of phase III, and 90% of drugs passing phase III go to market and get FREEDOM approved) and the drug + Freedom system delivery only achieves 20% penetration in these markets. This would increase the number of FREEDOM system users by 5 times. Using the above assumptions, this comes out to be a 65% IRR over the next 5 years. This also severely understates the possibility of further expansion to other oncology IV drugs that convert to subcutaneous over the long term.

Between the two scenarios, I believe the bear case is far too pessimistic. The bull case seems conservative when considering the growing trend of subcutaneous delivery, the very limited number of players in the subcutaneous drug delivery market, and the high regulatory barriers to entry in terms of time, expertise, and capital.

Naturally this is a small cap growth stock, so qualitative factors are extremely important as well. Management has set and hit goals with the utmost transparency since the management change in 2021, which gives me confidence.

Risks

New competitors enter the market

Existing competitors get more label/drug expansion

IV conversions don’t materialize

Novel therapies fail to make it through Phase III

Novel therapies fail commercially

International growth does not materialize

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Novel therapies go to market with the FREEDOM pump system as the preferred or only FDA approved automated subcutaneous drug delivery system for the given drug. Five novel therapies are expected to go to market in 2025.

The FREEDOM pump system expands outside of the US, which has a market size 150% the size of the US market and is dominated by inferior electric pumps.

IV patients convert to subcutaneous treatment for more stable drug concentrations in blood over time.

Koru breaks into the clinic setting, simplifying subcutaneous treatment of patients for nurses and reducing pain for patients. The first entry into the clinic setting is expected in early 2025.