NeuroMetrix, Inc.
Q1 2018 Earnings Call Transcript

Published: 19 Apr 2018

[Operator:]

Good morning and welcome to the NeuroMetrix's First Quarter 2018 Earnings Call. My name is Candice and I will be your moderator on the call. On this call, the company may make statements which are not historical facts, and are considered forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions are forward-looking statements. Any forward-looking statements reflect current views of NeuroMetrix about future results of operations and other forward-looking information. You should not rely on forward-looking statements because actual results may differ materially as a result of a number of important factors, including those set forth in the earnings release issued earlier today. Please refer to the risks and uncertainties, including the factors described under the heading Risk Factors in the company's periodic filings with the SEC, available on the company's Investor Relations website at NeuroMetrix.com and on the SEC's website at SEC.gov. NeuroMetrix does not intend to and undertakes no duty to update the information disclosed on this conference call. I'd now like to introduce the NeuroMetrix's Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?

[Thomas Higgins:]

Thank you, Candice. I'm joined on the call by Dr. Shai Gozani, our President and CEO. NeuroMetrix as you may know is a health technology company and we have proprietary neurostimulation technology that we apply to chronic pain, sleep disorders, and diabetes. Our commercial products are Quell, an over-the-counter wearable device for managing chronic pain; DPNCheck, a point-of-care test for diabetic peripheral neuropathy or DPN; and Advance, a general purpose nerve testing device. Our business strategy is to maintain disciplined growth led by Quell. We intend to do this within our present cost structure and while continuing to deliver product innovation. This is our pathway to profitability. Our marketing focus is on the United States. We have partnerships with several global companies to promote our products outside the U.S. In the first quarter we entered into an agreement with GlaxoSmithKline, transferring Quell international rights in exchange for payments of up to $26.5 million. We retain all rights to the U.S. market. We collaborate with Fukuda Denshi on DPNCheck sales in Japan and with Omron Healthcare in China. We directly handle all DPNCheck sales in the U.S. Our Q1 results reflect continuing revenue growth plus the initial benefits of the GSK collaboration. Turning to the results that we released earlier this morning, total revenues of $4.9 million represent growth of 15% from $4.3 million in Q1 2017. Quell revenue was $3.5 million and accounted for 70% of the top line. This was an increase of 13% from $3.1 million in 2017. We distribute Quell through three main channels. These are e-commerce, retail stores and TV home shopping. Replacement consumables are mostly sold through e-commerce. We use TV and digital marketing to build awareness and to generate sales. DPNCheck revenue was $1.2 million. This was up 43% from about $800,000 in Q1 of last year. It contributed 23% of total revenue and was a new quarterly high. DPNCheck is a professional diagnostic technology sold in the U.S. to healthcare providers mostly within the Medicare Advantage system. OUS sales by our distribution partners are to healthcare providers such as hospitals and clinics often with a diabetes focus. Our Q1 sales growth was in the U.S. Medicare Advantage business where order volume increased nearly 70% year-on-year. Our legacy products, primarily ADVANCE contributed the remaining $300,000 in revenue. Gross profit was $2 million up about $400,000 or 24% from Q1 last year. Gross profit benefited from revenue growth, but importantly also posted margin expansion. The gross margin rate in Q1 this year improved to 40.2% from 37.4% last year a gain of 280 basis points. Margins improved for both Quell and DPNCheck partially offset by higher overhead costs and the effects of our legacy business that is in decline. OpEx spending in Q1 was $5.6 million up $670,000 or 14%. Two factors were responsible for this growth. About $375,000 in costs were due to higher Quell product development spending and about $300,000 in costs related to non-cash employee stock option awards. Quell advertising spending was $100,000 lower in the quarter and will be further reduced in Q2 and Q3 as we retain spending capacity for later in the year to support the launch of our next generation Quell. Under other income, collaboration income is a new item in the P&L. The amount of $4.8 million reflects the $5 million proceeds from the GSK agreement net of banking and legal fees. Collaboration income will recur in future P&Ls from time-to-time as we achieve predefined milestones. I'd like to emphasize the phrase "time-to-time" because these milestones will not be steady and predictable. As such, they will result in swings in our quarterly results. During 2018, we anticipate a total of approximately $12 million in collaboration income, including the $4.8 million recorded here. Our bottom-line net income net was $1.2 million in comparison with a net loss of $3.2 million in Q1 2017. This crossover to profitability resulted from the GSK collaboration. Our cash position was $6.1 million at March 31st an improvement of about $2.1 million from the beginning of the year. Our capital structure remains simple, equity only and debt-free. Fully diluted equity is 14.8 million common shares comprised of common shares trading of 7.3 million, preferred shares on an as converted to common basis 6.6 million and a combination of options and warrants of 900,000. The options and warrants are each about 400,000 shares. The warrants are inconsequential with an exercise price of $40 and only two years remaining. We do not foresee material change in our capital structure and given the expected collaboration income do not anticipate a need for equity funding during 2018. Dr. Gozani will now address our overall strategy.

[Shai Gozani:]

Thank you, Tom. My comments today will touch on three points. They will be the third generation Quell, a little bit more about our GSK collaboration and then a few thoughts about our longer-term vision, so starting with the third generation Quell device. For the past couple of years our R&D resources have been focused on development of the third generation Quell device and we are planning to launch it later this year. It is a critical element in both our near and long-term business strategy. We believe that the third generation device and its accompanying digital health tools which include the Quell app and Quell Health Cloud will improve on their already impressive usability and clinical performance of the current Quell device. The third generation device has been designed from the ground up to have lower costs and improved manufacturability. We have accomplished this without sacrificing and in fact we believe we've enhanced the premium features of Quell compared to alternative over-the-counter pain relief devices. We believe that this will drive substantial margin growth for Quell and the entire business into a range exceeding 60% once we have optimized its supply chain. Our collaboration with GSK is built around the third generation technology. First, early milestones as Tom mentioned are related to product development. Second, a key part of our collaboration agreement with GSK is to co-fund further development of the Quell platform with a 50-50 split starting in 2019. In addition to offsetting R&D costs this will allow us to tap into the tremendous scientific, clinical and marketing resources of GSK. Moving on to a little bit more detail about the GSK collaboration, as we’ve already touched on several elements, I'm just going to add a few points here. First about big picture, it is gratifying that this collaboration will make Quell technology available to the many millions of chronic pain sufferers outside the U.S. The chronic pain epidemic is a worldwide problem that affects 1.5 billion people. We are very encouraged that GSK feels that our technology is worthy of being commercialized under their highly regarded consumer brand. From a practical point of view, the GSK collaboration is central to our near and long-term business strategy. First, it provides us with a reasonably predictable source of income that may offset our operating losses until we achieve profitability. We believe this may us to turn the corner on profitability without any further dilutive financing. Second, GSK is one of the largest consumer health businesses in the world. In pain, they have several of the top international brands including Voltaren, Panadol and Excedrin. They have deep market knowledge and capabilities. Through this collaboration we are tapping into some of those resources and feel that they will benefit us in the U.S. business. And third, as I mentioned earlier, we will collaborate on future Quell R&D which allows us to shift some of our R&D spending to new products that could represent additional revenue streams in the future. Finally, a few words about our long term vision. As we have stated over the past several earnings calls, our core focus is to move NeuroMetrix towards profitability over the next two to three years. We believe we can achieve this well showing attractive top line growth and investing in R&D. Some outcomes of this strategy include the following. First, our TV advertizing strategy will be rational. This means that we will time spending to when it is most cost efficient and generates the greatest return. As a consequence, we may see quarter-to-quarter variability as we adjust to the inherent fluctuations in TV advertising costs. On a related note, we will focus our spending on the fourth quarter which is inherently the most efficient and should coincide with the launch of our new core product. We are also rationalizing our distribution strategy to most productive and cost-effective channels. As a practical matter this means that we will limit Quell availability to certain retailers as opposed to targeting a specific number of store fronts. And finally and importantly we will not cut back on R&D and clinical work we believe it is essential that we continue and in fact accelerate innovation to secure significant competitive advantages and to create future revenue opportunities. On the clinical front we are committed to a strong and public clinical program that enhances recognition, understanding and value for our products. And that concludes our prepared comments and we will be happy to take questions at this point.

[Operator:]

[Operator Instructions] And our first question comes from Joseph Lamott [ph] a private investor. Your line is now open.

[Unidentified Analyst:]

Hello, I have a question regarding and you possibly have answered it. The amount of co-funding that might be anticipated in 2019 and apparently there's going to be a 50-50 split in that, do you have an estimate of the funding that might be necessary at that time? And another question is, have either Glaxo or your company considered having the Quell covered by insurance?

[Thomas Higgins:]

Thank you, thank you. Let me handle the first question and Shai can handle the second. With regard to co-funding R&D expenses on Quell in 2019 and beyond, we have set up with GSK an organizational structure where teams from both sides will decide on the spending program and the projects that we're going to undertake for enhancing Quell in the future. And so as you can imagine at this early point we haven’t decided on the program for next year. But if it's indicative, our spending rate in R&D has been approximately $4 million over the last several years and we intend to work broadly within that range. Most of our spending in R&D has been on Quell, so one might imagine that if we continued at the same pace, roughly half of that $4 million spending would be supported by GSK. But of course it depends on the two parties getting together and deciding on the priorities for next year.

[Shai Gozani:]

Taking your second question, I can't speak to GSK's commercial plans vis-à-vis reimbursement in their markets. In terms of our view in the U.S. our current thinking and efforts are not directed towards third party reimbursement for Quell in the U.S. market. We continually look at that and review that and part of the clinical effort that we have underway has resulted in a number of publications and we'll continue to put out more clinical publications. We think over time we may get to the point where we have enough of sort of the clinical story to potentially approach third-party payers under some circumstances so that's something we might look at in the future. But I would say for the next several years we don't see third-party reimbursement as being substantive.

[Unidentified Analyst:]

Thank you very much for those very specific answers. Can I add one more question and that would be, is there a consideration for possibly increasing future guidance?

[Shai Gozani:]

Sure, that's a good question, one that we get asked often. We haven’t provided forward guidance in any detail to date because of the early commercial stage of our principal product and its unpredictability. As we go through 2018 and particularly after we launch our next generation Quell, we're going to revisit that issue and decide for 2019 whether or not specific guidance is something that could be meaningful. Obviously it wouldn’t be meaningful if the numbers do not seem relatively predictable and under control. So the short answer is, it's on our mind and we will consider it for next year.

[Unidentified Analyst:]

I'd like to just also say that having no debt is phenomenal and your company deserves a lot of credit for that.

[Shai Gozani:]

Thank you.

[Operator:]

Thank you and our next question comes from Jared Cohen of JM Cowen & Company. Your line is now open.

[Jared Cohen:]

Yes, just a few questions. One, I know you've mentioned it in the past, but were there any sales or did you do any marketing through QVC this quarter or not?

[Shai Gozani:]

Thanks Jared. Yes, we had – in fact we had quite a busy QVC quarter. As you'll probably recall that QVC's philosophy has been that products -- health products like ours are probably not best for their audience in the fourth quarter, but after the first of the year in the first quarter when people start returning toward health and they are. So we had, we actually had a strong quarter with QVC strong first quarter.

[Jared Cohen:]

Okay, second I know you've talked about in the past, but and probably it hasn’t changed, but in terms of reordering of electrodes from your existing user base?

[Shai Gozani:]

It's been pretty consistent. Jared, I mean we're seeing in our active base about one electrode on average, about one active electrode per quarter per customer that's - it's been pretty stable.

[Jared Cohen:]

Okay, so that hasn't changed or you haven't seen that increase in terms of the reordering?

[Shai Gozani:]

We have not, we actually have under Frank McGillin’s guidance his team has many initiatives in play to - we believe to improve that and we hope to start to see the benefits of those over the course of this year. So it's very much something that is on our mind and as we - we're at the point now where we have a sizable base of customers, it's natural to start putting more and more marketing focus on the recurring sales as opposed to just the new sales.

[Jared Cohen:]

Okay and then in terms of marketing, have you thought about or we’ve talked about in terms of – because sometimes getting an awareness to people in terms of the physical therapy market, in terms of people out there to let them know that the product exists in terms of that they can recommend it to whoever they're dealing with to their customer base. Because I know they – I'm just saying that they don't even know that it exists?

[Shai Gozani:]

Yes, we have not, we have had some efforts to promote or even distribute the product through healthcare professionals. For the most part those efforts have been directed at Physicians, pain medicine physicians, Podiatrists and to a lesser degree, physical therapists. We still have those efforts, particularly as they pertain to physicians because it's important for the clinical credibility of the technology. We don't have an active effort right now with physical therapy. I think we have some outreach there, but we've really been focusing our energy on the direct-to-consumer, but we are always revisiting the various channels and that might be something that at certain point makes sense, but at this point we have now put a lot of energy specifically in the physical therapy market. And just, one reason for that is, this is not entirely completely the case, but typically physical therapists are more dealing with acute pain and rehabilitation from injuries as opposed to chronic pain. There are exceptions to this and whereas you know Quell is really a chronic pain tool, so the overlap there is not perfect.

[Jared Cohen:]

Oh no, you're absolutely right, it's just sometimes, I just that someone was mentioning to me two people who just as examples who said that it has helped them out and then it, I guess what within after 12 weeks if your pain or has it gone away I guess, does that crossover from being acute to chronic in some cases and then you need something else to help you out?

[Shai Gozani:]

Yes, that's correct. I mean essentially, well it's an it's about an arbitrary distinction but…

[Jared Cohen:]

Right.

[Shai Gozani:]

Three months is typically the cut off between acute and chronic pain, but that's a that's more of just a definition as opposed to physiological, but at three months it typically is considered chronic pain.

[Jared Cohen:]

Right, so that's why I brought it up and lastly in terms of because I know there was, you brought up the whole change of accounting Tom and this goes into seasonality because I wonder if you had expected whether sales were actually going to be up a little bit this quarter relatively speaking just because of the change of sales recognition or so forth?

[Thomas Higgins:]

Yes, that's a good question and a longer question. The short answer is that we did implement the new revenue recognition rules in this first quarter and as part of that we no longer book revenue on a sell through basis but rather when we ship the product or the product is received by the customer net of expected returns. And in fact as it worked out this quarter it was just about the same as it would have been under the prior accounting treatment. But that won't always be true in the future and we'll disclose the effect, but this quarter was about the same.

[Jared Cohen:]

Okay, all right. Thank you very much.

[Thomas Higgins:]

Thank you.

[Operator:]

Thank you. And our next question comes from Manish Israni of TeleBrands. Your line is now open.

[Manish Israni:]

Hello, hi how are you?

[Shai Gozani:]

Good, thank you.

[Manish Israni:]

So, our business is, we're leaders in direct-to-consumer advertising and retail distribution and my question has to do with the type of advertising that you invest in and you have a high price point product and I've seen that primarily the commercials that you advertise direct-to-consumer are 60 seconds to a minute 30 seconds, but what we've seen in direct response, direct-to-consumer advertising is that products that have a high price tax such as yours, typically need a long form type of advertising which is a 30-minute infomercial. And I wanted to know if you have any plans to invest in the long form advertising which typically works well with products that are of higher price tags?

[Shai Gozani:]

We don't, at this time, but I would suggest on a topic like this, if you can be please reach out to us directly and we'll be happy to have an offline discussion on that.

[Manish Israni:]

That sounds good. Thank you.

[Operator:]

Thank you. And our next question comes from Roger [indiscernible] of [indiscernible] Partners. Your line is now open.

[Unidentified Analyst:]

Thank you. Just to make sure I understand the GSK Agreement. They are buying ownership of the international rights to the technology for $26.5 million. I think that was it. The after - beyond those payments there is or is not a royalty is the first question? And secondly, since you're expecting significant additional milestone payments this year, the milestones are both technology and sales driven or multiple different criteria as opposed to just sales driven? Those are the two questions.

[Shai Gozani:]

Yes, so the answer is there is no royalty structure associated with the agreement, so this is - the $26.5 million is the, this is a complete value of the transaction in addition to of course there is the R&D collaboration that we talked about previously and then the, so what’s the question was?

[Unidentified Analyst:]

Milestone criteria…?

[Shai Gozani:]

I’m sorry. The milestones are both, there are both mild technology product development type milestones and then there are commercialization milestones. There are both types of milestones.

[Unidentified Analyst:]

Okay, thank you.

[Shai Gozani:]

Sure.

[Operator:]

Thank you. And our next question comes from Annette Flowers [ph], Private Investor. Your line is now open.

[Unidentified Analyst:]

Hi, good morning. On net flows from the GSK I didn't hear anything about royalty, so have you just [indiscernible] sold the international rights to the product internationally what we are receiving any royalties or just be receiving may be $26 million and marks on payment is that it?

[Thomas Higgins:]

That's correct, so the value of the collaboration is $26.5 million. There are no royalties for this generation technology.

[Unidentified Analyst:]

All right. My second question is, I understand you now trying to target clinicians or looking to insurance and insurance reimbursements as part of your sales methodology of Quell. I want to understand why that is given a time in which chronic pain has become one of the leading issues in the United States and the treatment of it and the interests and moving people away from drugs as a methodology for treatment?

[Shai Gozani:]

Yes, well I would say we would be delighted if it was possible and in the near term to engage third party payers. And in it with Quell and to get near term coverage, but just from a practical perspective that's not the case. As I said in response to the other question earlier, we do believe there may be a longer term opportunity to get third party payers to look at the technology to find opportunities for them too, reimburse or otherwise offset the cost, but it's about just a longer term effort and so in the near term, in terms of building the business and making the technology available to chronic pain sufferers the best approach is direct-to-consumer over the counter. We are actually and have been quite active in engaging physicians. As I mentioned pain medicine physicians, neurologists and others in the technology making them aware of it and just in the last couple weeks we've announced presentations at major medical conferences we're presenting the technology scientifically and sometimes we're also exhibiting. We have quite a few physicians who are either directly disturbing the device or prescribing or then prescribing it or informing their patients about it. But it's not at this point the primary driver for availability of the technology or growth of the business. But I completely agree with you on the importance of engaging the healthcare system and the criticality of the opioid crisis and such. So it's very much on our minds, but we're just from a practical perspective we have to view it as a longer term strategy versus a near term strategy.

[Unidentified Analyst:]

In keeping with you strategy, I didn’t hear anything about chiropractors who of course are in the business of using non-prescription methodology for treatment of chronic pain?

[Shai Gozani:]

Yes, they are in the mix we have it. We have a distributor who calls on chiropractors and we've been to some of their conferences. So yes they're part of it. We tend to focus mostly on physicians at this point, because I think that will establish the strongest credibility in terms of the third party payers in the long term, but chiropractors, physical therapists and anybody who's around the pain management of a patient with pain is relevant to us.

[Unidentified Analyst:]

Okay, all right. Thank you.

[Shai Gozani:]

Absolutely, thank you for the question.

[Operator:]

Thank you. And our next question comes from Robert [indiscernible] Asset Management. Your line is now open.

[Unidentified Analyst:]

Good morning.

[Shai Gozani:]

Good morning.

[Unidentified Analyst:]

I had a couple of questions, so stop me if I go on beyond my reasonably allotted time. You spoke a little bit about the kind of arbitrary distinction between chronic pain and acute pain and I am wondering about they tried to get my head around how Quell works, obviously not being an expert, why can't it be used for acute pain? and I’m thinking like a long lines if somebody is anticipating acute pain like for instance if a woman knows she's going to be going into labor why she couldn't use the product in anticipation of that to ease for instance the pain of delivery for instance, just as an example, can you speak to that at all?

[Shai Gozani:]

Yes, I mean so the broader umbrella methodology of transcutaneous neuro stimulation or stimulating nerves to evoke pain relief is applicable to acute pain by all means. We designed a product particularly with a chronic pain patient in mind or chronic pain sufferer in mind and it doesn't mean it's not relevant for the acute pain case, but there it's not necessarily, its strengths lie in chronic pain. The issues with chronic pain are particularly you're going to be in chronic pain for long periods of time. You have it for often most of the day, so it's almost continuous or near continuous stimulation for very, very long periods of time, six to 12 hours a day for months or years is really what's necessary and that is how Quell is designed and really where it's optimized in terms of benefit. So it's not that it's not relevant in acute pain and but it's not necessarily at its strongest. Its benefits are more in line to chronic pain.

[Unidentified Analyst:]

Okay, then the next question I had pertained just to manufacturing capacity. If I understand it right, you guys manufacture - basically assemble it from parts that you order and what does that look like, I mean are there any bottlenecks or anything?

[Thomas Higgins:]

No, I think we're in good shape there. We assemble this product at a small facility that's about 10 miles from Boston, 10 or 15 miles from Boston and that facility has a capacity well in excess of 200,000 units per year at full staffing and so we're far below that level.

[Unidentified Analyst:]

Okay and then along those lines if I'm looking at the revenue numbers right, I think, I heard you say that from a seasonality standpoint that on QVC that the quarter that you - the first quarter, I guess the March quarter is normally better than the one perhaps because the holiday sales or something, but it looks like the Quell sales were actually down sequentially. Am I looking at that right or can you speak to that at all?

[Thomas Higgins:]

Yes, now that's precisely the case. So the fourth quarter, the holiday season excluding QVC is the strongest quarter for us and maybe the strongest quarter for medical devices generally. And so you're correct. The first quarter things tend to let up a little bit, but it's just the opposite with QVC where during the fourth quarter they're promoting other consumable present type products and in the first quarter they turn more to healthcare. So for us the fourth quarter in the three years that we've now been in this consumer related business the fourth quarter is our strongest quarter.

[Unidentified Analyst:]

Okay, but that's outside of the QVC?

[Shai Gozani:]

Correct yes, already compensates for it.

[Unidentified Analyst:]

Okay, that was it from me. Thanks and keep up the good work.

[Shai Gozani:]

Thank you.

[Operator:]

Thank you. And our next question comes from Jared Cohen of JM Cowen & Company. Your line is now open. [Operator Instructions] I’m showing no further questions at this time. I’d like to turn the conference back over to Dr Gozani for any closing remarks.

[Shai Gozani:]

Well, thank you for joining us on this conference call and the excellent questions. We look forward to updating you on our cost strategy and results over the balance of the year.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.