NeuroMetrix, Inc.
Q4 2018 Earnings Call Transcript

Published: 24 Jan 2019

[Operator:]

Good morning and welcome to the NeuroMetrix Fourth Quarter and Full Year 2018 Earnings Call. My name is James and I'll be your moderator on the call. On this call, the company may make statements that 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 and undertakes no duty to update the information disclosed on this conference call. I'd now like to introduce the NeuroMetrix Senior Vice President and Chief Financial Officer Mr. Thomas Higgins. Mr. Higgins.

[Thomas T. Higgins:]

Thank you James. I am joined on the call by Dr. Shai Gozani, our President and Chief Executive Officer. NeuroMetrix is a health technology company with proprietary neurostim technology applied to chronic pain, sleep disorders, and diabetes. Our primary commercial products are Quell which is an over the counter verbal device for managing chronic pain and DPNCheck a point-of-care test for diabetic peripheral neuropathy. Our operating objectives are to position the company for future profitable growth while delivering meaningful innovation and spending within our present cost structure. Among the 2018 highlights indicating progress we reported full year profitability with improving gross margins, operating spending flat with 2017, launch of our next generation Quell technology Quell 2.0 and the expansion of our Quell IP positions through multiple issuances of utility patents and non-dilutive funding via our GSK collaboration. On the other side of the equation Q4 revenue was adversely impacted by marketing challenges. Turning to the financials which were included in the press release this morning, Q4 total revenue was 3.7 million down from 4.9 million in Q4 of 2017. And on a full year basis revenue was 16.1 million down from 17.1 million prior year. Quell in the fourth quarter contributed 2.8 million in revenue compared with 3.7 million prior year fourth quarter. For the full year Quell revenue was 10.5 million versus 12.4 million in 2017. Several factors affected Quell revenue. We shed uneconomical distribution channels throughout the year including TV home shopping and several retailers. This reduced device shipments but it did not improve -- but it did improve the quality of revenue. The fourth quarter efficiency of our advertising spending was significantly below our expectations and consequently we cut spending. In addition 2018 full year advertising spending was reduced from 2017. The combination of more costly promotion on a per unit basis in Q4 and lower spending during the balance of 2018 resulted in reduced device placements and lower revenue. Quell aftermarket sales which are primarily electrodes were about flat quarter-to-quarter and year-to-year. DPNCheck Q4 revenue of $600,000 was down from $800,000 in Q4 of the prior year. For the full year DPNCheck revenue of 4.2 million was up 34% from 3.1 million last year. It was a good year for DPNCheck. In 2018 we saw a strong demand both in the U.S. Medicare Advantage market and internationally. The quarterly revenue variations which depressed Q4 are the result of the timing of our customer orders. Legacy diagnostic products contributed $300,000 in Q4 and 1.4 million full year. This was flat quarter-on-quarter and down 14% annually. Legacy products are strictly managed for cash flow. Our gross profit in Q4 of 1.7 million compared with 2.1 million in Q4 2017. For the full year 7.4 million gross profit was higher by $0.5 million versus 6.9 million in 2017 and this was achieved on a smaller revenue base. Gross profit dollars reflect an expansion in the margin rate by 4.9 percentage points in Q4 to about 47% and for the full year by 5.8 percentage points to about 46%. Contributing to this, Quell distributor rationalization improved the margin quality of our revenue as I just mentioned. E-commerce which is our most profitable channel expanded from 40% of units shipped in 2017 to 60% of units shipped in 2018 and against an ultimate goal of 80% of Quell shipments which we intend to have processed through e-commerce channels. The Quell 2.0 launch in September at a higher price point and with lower cost of goods favorably impacted the margin rate and the strong 2018 growth of our high margin DPNCheck business also played a significant role in the overall margin improvement. OPEX in the fourth quarter was 4.6 million down by 400,000 from 5 million prior year. And full year OPEX of 19.7 million was down 200,000 compared with the prior year. Within OPEX the increased R&D spending was related to the launch of Quell 2.0 and also to support for the new GSK collaboration. Sales and marketing were up 300,000 or 15% in the fourth quarter was lower in the full year by 1.1 million or 11%. The quarterly and annual variances in sales and marketing were primarily due to advertising spending. G&A reductions both Q4 and full year reflected lower employee compensation and reduced spending on professional services. Moving down the income statement, collaboration income full year was 12.3 million net of cost. This is comprised of GSK milestone payments. In addition to the collaboration income recognized we received $2 million in a payment in the fourth quarter upon signing an amendment to the GSK deal. In conformity with GAAP this payment was deferred and will be booked into income in connection with future performance obligations. The total GSK milestone funding received in 2018 was 14.7 million. Net income in Q4 was a negative 2.8 million that was a negative $0.38 a share compared with a negative 2.9 million or a $1.16 a share in the fourth quarter of the prior year. Full year net income was a positive $24,000 or on a per share basis just under a penny compared with a negative 12.9 million or a negative $11.60 a share in 2017. Our cash balance at the end of the year was 6.8 million. Our capital structure was largely unchanged in the quarter and the year, it remains a simple equity only debt free structure, common shares outstanding are about 7.7 million and fully diluted shares are about 14.9 million. Dr. Gozani will now address our overall strategy.

[Shai N. Gozani:]

Thank you Tom. As Tom has noted unfortunately our fourth quarter results were a disappointment. We anticipated higher revenues driven by the launch of Quell 2.0 product. On the positive side we have received positive feedback on Quell 2.0 and our ASP and gross margins were up substantially from prior quarters. We were also encouraged by early evidence for strong user engagement with Quell 2.0 that we believe could lead to attractive long-term aftermarket sales of electrodes. However our overall unit sales are below expectations, in particular we saw an increase in customer acquisition cost in the fourth quarter and decided against boosting advertising spending to overcome this increase. Going into the fourth quarter we had seen a steadily decreasing trend in customer acquisition cost over the past couple of years. We anticipated this trend will continue in the quarter particularly given that the fourth quarter has traditionally been our most efficient period for advertising. However we encountered a surprising trend reversal, in fact customer acquisition cost increased. We do not believe that the reason for this was a higher price associated with Quell 2.0 where it went from $249 to $299. We suspect that one factor was increased media cost triggered by the midterm elections another factor it may have been our decision to exit unprofitable channels such as home shopping but other factors may have also been in play. Whatever the cause is we have concluded that we need to revisit our commercial strategy and evaluate all elements including market segmentation, pricing, promotional strategy, and smart configuration to make sure we are making the best decisions. We are reviewing proposals from a number of consumer and healthcare consultancies to lead a comprehensive project to study these questions. We believe that a fresh set of eyes is the fastest way to help us modify our Quell commercial approach and put the product into long-term profitable growth. Recent publications and peer reviewed journals and scientific presentations and Medicine conferences have further confirmed the clinical benefits of Quell and the people suffering from chronic pain. As such we remain quite bullish about the commercial prospects for the product line. However we also believe it is imperative that our Quell strategy generates profitable growth rather than just top line growth. We anticipate launching our updated commercial strategy in the second half of the year. While we are revamping our Quell strategy we will be reducing our advertising spending to a modest level to preserve our cash while maintaining brand momentum. We will continue to focus on our collaboration with GSK in support of their market launch of the Quell technology outside the U.S. During the fourth quarter we agreed with GSK on a 2019 joint development program which incorporates ambitious objectives for Quell 2.0 and beyond that spend functionality and cost. We believe that our current balance sheet and commercial activities combined with anticipated milestones from our GSK collaboration and shared R&D funding from a joint development plan will provide sufficient resources to fund our operations throughout the year and we do not expect to need to raise additional capital this year. Finally we will continue to build the DPNCheck business which is growing and generates over 60% operating margins and strong cash flow. That represents our prepared comments, we would be happy to take questions now.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from James Rybacki with Medicine Information. Your line is now open.

[James Rybacki:]

Yes, it is Dr. Rybacki, the Medicine Information Institute. With all of the hoopla and all of the valid concern about opioid addiction where have you positioned yourself relative to an opioid free strategy hoping for earlier adopters? And then part two of the question, looking at DPNCheck it seems to be a really high margin device for you, how are you moving into the diabetic market with the American Diabetes Association or other alignments?

[Thomas T. Higgins:]

Thanks for the question. Regarding the opioid epidemic and our position relative to that, we've taken the position that we are advocating for the chronic pain community which as opposed to positioning ourselves against opioids. And so while we see ourselves as definitely part of the solution and a potential approach to reducing opioid use we haven't taken a direct alternative to opioid strategy to this point. One sort of obvious reason for that is our FDA labeling is for the treatment of chronic pain. It's not as an opioid sparing or opioid alternative at least at this point. We have conducted and continue to conduct studies in specific patient groups looking at the specific question of opioid reduction and if those studies are positive we might take a stronger positioning vis-à-vis opioids. On your question on DPNCheck obviously the primary application of DPNCheck is in the early screening of diabetic neuropathy meaning the nerve disease associated with diabetes. Our focus in the U.S. has not so much been the ADA but Medicare Advantage plans which are quite focused on early detection and characterization of their beneficiary pull vis-à-vis diabetes complications. We have sort of, that's in the commercial strategy we have had conversations with the ADA and continue to particularly as the scientific literature and support of DPNCheck continues but I don't think it is included in the ADA guidelines is probably a near-term outcome.

[James Rybacki:]

I understand, that makes sense. And in the longer-term strategy there it seems to make great sense to leverage that early diagnosis because as you look at that the Quell event and other challenges that have come up if you don't keep stepping up early obviously it is potentially catastrophic nicely done.

[Thomas T. Higgins:]

Yeah, I absolutely agree with you and I think just one additional piece of information, the Japanese Diabetes Association which is sort of the ADA equivalent in Japan is actually looking at incorporating DPNCheck into their guidelines. So that's a good kind of test case for us for how to approach the ADA.

[James Rybacki:]

I would leverage that very strong and when you look at guideline penetration, though some people look at Guidelines as cookbook medicine that's the position to say here we are, this is what we can do, and early diagnostics are just the way to go. Very good, thank you.

[Thomas T. Higgins:]

Thank you for your question.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Jared Tone [ph] with JM Cohen and Company. Your line is now open.

[Unidentified Analyst:]

Yeah, I know you're doing some more direct marketing over the internet, I was just curious what are you seeing that's been a better channel to get more responses from?

[Shai N. Gozani:]

Yeah, the question right now historically our spending has been about 75% to 80% TV and the remaining primarily digital. We have found that TV is essential in building awareness. That generally then drives potential customers to our various digital properties like corerelief.com where they learn about the product and then place the order but to kind of get the input into the funnel which ultimately is a digital funnel but the open part of the funnel awareness is built by TV. So at this point we don't have a good alternative to TV in terms of generating that preliminary awareness but that's something we're going to be looking at and see if we can more heavily weigh our advertising towards digital which could be more cost effective ultimately than TV.

[Unidentified Analyst:]

Okay, alright, thank you.

[Operator:]

Thank you. Our next question comes from Andrew Fein with H.C. Wainwright. Your line is now open.

[Unidentified Analyst:]

Hi, this is Lee on for Andrew. So thanks for the update. I'm just wondering if you can talk a little bit more of your recent publication of the random control traffic of Quell and how do you plan to sort of leverage the data for the uptake? Thank you.

[Thomas T. Higgins:]

Yeah, thanks for the question. So just to put little more color on that, a study was just published, it was a randomized control trial looking at Quell against the cost of treatment as usual which is kind of conventional treatment for low back pain. This was a sample size of around I think 60, 65, or 70 subjects. The study was conducted at Harvard Medical School and what they found was substantial reductions in pain and disability and pain catastrophizing which is the kind of the psychological burden of chronic pain in those subjects using Quell for 90 days versus those who use conventional therapy. So really strong results, it just got published in Pain Practice over the last several weeks. It dovetails with other studies that we've done in low back pain and in fact other studies that we think will be published here in the near-term on chronic low back pain and it's going to -- it's forming the basis for what I would say to be more specific and targeted promotion of Quell for low back pain. And we typically approach the promotion as fairly generic for chronic pain and haven’t focused on specific conditions. But as our clinical story for and clinical support for specific conditions enhances such as with this study and related studies we will start to be more specific on those conditions. And I think that will help with adoption because I think as you talk about specific conditions that registers more easily for consumers that are talking about chronic pain in a generic sense.

[Unidentified Analyst:]

Okay, that's helpful. Thank you.

[Thomas T. Higgins:]

You are welcome.

[Operator:]

[Operator Instructions]. I'm not showing any further questions in queue so I'd like to turn it back over for closing remarks.

[Thomas T. Higgins:]

Well, thank you for listening to the call today and for the questions and we look forward to updating you over the balance of this year.

[Operator:]

Thank you. Ladies and gentlemen that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Everybody have a wonderful day.