NeuroMetrix, Inc.
Q4 2017 Earnings Call Transcript

Published: 25 Jan 2018

[Operator:]

Good morning and welcome to the NeuroMetrix's Fourth Quarter 2017 Earnings Call. My name is Crystal and I will be your moderator on the call. NeuroMetrix is a commercial stage, innovation driven healthcare company combining neurostimulation and digital medicine to address chronic health conditions including chronic pain, sleep disorders, and diabetes. The company is located in Waltham, Massachusetts. 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 Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?

[Thomas Higgins:]

Thank you, Crystal. I'm joined on the call by Dr. Shai Gozani, our President and CEO, and we appreciate your participation in this quarterly review. NeuroMetrix operates in two markets, wearable therapeutics and point-of-care diagnostics. Our proprietary platform technologies in both markets are based on in-house expertise in precision neurostimulation to achieve therapeutic or diagnostic results. We are addressing large markets. Quell, our over-the-counter wearable device for chronic pain, addresses the U.S. market that we estimated about 20 million persons; and DPNCheck, our test for diabetic nerve disease, addresses a medical condition affecting about half the people with diabetes. This represents about 5% of the U.S. population, or about 15 million people. DPNCheck is available in Japan, recently in China and in Mexico, all markets with a significant diabetes challenge. NeuroMetrix' financial results for Q4 were released this morning. It was a solid conclusion to a strong growth year for the company. Total revenues in Q4 were $4.9 million, that was up 33% year-on-year and Quell and DPNCheck both outperformed targets. Quell contributed $3.7 million revenue, up 48% in Q4 year-on-year. Device starter kits and electrode shipments both posted growth in excess of 80% compared to Q4 2016, as well as attractive sequential quarter growth. We shipped over 26,000 Quell starter kits and over 36,000 electrode reorders in the quarter. Demand was solid in our primary channels of e-commerce and retail and this included sell-through to end customers. QVC was the exception, where historically there has been limited Quell air time during the holiday season followed by strong post-holiday promotion and we expect a similar pattern starting out in 2018. Deferred Quell sales, which should convert to future GAAP revenue were $2.2 million at the end of the year and this was an increase of $1.7 million from the end of the third quarter. DPNCheck contributed 841,000 in revenue in Q4, up 10% year-on-year. It was our best ever revenue quarter for this product. Domestic biosensor test shipments which are primarily Medicare Advantage were up 70% in Q4 year-on-year and more than compensated for slow international sales. Our legacy products, primarily diagnostic electrodes for our advanced products contributed 343,000 of high margin revenue. These products are managed for cash flow and not actively marketed. Gross margin in Q4 was $2.1 million, up 23% year-on-year. The Q4 margin rate of 42% was lower than the Q4 2016 rate of 45.5%. Quell with lower margins has increased weighting in the margin calculation due to its faster sales growth. OpEx of $5 million in Q4 was up 9% from Q4 2016. R&D spending was flat. Sales and marketing declined 340,000, as Quell advertising spending was tapered toward the end of Q4. The increase of 770,000 in G&A includes 380,000 of legal and banking fees related to the GSK agreement that we announced earlier this quarter and 360,000 of other legal and support costs. Our net loss in the quarter was $2.9 million and cash usage in the quarter was $3.3 million. Turning to the full year 2017 highlights, revenue of $17.1 million was up $5.1 million or 42% over the prior year. Solid growth in both Quell and DPNCheck. Quell revenue contributed $12.4 million that was up $4.9 million or 65% year-on-year. DPNCheck of $3.1 million was up 25%. Interestingly on DPNCheck if Mexico's sales are isolated from both years the growth rate year-on-year for DPNCheck was 75%. There were no Mexico sales in 2017 largely due to earthquake disruption. And by comparison in 2016 we shipped about $700,000 worth of product to our Mexico distributor. Gross profits in 2017 was up $1.9 million or 40% year-on-year, margin rates were flat at about 40% in both years. However, those margin rates obscure Quell margin improvement, which on a standalone basis improved from the mid 20% range in 2016 to the mid 30% range in 2017. There's more work to do, but with a combination of parts savings in Quell manufacturing efficiencies with growing scale, increasing electrode sales and the next generation Quell launch which we expect late in 2018 bringing with it lower COGS, all will combine to push future margins in a favorable direction. Net loss in 2017 was reduced by $2.1 million from the prior year and cash consumption was $2.4 million lower than the prior year. Again, here there's more work to do, but the trend of profitability is a primary focus of the company. Regarding our capital structure and financing needs, today we have a simple equity only capital structure with no debt. Over the past six months the warrant overhang has been retired and at present our fully diluted equity is 14.2 million shares. This is comprised of a common stock float of 7.1 million, common shares assuming conversion of outstanding convertible preferred of 6.6 million and options and warrants of 0.5 million, all adding up to 14.2 million. The GSK collaboration announced last week provided $5 million in cash and $21.5 million in development and commercial milestones. And while we are restricted by confidentiality agreements from disclosing any specifics, we believe that our pro forma Q1 cash resources of $9 million that consist of the $4 million we had at the end of the year, plus the $5 million GSK payment and forecast completion of development milestones will address our capital needs in the foreseeable future. We do not see a near - a near term need for additional capital. Now Dr. Gozani will comment on GSK, our business and our strategy.

[Shai Gozani:]

Thank you, Tom. As we start 2018 and look towards the future of NeuroMetrix, we have a high degree of optimism. My comments today will address the continuing evolution in our strategy. Since launching Quell about 2 years ago our focus has been on rapidly building and validating consumer interest, while concurrently advancing the technology through our R&D efforts and we have made substantial progress on both fronts. We have now shipped over 140,000 Quell devices since launch and at the same time our R&D program has progressed such that we are positioned to launch a novel third generation Quell product later this year. We now have two solid commercial product platforms in NeuroMetrix's, Quell and DPNCheck. As we look forward we believe the optimal course of action for the company and our shareholders is to place our primary focus on moving our company to profitability with limited future shareholder dilution, while at the same time sustaining consistent top line growth, and we think we've made substantial progress in implementing the strategy. As Quell is our primary growth product, I’ll focus my remaining comments on our Quell program and how it integrates with the strategy. And in particular, I will focus on our advertising strategy, our retail channel strategy, research and development and our strategic collaboration with GSK that we recently announced. First with respect to our advertising strategy. Quell market penetration at this point we believe is less than 1% of the estimated attainable market of 20 million U.S. consumers. As we expand our user base over time, we expect to reach a tipping point where viral marketing within the chronic pain community generates an upward sales inflection. In fact, we have seen some evidence of this effect. However at this stage of commercialization most sales are still generated by direct advertising, as a result of sustained - a substantial portion of our sales and marketing spend is devoted to building awareness through TV and digital marketing and we continue to believe that TV advertising in particular is important. However, we are aligning TV spending to a sustainable level that's consistent with our profitability focus and we do supplement our TV efforts with cost effective media such as TV shopping. On our retail strategy. We continue to believe that the availability of Quell in top retail outlets is important to growth of the brand. Based on our learning over the last two years, we are rationalizing our channel strategy by focusing on those outlets that provides opportunities to deliver good margins, drive growth, educate consumers and enhance the Quell brand. Therefore, while we expect to - for Quell to remain available at retail, it will be more focused and strategic. With respect to R&D. A core strength in NeuroMetrix is our research and development capabilities and the ability to rapidly innovate. We believe we have the most sophisticated capabilities and technology in the wearable stimulation sector. Our focus is to enhance our competitive advantages and establish a foundation for long-term growth of Quell technology. We are currently developing a novel third generation Quell device that we expect to launch later this year. It will enhance the user experience and substantially improve profitability of the Quell business. We anticipate Quell margins over 60% once the supply chain for the third generation device is optimized. We are starting to take a deeper look at additional clinical indications and applications for the Quell platform as well, and we'll be providing updates on those efforts later this year. It is essential that we continue to invest in Quell innovation and therefore plan to maintain our current level of R&D spend. As I will mention later, our agreement with GSK will provide R&D funding that will allow us to expand R&D programs without necessarily increasing R&D OpEx relative to current levels. Now with respect to strategic partnerships. Since the launch of Quell, we have communicated that strategic partnerships have the potential to bring non-dilutive financing and offset certain ongoing costs such as R&D. In particular, we felt that there were excellent opportunities for Quell outside the U.S. where there are 1.5 billion people worldwide with chronic pain. On this front, we recently reported a strategic collaboration with GlaxoSmithKline Consumer Healthcare to develop and expand access to Quell wearable pain relief technology. GSK Consumer Healthcare which is one of the core divisions of GSK is among the largest international consumer health companies. They have several of the top global over the counter pain relief brands. The key elements of the collaboration are as follows, GSK will acquire - has acquired exclusive ownership of Quell technology for markets outside the US. We retain exclusive ownership of Quell technology in the U.S. market. The two companies’ will co-fund development of Quell technology for a three year period beginning this year through at least 2020 and we may continue beyond that based on mutual agreement. GSK has paid NeuroMetrix $5 million, as Tom noted and is committed to an additional $21.5 million for certain development and commercialization milestones. We feel this collaboration is transformative for NeuroMetrix's. First, we are honored and excited to collaborate with GSK which is one of the world's premier healthcare companies. The two companies share a commitment to science based therapies and to the health and quality of life of their customers. Second, this agreement fundamentally alters our financing strategy by creating a potential path to profitability without substantial shareholder dilution, which again has been our focus in our evolution of our strategy. So in summary, we are excited by our strategic collaboration with GSK and invigorated by the opportunity to evolve our business strategy with a long-term view towards profitability and sustained growth leveraged on the Quell and DPNCheck product lines and enhanced by our strong commercial and R&D capabilities. And that represents our prepared comments and we'd be happy to take questions at this point.

[Shai Gozani:]

Thank you for joining us on today's conference call and we look forward to updating you on our Quell strategy and our overall business progress during the balance of the year. Thank you.

[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 wonderful day.