NeuroMetrix, Inc.
Q4 2016 Earnings Call Transcript

Published: 27 Jan 2017

[Operator:]

Good morning and welcome to the NeuroMetrix Fourth Quarter 2016 Earnings Call. My name is Sonia and I will be your moderator on the call. NeuroMetrix is a commercial stage, innovation driven healthcare company combining bioelectrical 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 would now like to introduce the NeuroMetrix Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?

[Thomas Higgins:]

Thank you.. I'm joined on the call today by Dr. Shai Gozani, who is our President, Chief Executive Officer, and we both appreciate your participation in this Q4 review. A couple of background observations. We operate in two markets, wearable therapeutics and point-of-care diagnostics. Our platform technologies in both markets are based on deep expertise in precision neurostimulation to achieve a therapeutic or a diagnostic result. We are addressing large market opportunities. Our primary product which is, an over-the-counter wearable device, design for the millions of people suffering from chronic pain. DPNCheck, our test for diabetic nerve disease, addresses a medical condition of about half of diabetics, representing about 5% of the US population. Quell was launched a year and half ago and is in early stages of commercialization. The rate of market adoption is impressive and there are two primary business metrics that we look to. The first is devices placed, which is a proxy for growth in the user base and eventual electrodes reorders. And the second invoice shipments, which is an indicator of our overall commercial activity. In the fourth quarter of 2016 these metrics continued to point upward, device shipments totaled 14,301, up 18% from the preceding future rate and the invoiced value of Quell shipments totaled 3.5 million, which was up 19% from Q3. Quell is been in the marketplace for seven quarter or 19 months and we have seen sequential growth in every quarter. Annualizing Q4 performance, we are currently shipping at the annual rate of about 57,000 devices and an invoice – and we're invoicing at an annual value of about $14 million. Turning to the financial highlights for on the fourth quarter that were released this morning, we reported revenue of $3.7 million, that’s an increase of 36% year-on-year and it's up 10% from Q3 of 2016. Within that $3.7 million, Quell GAAP revenue was $2.5 million, that was up about 20% sequentially and Quell contributed 67% of total revenue. As I mentioned, we shipped over 14,000 devices at an annual 18% sequential growth rate. The growth in electrode reorders was more impressive, where we shipped about 20,000 electrode reorders or 39% sequential growth rate. This accelerating electrode reorder rate is evidence of recurring revenue from an expanding user base and that is the underlying premise of our razor blade business model. Deferred Quell revenue recorded in the balance sheet and anticipated in to be recognized in future income was about $923,000 versus $755,000 at the end of Q3. The deferral is due to retail distributor shipments that are not recorded revenue until the products are sold through to end customers, and that number is net of estimated return. Sales returns continue to average about 25% of our shipments. DPNCheck revenue was $800,000 or 20% of total revenue. It was up slightly in comparison with a very strong fourth quarter of last year, which saw our initial shipments into the Mexico market. DPNCheck biosensor shipments reached a new four year highest 63,624 tests. There are several developments in this product line. Omron Healthcare, our Japan distributor completed the sale of its hospital product subsidiary to Fukuda Denshi. Fukuda will initially handle our Japan distribution while we negotiate a longer-term agreement. Omron Beijing is our distribution partner in China. We obtained China regulatory clearance in September and introduced DPNCheck to prominent Chinese medical practitioners at the annual meeting of the Chinese Diabetes Society which was held in November of last year. Omron Beijing will lead broader commercial rollout in several key provinces starting in the early months of 2017. Our legacy products SENSUS and ADVANCE contributed revenue of about $0.5 million in the quarter or 12% of total. Gross margin for the fourth quarter was $1.7 million or 45.5% of revenue. This was a solid improvement from approximately 40% margins of recent quarters and it reflects several factors. First is volume related production efficiencies, the second is products improvement and this is essentially the outcome of an initiative we have underway to reduce parts costs, and to have backup sources of supply for each principal product that goes into our Quell devices, improve returns on our processing, these are Quell devices that come back and growing Quell electrodes sales have also improved the gross margin. Our margins today remain below our historical 50% to 60% levels, as we continue to build the Quell user base and over time we see margin expansion coming from product design, growing electrodes sales and the continuing volume benefits on manufacturing and parts procurement. Operating expenses in the quarter totaled $4.6 million, that was up about $100,000 from the fourth quarter of the prior year, but it was down from $5.3 million in the preceding third quarter of this year. R&D spending of $970,000, decreased by 160,000 [ph] from Q4 last year lower, due to lower outside engineering support related to Quell design enhancements. Sales and marketing expenditures of $2.7 million increased by about 600,000 from Q4 of last year due to higher level of TV promotion, this TV spending was initiated in the second quarter of 2016 as we supported our retail distribution launch. G&A spending of $990,000 decreased by about $350,000 from Q4 of last year, due to reduction in personnel related costs, as well as lower IT infrastructure spending. So our net loss for the quarter was $2.8 million, compared with $2.7 million in the fourth quarter of last year. On a per share basis, our net loss per share was $0.52, reflecting a weighted average $5.4 million shares outstanding, that compares with a net loss of $3.19 per share in the fourth quarter 2015 on 3.5 million shares outstanding. And I will note that the 2015 number reflects the effects of a deemed dividend accounting adjustment relating to a fine that hit in the fourth quarter that was about $2.14. Our cash usage in the fourth quarter was $3.6 million and this continued the downward trend in cash usage from operation from a peak of $4.2 million in the second quarter of 2016. In the first week in January of this year 2017, we completed a $7 million equity offering and closed the initial $4 tranche, a second $3 million tranche is forecast to close in March following shareholder approval. We ended the quarter with slightly below $4 million in cash and on a pro forma basis if you took into account the closing of the January financing and funding of the first tranche, our pro forma cash at the end of year was $7.6 million. So in summary for the quarter, there was top line growth of 65% year-on-year and 10% sequentially. Quell contributed nearly 2/3rds of the revenue. Our margins of 45% or an improvement of 500 basis points benefited from manufacturing efficiencies and Quell electrodes sales. Cash usage continue to trend downward and restart 2017 with $7.6 million cash pro forma. So those are the financial highlights for the quarter and now Dr. Gozani will provide a review of our business and strategy.

[Shai Gozani:]

Thank you, Tom. And thank you for joining us today. I will focus my comments on Quell, which is our primary growth driver. We believe that Quell is well-positioned to address unmet needs in the $20 billion global market for devices and drugs that treat chronic pain. In the US alone there are over 100 million people with chronic pain of which our market research indicates that about one fifth or 20 million are ideal targets for Quell. I will address the following aspects of our Quell commercialization efforts, TV promotion, development of our retail channel, strategic partnerships and our innovation in clinical program. Starting with TV promotion. Our quantitative market research continues to indicate that the single most effective way to reach our core audience to both drive near-term sales and build long-term brand awareness is through TV advertising. Therefore, starting in the second quarter of 2016, we have been investing in TV promotion. We are constantly optimizing our approach in terms of specific channels, commercial spotlight, time of day and other factors, such as in the fourth quarter had to managed through the election cycle. Our most common approach is our 32nd spots on national cable news channels. However, we have expended other cable channels that match our customer demographics and characteristics. Our expectations that will continue a similar or slightly increased level of TV promotion in 2017. In addition to our own TV advertising efforts, we continue to effectively partner with QVC. Although we are not - we were not QVC during the fourth quarter because of their gifting focused around the holiday, we have been on the air repeatedly this month and expect continued spots over the remainder the quarter. QVC has a strong interest in health product and we fit along to this agenda. Moving onto the retail channel, we believe that the availability of Quell in top retail outlets is important to continued growth and expansion of the Quell brand. Our market research indicates that many consumers with chronic pain are most comfortable learning about and purchasing chronic pain treatments in and around the pharmacy, where they are obtaining a prescription medications and other over-the-counter healthcare products. Therefore our goal for 2016 was to make substantial progress towards availability of Quell in pharmacy affiliated retail settings. Quell is now available in 1500 retail stores, approximately evenly distributed among Target, CVS and Walgreens. The primary objective of this initial rollout was to understand how to most effectively position the market Quell for success in the over-the-counter section of these leading retailers. We believe that the retailers have generally been satisfied - satisfied with initial results, and we are now looking to expand Quell availability at retail and are optimistic that we will see expansion during 2017. In addition to pharmacy centric retailers. We believe there are attractive opportunities for Quell with specialty and chronic retailers. For example, we have had good success with Bed Bath & Beyond. Thus far focused on the e-commerce site with potential in-store availability later this year, and we are currently working on several additional opportunities and maybe in position to announce one or more pilots later in this year. With regarding to strategic partnerships. The US consumer healthcare market is the largest in the world and we intend to build Quell directly into a premium, high value consumer brand under NeuroMetrix ownership. However, we also see opportunities to partner in the US, in a way it will able accelerate adoption. As one example, Medtronic now offers Quell on their diabetes focused e-commerce site and we are in early discussions with several additional potential US partners. We also see large opportunities for Quell outside the US. On this front we obtained the CE marking for Quell in the fourth quarter, allowing us to enter the European market. It is our expectation that will tap into outside the US opportunities, primarily through distribution and licensing partnerships, with international consumer healthcare companies. On this front, we've had several active discussions and maybe positioned to make related announcements later this year. Finally, on our innovation in clinical program. One of our core strength in NeuroMetrix is our R&D specification and ability to rapidly innovate. I believe we have the most advanced engineering team and capabilities in the wearable nerve stimulation sector. Over half of our tech people PhDs, MDs, or master's degrees in engineering or scientific disciplines. Our Quell product roadmap is exciting with several important product enhancements to launch for the plan for the next several years. And as a general matter, we do not preannounce details of upcoming products. However, the guideline we will typically target major product launches for the consumer electronics show, and on CES which persist every January, and other major consumer health and a wearable technology event. In fact, we announced our second-generation Quell device at the recently completed CES meeting in early January, to very, very, positive reviews. This updated device which is now starting to ship provides enhanced personalization automation, extended battery life, and new health tracking technology. Our clinical program also continues to expand, we currently have three ongoing clinical studies, one in cancer pain at Scripps in San Diego, another neuropathic pain at the University of Rochester and one low back pain in Harvard Medical School. We expect to start seeing readouts on these clinical studies in the second half of this year. Those represent our prepared remarks. We will now be happy to take questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Yi Chen from Rodman & Renshaw. Your line is now open.

[Yi Chen:]

Hi. Thank you for taking my questions. My first question is, can you give some additional color on the potential revenue impact from the distribution of Quell EU and also the role of commercial rollout of DPNCheck in China? Thanks.

[Shai Gozani:]

Yes. Let me – I'll take the first part, you can take the second. I don't have a - I think - so the first question being what is the potential revenue impact of Quell in the EU. The market is large. It’s probably on the order of the US market. I think I will withhold making a prediction on that until we define our final distribution strategy. If we can find the right distribution partner, we think it could be very significant, probably impacting more towards late part of 2017. But until we define the final distribution strategy, I think we're not in position to make a prediction. I think as we get into 2018, we expect it will be fairly significant and in over several years start to – mirror the US market because the characteristics are quite similar. And then the second question being, what we think DPNCheck might do in China, I'll let Tom answer that.

[Thomas Higgins:]

Sure. Let me first tell you where we stand with DPNCheck in China. So, regulatory approval was obtained in September. In November we took to avail [ph] of the product at the annual Chinese Diabetes Society Meeting, and began distributing devices to key opinion leaders in China. So from our – from a revenue perspective in the fourth quarter there was a very modest benefit to us on those early shipments. Now as we get into this year, Omron Beijing is planning a broader rollout, but it really does occur through two parts. One is to continue to cultivate key opinion leaders and the other is to develop sub-distributors to Omron throughout China, through relationships they have already. And so the key opinion leader development process we saw very effectively handled by Omron in Japan and we continue to see the benefits of that. Today, in China I would see that process evolving over at least the next year to a year and half, probably as we provide devices and biosensors in support of local clinical studies. And then in terms of the commercial side of the business, the sell throughs through sub-distributors, to users that probably won't get seriously underway. And so the second quarter, third quarter and again it’s sort of a – it’s a multi-step process of providing product to sub-distributors and then sub-distributors selling onto users. We of course will have some modest amount of revenue from China in Q1 and Q2, as we front-end those devices, as we ship them. But to your overall question, there probably will not be a material impact during 2017, material impact to us and to our overall results. But of course, the potential is great and we think we have the right distribution partner to work with.

[Yi Chen:]

Got it. Thank you. Second question is another stat [ph] the - in the first quarter the R&D expense, the R&D expenses, sales and marketing expenses and G&A expenses are all lower than the third quarter, so should we expect further reductions going forward?

[Thomas Higgins:]

So I think that – that we are of course tightly managing our operating expenditures. The fourth quarter was probably a bit lower than we would expect going forward on at least the early part of next year. So I would see us being under $5 million in quarterly OpEx, but probably somewhere in mid between $4.5 million and $5 million.

[Yi Chen:]

Okay. Thank you.

[Operator:]

Thank you. And our next question comes from Sherry Grisewood of Dawson James. Your line is now open.

[Sherry Grisewood:]

Hi, good morning. Thank you for taking my question. It seems to me that one of the opportunities that your company has is to improve that return rate, since its been fairly consistent at 25%, you know, that ends up really been a cost to you, have you done some metrics on what funds to return and have you developed a strategy that might improve that return ratio?

[Thomas Higgins:]

So Sherry, the – actually the return rate winds up with the clinical expectation that the product is going to benefit about seven to eight out of ten people which our clinical data suggested and its what we're seeing in practice. So the returns are not because the device does not operate correctly or manufacturing defect if you will return rate is minuscule. This is simply the fact that any analgesic approaching, any pain relief approach is not going to work for everybody, and that’s true, whether your device or your pharmacologic therapy. So it is our expectation that we should see something around 25% - lack of efficacy if you will and that’s due to just the inherent genetic, physiological behavioral variation that you see in chronic pain. So our focus - we understand that and we operationalize that, I don't think that is a number that can be dramatically decreased. That being said, we – there are probably - some aspect to that return rate is people, consumers not using the product correctly or long enough or its going be usability issues and we're absolutely focused on those. And in fact, in fourth quarter we did see some early improves - some improvement in the return rate. And I think it's realistic to focus on getting that number down, maybe towards 20% or the high teens potentially, but fundamentally its never going to – its just clinically cannot be a product that’s going to work out of the gate for you know, 95% of people. So we were trying to optimize it, but also realize the clinical reality.

[Sherry Grisewood:]

You are you – in terms of the customer feedback, are you able to develop perhaps a better customer profile that will allow large targeted marketing to it, or just kind of fits your logical issues? Then the other question is how do you target the profile of the rightly come user that will benefit?

[Thomas Higgins:]

Right, we do a lot, with comp predictive analytics, we are trying to do that. The reality is that and this is you know pharmaceutical companies in the pain space, we've been trying to do this for a decades. It's very, very hard to find apery [ph] predictors, measurable predictors. So we haven found those per se in our clinical work or our market research. We have identified some categories of chronic pain, which we know sort of physiological reasons and it’s not going to be particularly effective, such as migraines and headaches and we become - we try to dissuade customers who purchase it primarily for that purpose and we've seen some benefit there. But as it turns out the differences amongst disease states and obvious demographic factors like age or measurable are just less and inherent [ph] variability from person-to-person. So it's a challenge, we continue to try to find those predictors, but I'm not, I'm not overly optimistic that we can develop a tight marketing profile that would suddenly drop us to know dramatically lower return rate, I don’t want to imply that I think that's realistic. I think it's more – a more rational approach is to accept that, you know, maybe with optimal performance 15% to 20% devices will come back as its just not going to work and to most efficiently operationalize that fact.

[Sherry Grisewood:]

Okay. Thank you very much.

[Thomas Higgins:]

Absolutely.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from [indiscernible] Your line is now open.

[Unidentified Analyst:]

Hi. My name is [indiscernible] physiatrist from Chicago. There is a lot of studies done in the effect of chronic pain on psychiatric diagnosis, depression, anxiety, et cetera, and there is already a lot of literature out there on inflammatory markers, things like that, has there ever been any thought of maybe looking at seeing how you know, Quell and neurostimulation maybe be applied to these diagnosis, so they could potentially a large untapped market that could be used?

[Thomas Higgins:]

That’s a great. You know, we're very – I think the overall answer is no, not yet. I mean, we thought about and those are the kinds of things we like to move into and do clinical studies. We are very cognizant of the interplay between mood disorders, anxiety, depression, as you suggested and in chronic pain. And in fact, in the most recent version of the app we're tracking, allowing users to track the impact of pain on, so that we start to collect that kind of data, in fact, that's all going up to our cloud and we'll be able to do some interesting analyses to try to address that. But, yes, we're – in all our studies that we do we include outcome measures related to mental health and I think we are very interested in that, we haven't been as – we haven’t moved in that direction as forcefully as you might - as you suggest. But I think that is a scope in what we're interest in doing.

[Unidentified Analyst:]

Okay. Great. Thanks.

[Thomas Higgins:]

Thank you for the question.

[Operator:]

Thank you. And our next question comes from Bill Church of TGRA. Your line is now open.

[Bill Church:]

Good morning, Thanks for taking my call. The question has to do with the clinical trials. Let's say we're seeing about 70% to 80% success ratio as we get the second half of the year, what's the timing and the path for labeling and go to market with that sort of labeling?

[Shai Gozani:]

The clinical studies are not – if I understand the question, the clinical – we're not looking to alter the label. The label for Quell is quite strong. It's for the treatment for chronic pain, so it’s a very broad and you know, effective label from a marketing perspective. The clinical studies are really looking to strengthen our understanding of the performance and clinical characteristics of the product and to build its credibility amongst healthcare professionals and in other another – and the stakeholders in the clinical setting. So you know, we're very interested in taking on challenging pain states, like cancer pain which is what we're doing in the our study with Scripps and then, more classic forms of pain, neuropathic pain and low back pain and the other studies. But it's not - it's not specifically - these studies were not specifically designed or to alter the labeling because we don't think that the label – we think the labeling is sufficiently broad and robust for us to market the product as we intend. But we do think that the clinical studies over time, not just these three, but a broader clinical base may lead us into a place where we could start to engage third-party payers, employers and others who may - may get you - may get excited by the results and see the potential and may begin to consider – in some ways offsetting the cost of Quell for the beneficiary. And that’s not an immediate outcome, but over time we do want to see if there are ways to engage third parties - third-party payers. I use the term broadly, just insurance companies that could be employers were already working with the VA and the VA is providing Quell to its beneficiary. So it's really more along that line than specifically labeling. I hope – was that question?

[Bill Church:]

Yes, yes. Thank you very much.

[Shai Gozani:]

Sure.

[Operator:]

Thank you. And our next question comes from Jeb Terry of Aberdeen Investment. Your line is now open.

[Jeb Terry:]

Good morning, gentlemen. Couple of questions. One, can you - Shai, could you kind of compare contrast how your channels are effecting us or developing the site Amazon Online versus bricks and mortar retail versus QVC and the how is QVC - since they were not present in Q4, what's the presence in Q3 – on Q1 and risk, if there is kind of learning from response relative to your TV ad timing? And then lastly, kind of any thoughts on price elasticity?

[Shai Gozani:]

Yes. Thank you for the questions. In terms of the development of the channels, we believe that because of the diversity of our customer base, we really have to make the product available in many different channels. So that individual, consumers can acquire the technology in the place they are most comfortable. A lot of people that is online, they just want to go to Amazon or website and so we really developed online channel, primarily we're Amazon. In fact, now we are – what's called Amazon vendor central store [ph] and actual Amazon vendor meeting, Amazon buys the product from us and then resells it to their customers and that gives us higher visibility that are content on Amazon. So that’s been a nice development. And the online channel is been growing. Retail as I mentioned, for a lot of our customers they just want to walk into a CVS, Walgreens into Target and you know, touch and feel and look at the product and maybe talk about with their pharmacist. So we definitely see retail growing this year as a percentage of our business, but we don’t –we're not saying – we're not trying to build the business just along the online or just along the retail to mention, we really see both as important components of our channel. QVC is - QVC is a great general for us, they can move a lot of product, its very – actually you want – might call it cyclical over the fourth quarter, is a gifting quarter as I mentioned and the focus tends to be on gift items and not on health items. Q1. On the other hand kind of tied into New Year's resolutions and such, it tends to be a strong healthcare quarter. So we're seeing strong QVC interest and demand this quarter and I'm sure it will be all persist through the rest of the year and then again in the fourth quarter of this year and probably very small because again we are moving to the gifting status. So QVC is a great channel for us, it’s a cable channel, parallels are TV advertising and it a complements it, but we have - we really don't have a lot of control, we kind of have to go with what they want to do.

[Jeb Terry:]

Thank you.

[Shai Gozani:]

Price elasticity. Our initial market research suggested that the less the price elasticity, we – that market research supported and help us walk in on our initial $249 price. We remain confident that that’s the right price for the product. We have not done in-market or in-channels, studies yet to see if we drop it by X, we'll see a Y increase in demand. We're pretty comfortable with where we are and then the associated margins that gives us because obviously particularly in retail channels we are giving away significant margin to our partners and we always want to be on operating front for us in a positive margin framework. So right now we're pretty settled in a 249, we are working as Tom said, to reduce our cost, which obviously would increase our margins, will also give us more flexibility to try somethings on pricing. I don't see those occurring in 2017, they might be in the playbook for 2018.

[Jeb Terry:]

Okay. Very good, thanks. Congratulations.

[Shai Gozani:]

Thank you.

[Operator:]

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I will now like to turn the call back over to Dr. Shai Gozani for any further remarks.

[Shai Gozani:]

Thank you very much and we appreciate you joining us on this conference call. We are encouraged by the continued strong response to Quell and the opportunities that we're sent DPNCheck and we look forward to updating you on our progress through the balance of the year. Thank you.

[Operator:]

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