NeuroMetrix, Inc.
Q3 2014 Earnings Call Transcript

Published: 28 Oct 2014

[Operator:]

Good morning, and welcome to the NeuroMetrix Third Quarter 2014 Conference Call. My name is Adrian, and I will be your moderator on the call. NeuroMetrix is a healthcare company that develops wearable medical technology and point-of-care tests to help patients and physicians manage chronic pain, nerve diseases and sleep disorders. 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 and depend upon or refer to future events or conditions that include words such as believe, may, will, estimate, continue, anticipate, intend, expect, plan or other similar expressions 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 risks and uncertainties including the factors described under the heading Risk Factors in the Company’s 2013 Form 10-K filed with the SEC in February 2014 and available on the Company’s Investor Relations Web site at http

[Shai Gozani:]

Thank you. I’m joined on the call today by Tom Higgins, our Chief Financial Officer. We appreciate this opportunity to review our business highlights for the third quarter of 2014. Following our prepared remarks, we’ll be pleased to take your questions. For the third quarter we closed out another solid quarter of business performance. Our key highlights include, we attained a new high for our diabetes product revenue of about 800,000. Our diabetes products include DPNCheck and SENSUS. We made substantial progress with our over-the-counter wearable technology to treat chronic pain. We launched DPNCheck in Japan and we generated year-over-year revenue growth on an overall basis of about 9%. I’ll talk first about SENSUS. SENSUS is our FDA-cleared wearable therapeutics device designed to treat chronic pain particularly neuropathic pain, which effects about one-quarter of people with diabetes, as well as other categories. It is only such device cleared by the FDA for use during sleep, a critical advantage for patients with chronic pain. The device is a powerful and precise vertical stimulator of high level proprietary automation, it is light weight and it can be worn and easily operated in the clothing, either while active in the day time or at night while sleeping. We distribute SENSUS through a number of durable medical equipment or DME suppliers most notably the Recovery Sciences division of DJO Global. DJO has shown a consistent commitment to the product and continue to deliver good results. During the third quarter we shipped out 5,000 SENSUS device. This significant milestone was achieved within 20 months following launch in the first quarter of 2013. The SENSUS numbers continue to grow. As of today, over 6,000 SENSUS devices are on the market. Within the third quarter we placed 951 devices, which was down from the prior quarter, which reflected seasonality in the sales process and inventory adjustments at several distributors. We also terminated several distributors for strategic reasons. Despite the devices being down from prior quarters, SENSUS electrode sales in the third quarter grew to 4,683 tests an increase of 13% over the prior quarter. The DME channel is structurally challenging because of complex claims processing, tight reimbursement in the spectra of Medicare competitive bidding. Nevertheless, we are pleased with our results to-date and in particular we are delighted with the product performance in the hands of patients and physicians and we are pursuing opportunities to continue to expand the sales channel. Our strategy to expand the overall market for our wearable pain relief technology involves a differentiated over-the-counter or OTC device that would be sold without a prescription to various retail channels. Product development for this OTC product is in late-stages and FDA clearance has already been obtained. We are working closely with a global design from IDEO to incorporate innovative features, functionality and packaging for the consumer market. We are also developing and accompanying smartphone application. In terms of branding for the new product we have engaged a San Francisco based branding and design from Character to lead the process. It was a great progress in all three areas during the quarter. Also it was very important for us to acquire in-house consumer sales and marketing experience and that was a priority. In the third quarter, we appointed Frank McGillin, formerly at Philips and Johnson & Johnson as SVP and General Manager for the consumer business. And Frank built the global oral care business at Philips Sonicare to become the number brand in the nearly $1 billion U.S. power toothbrush market, his extensive experience in launching new consumer products. Since joining us, Frank has moved quickly to build out a new discipline for our OTC marketing team. There are related initiatives underway in our operational consumer service as well, all targeted at a launch of our consumer wearable pain relief device in 2015. Now moving on to DPNCheck, DPNCheck had another stronger quarter in both the U.S. and O-U.S. markets. DPNCheck is a point-of-care test for screening, diagnosing and monitoring peripheral neuropathy such as diabetic peripheral neuropathy or DPN. During the third quarter we shipped 35,800 DPNCheck tests representing an increase of 66% over the third quarter of 2013. The U.S. DPNCheck business which primarily consists of Medicare Advantage grew by nearly 50% over the third quarter of 2013. We had a total of 26,550 tests in the Medicare Advantage sector. In Medicare Advantage DPNCheck testing plays an important clinical role in patient assessment and an important financial role in the risk adjustment process. Outside the U.S. we launched DPNCheck in Japan with our Asia partner Omron Healthcare. Omron has done an excellent job in promoting the product in advance of sales launch. Given the importance of this relationship in the Japan market, I spent time with Omron including their sales leadership recently, who reported strong early interest from their customers. I also participated in the Annual Meeting of the Japanese Diabetes Complication Society. This was an opportunity to discuss NeuroMetrix and diabetic neuropathy with Japanese key opinion leaders and the contribution that DPNCheck can make to clinical outcomes in Japan. I will now turn it over to Tom for a discussion of revenue in the overall financial results.

[Tom Higgins:]

Thanks, Shai. We reported this morning overall revenue of 1.4 million for the third quarter. This was up 8.6% from 1.3 million in Q3 of last year and up slightly on a sequential quarter basis from the second quarter of this year. Looking more closely at the product details, our combined diabetes products produced revenue of about $800,000 in the third quarter. This compares with about $400,000 in Q3 of last year, a 2x increase year-on-year and a 26% increase from Q2, the preceding quarter of this year. SENSUS revenue was a 164,000 in the third quarter, versus about 73,000 in Q3 a year ago and 256,000 in the preceding second quarter of this year. So year-on-year SENSUS revenue doubled, however revenue declined about 36% on a sequential quarter basis and Shai commented on the decrease in device shipments from Q2 which were largely attributable to lower summer sales activity and to some inventory adjustments at distributors. The trend in SENSUS electrode orders continued to be positive and electrodes posted up a 13.3% gain from the preceding quarter. DPNCheck revenue was $611,000 in the quarter compared with 317,000 in Q3 of last year. Effectively, DPNCheck doubled from last year and was up 70% on a sequential quarter basis. U.S. Medicare Advantage testing rates continued to grow at strong pace. O-U.S. we initiated commercial shipments to Omron Japan in the quarter with substantial device and biosensor shipments into Omron inventory to support the launch. To clarify, our revenue recognition policy here on this Omron business as on all of our distributor sales, we recognized revenue at the point of shipment from our factory and not on a sell through model to our distributor’s customers. So revenue growth from our diabetes products offset the anticipated decline in our legacy ADVANCE business. ADVANCE revenue was $650,000 in Q3 and that was a decline from $272,000 -- up $272,000 from Q3 of last year. For the first time quarterly revenue from this historical ADVANCE product line dropped below half of revenue with diabetes products contributing 54% of revenue in this quarter and ADVANCE contributing 46%. And by comparison, in the year ago quarter, ADVANCE represented 70% of our business, so that's moved from 70% to below 50%. We'd expect it to reach this crossover point during 2014. This is a profitable business for us with a few direct costs associated with ADVANCE other than cost of goods sold. Gross profit in the quarter, our gross represented a margin rate of 55.2%. That was about level with 56% in the third quarter of last year. The margins increased slightly from the preceding quarter, which were about 51% with the shift in our product mix toward a heavier weighting of our higher margin DPNCheck Biosensor business. Our operating expenses totaled 2.8 million in the quarter, an increase of about 460,000 from 2.3 million in Q3 last year and this increase was wholly attributable to our OTC initiative. If you dig a little deeper into OpEx, R&D spending increased to $945,000 from 740,000 a year ago, and about 340,000 of this spending in this year's quarter was for outside engineering support for the OTC project. If you exclude the OTC spending, our R&D of about 600,000 was down by 140,000 from Q3 of last year. Sales and marketing spending was $538,000 in Q3 and while this was down from 581,000 last year, it included about 90,000 of spending related to OTC. And then finally on G&A spending of 1.3 million was up from 1 million in Q3 last year. There were no structural factors that contributed to this increase. It primarily reflected some cost associated with our Q2 financing and several timing differences related to ongoing spending on G&A activities. We recorded in the income statement a non-cash credit of $564,000 for revaluing our outstanding common stock warrants to fair value. We do this at the end of every quarter. The warrant liability in the balance sheet was $4.8 million at the end of September 2014, so that's the value of the warrants based on a Black-Scholes valuation approach. Our net loss for the quarter was 1.5 million or $0.19 a share. Our weighted average shares outstanding during the third quarter were 7.9 million this year and 2.7 million in the third quarter of last year. We ended the quarter with 11.7 million cash on-hand. Our net cash usage during the quarter was about $2 million. Our key current assets receivables and inventory, the aging of receivables and inventory turnover continued to be under satisfactory control. Quarter end receivables of 612,000 reflected 36 day sales outstanding. And inventory of $630,000 reflected a turnover rate of just over 4.1 times per year. So those were the financial and liquidity highlights, back to you Shai.

[Shai Gozani:]

Thank you, Tom. Those are our prepared comments so we'd be happy to take any questions at this point. Question-and-Answer session

[Operator:]

(Operator Instructions) The first question comes from the line of Bob Wasserman of Dawson James Security. Please go ahead. Bob Wasserman - Dawson James Securities Hi Shai, hi Tom, congratulations on the quarter, just a couple of questions.

[Shai Gozani:]

Hi. Bob Wasserman - Dawson James Securities Hi, just a couple of questions. The first one is on SENSUS, you mentioned in your prepared remarks that you're at 6,000 devices and in the press release you said you're at 5,000 so can I assume that you've shipped about a 1,000 already this quarter is that correct?

[Shai Gozani:]

We're not giving any of the specifics, yes we want the -- the 6,000 reflects literally the number as of I believe yesterday so. Bob Wasserman - Dawson James Securities Okay.

[Shai Gozani:]

We're just making a point that we continue to make progress and are coming out of that kind of summer slowdown. Summer doldrums so that's correct Bob. Bob Wasserman - Dawson James Securities Okay. And related to DPNCheck, did you book any revenues in Japan or outside the U.S. in the third quarter or is that something that's going to show off in the fourth quarter?

[Shai Gozani:]

No we did, we shipped, I guess our first shipments to Japan went out in the third quarter. Maybe Tom can provide some color on the numbers.

[Tom Higgins:]

Yes so we began shipping to Omron in early August. And so they were, they needed to go through an extensive evaluation process of incoming product particularly with a new supplier which we are. So we shipped to them in early August and again in later August and those devices and biosensors were used to start the launch in Japan which began in early September. So there was a substantial amount of shipment to Omron in the quarter.

[Shai Gozani:]

And that was booked in the quarter. Bob Wasserman - Dawson James Securities Okay. Tom you mentioned a little bit about that but I wanted to clarify it. And finally a little about the OTC product, do you know -- maybe give us some color about what type of design and pricing you are looking for, I know there is some competitors out there ICHOT for example that maybe you are targeting or trying to differentiate yourself from? And finally I guess when do you think we might see a product design or a prototype event prior to launch?

[Shai Gozani:]

Yes, we are not. So a great question, so there are a number of entry level test devices that you can find in chain drug stores like the ICHOT product as well as others. We are not really competing in that market. We are really competing in the premium chronic pain treatment market. So we are -- we are a premium product to those both in price and in functionality. Bob Wasserman - Dawson James Securities Okay.

[Tom Higgins:]

And I think it rather than getting into all those details right now, we will by the end of the year give. I suspect by the end of the year we will have or early in 2015, we will have a Web site and a lot of details about the product. At its core is the SENSUS technology. What we have done working with IDEO is consumerize it in terms of the types of materials, the form factor, the user interface it will have, it has Bluetooth, it will have a smartphone app to help personalize the pain control, so it’s really a high-end wearable pain relief device think of it more in the wearable technology sector than the low-end pain sector. And I think as we get through the balance of this year we will provide a lot more detail there. I think the key point is the technology is a validated SENSUS technology, but the shell and some of the functionality around it and the -- it is integrated to a digital ecosystem then I think we will create a lot of value for the consumer. As far as pricing, those sorts of things we are still working through that, but broadly speaking we are talking about a device that would be in the $200 plus minus range, we are just doing a lot of work but just to kind of put a stake in the ground it's in that vicinity could be a little bit more, could be a little bit less but just to kind of frame it. So think of it again more like a high-end wearable device than a short-term pain-to-use device. As far as timing, we are very confident we are going to launch in 2015. We are still working through the exact timing and the build. So we are building up our supply chain and the commercial strategy and so forth. So as we get to the rest of this year we will have more details on that time but it will be in 2015.

[Operator:]

(Operator Instructions) Your next question comes from the line of Jennifer Lane, Webster Court Asset Management. I am afraid her line has just been dropped down. (Operator Instructions) We do have Jennifer Lane back on the line from Webster Court Asset Management. Please go ahead. Jennifer Lane - Webster Court Management Hi, good morning. I am not sure if you heard me but congratulations on a great quarter. I have a few, hello?

[Shai Gozani:]

Yes, we are here. Jennifer Lane - Webster Court Management Okay, great. I have a few questions about DPNCheck. You had very strong growth in the U.S. Can you talk a bit about what accounted for that growth and what are you looking for, for year-end next year? And then my another question regarding DPNCheck I think I’d get it in, just in case I drop off is can you talk about the launch in Japan, why it's such an attractive market and are there any other countries that you are considering entering with Omron outside of Japan particularly the Asian markets? Thanks.

[Shai Gozani:]

Sure, thank you for the question. So as I think you pointed out, the U.S. DPNCheck market is primarily our Medicare Advantage accounts which is primarily UnitedHealthCare Optum which is the sort of the practice management arm of UnitedHealthCare. The growth really represents increased adoption, the growth in the third quarter of this year versus third quarter of last year primarily represents increased adoption and penetration into UnitedHealthCare as more and more of the practice groups that are under the Optum umbrella have had success with DPNCheck and started to spend more broadly within that Optum umbrella, so that's primarily the growth. There is a seasonality to the Medicare Advantage business which is, that tends to -- and generally speaking it tends to increase during the course of the year because of the risk adjustment process where all the data has to be provided to CMS by the end of the year. So there is an incentive to obviously get things done and naturally things get delayed and the third and fourth quarters tend to be the strongest quarter. So though some of our customers have been doing this for a while, so they've figured out ways to spread it out of the course of the year, but generally speaking the growth is increased adoption with the UnitedHealthCare. As far as the Japan launch, Japan is a very attractive market for us. One, it's essentially a wealthy country, it has a very strong healthcare system, they have a relatively high-rated diabetes and a strong focus on prevention and early detection of complications of diabetes. So DPNCheck fits very well into that. There is very-very strong support for DPNCheck within the thought leaders and it's something very unique about that market, which is, it's the only market where there is an approved drug which is called [KINDAC] or the generic name is the [PowerStep] to actually treat diabetic neuropathy. So it’s a perfect essentially a situation for a device like DPNCheck both in terms of the right setting, there is reimbursement and there is a very clear use of the data which is to put people on therapy. So that's an idea and we have a very strong partner in Omron Healthcare and that's their home market. We have -- the next market and that we are looking at and we've already started to pursue and partnership with Omron Healthcare in China. We are well into the regulatory process there again in partnership with Omron. China has over 100 million diabetics, also a very growing level of sophistication in their healthcare system and a strong orientation to data driven medicine. So we fit in very well into that. So that's the focus with Omron and our focus for the remainder of -- our next focus within Asia.

[Operator:]

Sir, you have no more questions at this time. I'd like to hand the call back over to Dr. Gozani for closing remarks.

[Shai Gozani:]

Thank you very much and thank you for joining our conference call today. We are encouraged by our progress in the third quarter, we are seeing positive momentum across the business and we look forward to continuing these trends over the balance of the year. Thank you very much.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.