NeuroMetrix Inc (NURO) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the NeuroMetrix Third Quarter 2006 Earnings Conference Call. My name is Steven and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will facilitate a question-and-answer session toward the end of the conference. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to Mr. Brad Smith, Chief Financial Officer.

Thank you and good morning everyone. First, I want to apologize to everyone for the delay in getting the conference call started. We had a technical glitch at Thomson Financial.

Before we begin, I would like to briefly discuss the use of forward-looking statements on this conference call. Statements we make on this call may include 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 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 our actual results may differ materially from those indicated by these forward-looking statements, as a result of a number of important factors including those set forth in Item 1-A, Risk Factors, of our annual report on Form 10-K for the year ended December 31, 2005 and our quarterly reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006 and our other SEC filings. NeuroMetrix does not intend to and undertakes no duty to update the information disclosed on this conference call.

Additionally on this conference call, we may refer to certain non-GAAP financial measures such as non-GAAP adjusted net income and non-GAAP adjusted diluted net income per share. You can find a tabular reconciliation of these non-GAAP financial measures to the most directly comparable GAAP numbers in our earnings release on our Web site at www.neurometrix.com under the Investors tab.

I would now like to turn the call over to Dr. Shai Gozani, our CEO.

Thank you, Brad, and good morning everyone and I would also like to extend our apologies for the glitch this morning. So, I would like to welcome you to the NeuroMetrix third quarter 2006 conference call. I'm joined today by Gary Gregory, our Chief Operating Officer; Brad Smith, our Chief Financial Officer; and Nicholas Alessi, our Director of Finance. I will start today's conference call by providing you with an overview of NeuroMetrix and some brief highlights of developments during the third quarter of 2006. I will then turn it over to Gary for a discussion of our key sales and marketing metrics and updates, and Brad for a summary and analysis of financial results.

NeuroMetrix is a medical device company advancing medicine through design, development and sale of proprietary products used to diagnose neuropathies, which are diseases of the peripheral nerves and parts of the spine. Neuropathies are frequently caused by or associated with diabetes, low back and other spinal disorders and Carpal Tunnel Syndrome, as well as other clinical disorders. Furthermore, as announced earlier this week, with an exclusive license for the DigiScope product from EyeTel Incorporated, we have now expanded our focus to include neurovascular disorders such diabetic retinopathy.

Our neuropathy diagnostic platform called the NC-stat System is used in over 4,500 physician practices and clinics, representing approximately 13,500 physicians throughout the United States. Our technology enables a broad group of physicians from internal medicine, endocrinology, rheumatology, family medicine, orthopedic surgery, pain medicine and other specialties to objectively and accurately diagnose neuropathies at the point of service. Our physician customers are finding that their ability to diagnose neuropathies earlier and more accurately is positively impacting the way in which they manage their patients and make important therapeutic decisions.

We believe the market opportunity we are addressing could be $1 billion or more annually in the US alone, given the millions of people with diabetes, spine problems and Carpal Tunnel Syndrome. There are now over 21 million people in the United States with diabetes and another 41 million who are pre-diabetic. Neuropathies affect 60% to 70% of people with diabetes and lead to pain, foot ulcers, amputation and in the elderly, a significantly increased risk of falls. The accurate confirmation of diabetic neuropathy and other neuropathies in people with diabetes leads to more effective patient management and treatment decisions and ultimately results in improved clinical outcomes.

Low back and leg pain and Carpal Tunnel Syndrome, which together account for over 10 million physician office visits annually in the US are also closely associated with nerve damage and effective clinical management of these condition often requires accurate diagnosis of neuropathies. The NC-stat System is improving the way in which thousands of physicians provide care for their patients.

Key highlights for the third quarter of 2006 include the following. We generated revenues of 15.3 million, an increase of 68% compared with the third quarter of 2005. Our gross margin percentage was 75.5% in the third quarter of 2006, an improvement over the prior year same quarter. We improved our bottom line results in the third quarter with net income of 2.4 million and have positive cash flows from operations of 3.1 million.

The number of customers using the NC-stat System and the usage of the NC-stat System continued to experience growth on a year-over-year basis. As I mentioned previously, we now have over 4,500 active customers and approximately 302,000 biosensors were used by our customers in the third quarter of 2006, which represents a 61% year-over-year growth rate.

We've also continued making progress on important products in our R&D pipeline. We are now in the late stages of our multi-year third-generation diagnostic platform development efforts. This product is called NC-stat Advance and we believe it represents a major engineering, scientific and clinical advance in the assessment and ultimately treatment of a range of neuropathies. We have begun production of NC-stat Advance with our manufacturing partner Sunburst EMS. Furthermore, we have completed or in the process of completing electrical and safety testing and are currently planning to file a 510(k) with the FDA by the end of the year.

NC-stat Advance has important innovations and features, which reflect our engineering expertise applied through our deep understanding of customer and market needs developed through 750,000 patient studies over seven years. Included among these innovation and features are key technical and engineering specifications that we believe exceed those of all electro diagnostic devices on the market, novel signal processing algorithms that provide physicians with very high quality and detailed nerve conduction data to incorporate into their diagnostic assessments. In fact, we have already filed two patents on these algorithms and several more are in the pipeline.

NC-stat Advance also has a user interface consisting of a high-resolution color touch screen that allows physicians and their clinical staff to conduct accurate nerve conduction studies and other electro diagnostic tests in an even more straightforward manner. Consistent with the current NC-stat, this user interface provides for real-time data review including waveforms. In addition to providing backwards compatibility with our current biosensors, NC-stat Advance will support several new nerve conduction biosensors to be released in 2007 and 2008. Furthermore, NC-stat Advance will support the performance of needle EMG studies. This is an important progression for our Company as we integrate the accurate NCS technology in the NC-stat with the needle EMG for the first time within this platform. We are very enthusiastic about this expanded capability in particular because it will support our planned expansion into the neurology market.

We had several additional peer review publications including in diabetes care, which is published by the American Diabetes Association, the ADA, and is a leading peer review journal of clinical research into diabetes. The study demonstrated the equivalence of the NC-stat to Nerve Conduction Studies performed in an academic neurology laboratory in patients with diabetes. Several additional studies were accepted for publication during the quarter, including a couple that evaluate the performance of NCS with the NC-stat in several thousand internal medicine primary care physicians. We expect these studies these studies to be in print within next six months.

Finally, as previously disclosed, during the second quarter of 2006, we received a subpoena from the Office of Inspector General of the Department of Health and Human Services requesting documents from us in connection with investigation of potential violations of the federal Anti-Kickback Statute and False Claims Act. We are fully cooperating with OIG and have provided them with the information they requested. The government has not instituted proceedings in any way against us in connection with this matter and we are not aware of any further developments pertaining to the OIG matter.

I will now turn it over to Gary Gregory, who will outline our performance as reflected in certain key operating metrics.

Thank you, Shai. I want to reiterate our thanks to each of you for joining our call today as well. As Shai has noted, we are coming off another quarter that demonstrates the continued progress of our Company towards our objective of establishing the NC-stat System as the standard of care and NeuroMetrix is the leading company in neuropathic diseases.

In Q3 2006, we expanded our customer account to 4,518 active customers, demonstrating a continued ability to secure and establish new customers across the internal medicine primary care segment and the specialty care segment. This represents customer growth of approximately 50% in our active customer count over the past 12 months alone. Testing with the NC-stat System in the third quarter of 2006 grew year-over-year by approximately 61% to 302,200 biosensors compared to 187,900 in the third quarter of 2005. Through this performance, our average customer continues to deliver approximately $9,400 in annual biosensor revenue based on their usage during the third quarter of 2006. The Q3 number is slightly down on a sequential basis due to some seasonality experienced in the third quarter.

The distribution of testing by our customers in the third quarter of 2006 is as follows. 67% of total testing was performed by our internal medicine primary care base of accounts and 33% came from within our specialty care segment. Here, 38% of total testing within the specialty care came from the orthopedic market, which represents 12% of the total testing. Endocrinologists and rheumatologists represent over 26% of our specialty care physicians and 9% of our total testing volume, and over 27% of total testing within the specialty care segment were performed by other specialists including occupational medicine, pain management, neurology and physiatry.

Testing within the primary care market which we define solely as internal medicine and family practice clinics grew by 108% year-over-year, illustrating our progress in this market segment. Total testing in this segment grew from 98,000 biosensors to over 203,000 biosensors.

Testing within the specialty care physician segment, which includes all other physician specialties, including endocrinology, rheumatology, orthopedics, occupational medicine, pain management, neurology and physiatry, grew by 10% year-over-year. Total testing in the specialty care segment grew from 88,500 tests to 99,000 tests.

So to summarize, overall testing grew by 61% year-over-year to 302,200 biosensors. This growth was manifested across all of our key market segments, which validates our continued progress in both the primary care and specialty care markets.

Of additional importance, new NeuroMetrix customers delivered annualized revenue of over $16,200 per account during the Q3 2006 based on their usage. Although this is flat sequentially from the past quarter, we are pleased with the summer results as it illustrates that our new customers continue to adopt and utilize our technology within the practice.

As a final note towards our progression in customer testing, testing for diabetic peripheral neuropathy and low back and leg pain now represents approximately 61% of the total testing in the third quarter of 2006, compared with 50% one year ago. This position which is split roughly 55% for low back pain and 45% for DPN, details the Company's continued progression from our original foundation built upon testing for Carpal Tunnel Syndrome to our present position of allowing all physicians to test for and more effectively diagnose patients who present with major clinical conditions such as hand and wrist pain, low back and leg pain and diabetic neuropathy with the NC-stat System.

On an organizational front, we are considering our plans for expansion of our field sales organization, now totaling approximately 46 highly experienced regional sales managers and three sales directors. We plan to make a decision about expansion during the fourth quarter of 2006. We also now have over 1,100 independent sales agents on the front line who have been trained in selling the NC-stat System and are calling on physician practice groups to generate qualified sales leads for our sales team. This extension of our sales organization is a key component of our market approach, which allows us to better secure and service our customers.

In April of this year, we signed an agreement with Physician Sales & Services to act in a lead generation and service capacity for NeuroMetrix. PSS, as you may know, is the national distributor with over 650 sales reps selling a broad array of products to physician practice groups. We completed the training of the PSS sales force in the third quarter of 2006 and we have been rapidly building our mutual business with PSS. We are enthusiastic about the strong potential this relationship holds for our business. And to illustrate, we just participated in their national sales meeting as a focus vendor. We reviewed our strong success with their entire field team, including a noteworthy fact that nearly one out of four PSS reps are already in the game and have sold an NC-stat System with their NeuroMetrix region manager.

On the international front, we are finalizing our research on the reimbursement landscape for performing NCS tests and look forward to providing an update to the market in the near-term. At present, we remain focused on the US opportunity as we estimate that we have only reached approximately 5% of the potential US market.

We wanted to cover some basic information which may offer some insights towards the reimbursement landscape. First and foremost, the NC-stat System is a FDA-cleared technology that is supported by strong language held within our FDA clearance. And I quote, "Clinical data submitted in the 510(k) demonstrates the nerve conduction measurements obtained using the NC-stat System are comparable to those obtained using conventional nerve conduction measurement equipment." As detailed here, the NC-stat System performs standard nerve conduction measurements.

This position is also further supported by over 40 published medical journal articles, abstracts and scientific posters, which detail the accuracy, validity and utility of the NC-stat System. To illustrate the portfolio of this published work, we cite the recent publication in Diabetes Care, where the study authors concluded that NC-stat System has excellent diagnostic accuracy for detecting electro physiological abnormality in patients with diabetes.

Furthermore, as reported by our customers, we believe the technology has been routinely reimbursed by over 600 payors, including all Medicare carriers and nearly all commercial and worker's compensation payors throughout the nation. Several Medicare carriers have draft LCDs or local coverage determinations, which includes select potential concerns for NeuroMetrix, which if implemented as a final policy could adversely impact the reimbursement for the NC-stat. One Medicare carrier First Coast or FCSO recently implemented an article which indicates that customers must bill for NCS procedures performed using the NC-stat under CPT Code 95999. As such, we have been informed that our customers can still perform medically appropriate tests, submit their claims electronically and seek reimbursement under this code.

Another Medicare carrier, Cigna, has issued a draft LCD for NCS test recently. And in our review with Cigna, we noted that this does not include any reference to the NC-stat System. Of course, this does not surprise us, as the NC-stat System performs standard nerve conduction measurements. Our concern with the draft is that if it implies that needle EMG should be performed with the majority of nerve conduction studies, we believe that the decision to perform NCS and/or needle EMG should be left up to the physician's clinical judgment and also supported by the evidence-based medical guidelines.

Finally, we are working with these payors to ensure that they understand our product, the nature of our FDA approval position, our array of clinical articles detailing the equivalence of the NC-stat to other NCS equipment and also to ensure that they hear from our customers who use the NC-stat as a valuable asset to advance their patient care. We do not plan on commenting on this conference call about our strategy with regard to specific payors. However, we do note that we are working with experts in the field to navigate through these reimbursement challenges.

On a very noteworthy front, as Shai has mentioned, we are pleased to announce our new exclusive license agreement with EyeTel Imaging. The agreement grants NeuroMetrix an exclusive license to market, brand, sell and service EyeTel's DigiScope technology and business throughout the physician office arena. We view this as a major advance for our Company. It transforms NeuroMetrix into a major platform foundation, where the Company progresses from allowing all physician to diagnose and treat neuropathies to a Company where we allow physicians to diagnose and treat neuropathies and neurovascular diseases. The business relationship is initially and primarily founded upon the DigiScope, which was developed in collaboration with the Wilmer Eye Institute at Johns Hopkins and is an FDA-cleared diagnostic device that primary diabetes care physicians, which includes primary care, family practice, internal medicine and endocrinology, can use for the early detection of diabetic retinopathy.

As background information, it's estimated that 21 million in the US have diabetes. Diabetic retinopathy, which is a major complication of diabetes, is a silent, progressive and debilitating condition. Furthermore, it's the leading cause of blindness amongst working-age Americans. Virtually, all patients with diabetes will develop some level of diabetic retinopathy during the course of their lives. Fortunately, blindness due to diabetic retinopathy can be prevented in the vast majority of patients through early diagnosis by annual dilated eye exams and appropriate intervention such as laser procedures. For this reason, the American Diabetes Association and many prominent commercial payors recommend that patients with diabetes receive annual dilated eye exams. Despite this recommendation, less than 50% of patients with diabetes have annual eye exams.

The DigiScope addresses this clinical problem by providing primary diabetes care physicians with a powerful gold standard technology at the point of care. Based upon the present and expanding patient demographic, confronting patients with diabetes, we estimate the annual US market opportunity exceeds $750 million annually.

EyeTel's current business experience is to generate between $10,000 and $12,000 in revenue per account in one year alone. This is built off of a $3,000 to $4,000 installation fee, and $150 per month in what is essentially a rental fee and $45 per retinal scan fee, with the retinal scan revenue reoccurring in successive years. With our sole responsibilities of sales, marketing, service, billing and collecting for this business, NeuroMetrix plans to recognize complete revenue recognition, while splitting 50% of the installation and retinal scan fees with EyeTel. Clearly, this is accretive to our business and we believe it will drive approximately 25% operating margins, which is very consistent with our long-term goals.

EyeTel Imaging which is a venture backed company, whose investors including Bain Capital, Radius Ventures and Lilly Ventures, came to NeuroMetrix because of our proven success in the market, our highly capable sales force and our unique ability to market game-changing proprietary technology. The synergy between our present product portfolio and the DigiScale platform is overt. The technology is a firmly aligned to our market focus towards endocrinology, internal medicine and high-volume primary care practices, featuring a large number of patients with diabetes.

Furthermore, the best-in-class skills and processes we have developed to market and sell the NC-stat are firmly aligned to the requirements to drive appropriate clinical utilizations in the DigiScope throughout the marketplace. The technology is a powerful [follow-on] position, and product through our sales force. It will allow our highly-talented field organization to bring even greater clinical value to our customers while we capitalize on our expansive base of physician relationships.

So, to summarize, we believe that securing of this exclusive licensing agreement with EyeTel represents an important advance for our business. Through this agreement, NeuroMetrix will significantly expand its product offering and the clinical value we deliver to primary diabetes care physicians. With our best-in-class market approach and field organization of nearly 50 sales professionals, NeuroMetrix looks to deliver this innovative diagnostics solution to physicians throughout the nation, including our current base of well over 13,500 physicians across more than 4,500 practices.

In closing, we are confident in our position as the market leader in this arena, remain very enthused by the strong advancements we have made as a Company and look forward to reporting back on future developments, as we continue to expand our standard of care within the marketplace. I will now turn it over to Brad Smith, who will discuss our financial results for the third quarter of 2006.

Thank you, Gary. Thanks to everyone for joining us on the call. Here's a recap of our financial performance for the three-month period ended September 30, 2006, our third quarter and for the nine-month period ended September 30, 2006.

Total revenues for the third quarter of 2006 were $15.3 million compared with revenues of $9.1 million for the third quarter of 2005, representing an increase of 68%. Biosensor revenues totaled $13.1 million or 86% of our total revenue in the third quarter of 2006 and diagnostic device revenues totaled $2.2 million or 14%. This compares with $8 million of biosensor revenues in the third quarter of 2005 or 88% of total revenue, and approximately $1.1 million of diagnostic device revenue or 14% of total revenue.

The increase in revenues in the third quarter of 2006 is a result of the increase in the number of active customer accounts to over 4,500 and the expansion of our direct sales force.

Revenues for the nine months ended September 30, 2006 were $41.1 million compared with $24 million for the same period in 2005, representing an increase of 71%. Biosensor revenues of $35.4 million represented 86% of total revenue while diagnostic device revenues of $5.7 million represented 14% of total revenue.

During the third quarter of 2006, overall gross margins were 75.5% compared to 74.6% in the third quarter of 2005. Looking at gross margins a little more closely, the biosensor gross margin was 74% in the third quarter of 2006 compared to 74.5% in the third quarter of 2005. The average selling price was relatively unchanged from period to period, approximately $35 per biosensor. But, in the quarter the gross margin was modestly impacted by the mix of biosensors sold.

Device gross margins for the third quarter of 2006 were 84.6% compared to gross margins of 75.2% in the third quarter of 2005. The increase in device gross margin percentage was due to an increase in the average selling price of the devices, and also a modest reduction in our cost of goods.

Gross margins for the nine months ended September 30, 2006 and 2005 were 75.7% and 74% respectively. Our biosensor gross margins year-to-date through September 2006 were 74.6% compared with 74.1% for the same nine-month period in 2005. Device gross margins were 82.4% year-to-date in 2006 and 73.8% for the nine months of 2005. And again, increased average selling prices for the devices, offset by the changes in the mix of biosensor sales attributed to the increased gross margin.

Total operating expenses in the third quarter of 2006 were $9.5 million compared to $6.2 million in the third quarter of 2005. Total operating expenses for the nine months ended September 2006 and 2005 were $27.9 million and $18.2 million respectively. The increase in operating expenses during the third quarter of 2006 and for the nine months ended September 2006 was driven by the expansion of our sales force and was also impacted by recognizing stock-based compensation expense of $635,000 in Q3 2006, and $2 million for the nine months ended September 2006. And it is the result of the adoption of FAS 123(R). By comparison, stock-based compensation was only $112,000 and $260,000 in the same three and nine-month periods in 2005.

Our net income calculated on a GAAP basis for the third quarter of 2006 was $2.4 million compared to $769,000 for the third quarter of 2005. Excluding stock-based compensation expense of $635,000 in the third quarter of 2006 and $112,000 in the third quarter of 2005, our non-GAAP adjusted net income was $3 million in the third quarter of 2006 compared with $881,000 in the third quarter of 2005.

Net income on a GAAP basis year-to-date through September 2006 was $4.1 million compared to $133,000 year-to-date in the same period of 2005. Excluding stock-based compensation expense of $2 million and $260,000 for the nine months respectively September 30, 2006 and 2005, non-GAAP adjusted net income was $6.1 million for the nine months ended September 2006 compared with just under $400,000 for the nine months ended September 30, 2005.

Our basic and diluted net income per share was $0.19 and $0.18 respectively in the third quarter of 2006 compared to basic and diluted net income per share of $0.06 in the third quarter of 2005. Excluding stock-based compensation expense, the non-GAAP adjusted diluted net income per share was $0.23 in the third quarter of 2006 and $0.07 in the third quarter of 2005.

Basic and diluted net income per share was $0.33 and $0.31 respectively for the nine months ended September 30, 2006 compared to basic and diluted net income per share of $0.01 for the same period in 2005. And again, excluding stock-based compensation expense, the non-GAAP adjusted diluted net income per share was $0.46 for the nine months ended September 30, 2006 and $0.03 for the same period in 2005.

I'd like to now shift focus over to the balance sheet. Our cash, cash equivalents and investments totaled $38.1 million as of September 30, 2006 compared with $32.3 million as of the end of 2005. During the third quarter, we had $3.3 million in positive cash flow from operations. And for the nine months ended September 2006, we had positive cash flow from operations of approximately $5.1 million.

Our working capital position as of September 2006 was $42.4 million compared to $34.7 million as of the end of 2005. The large increase in working capital, of course, is attributable to the increase in our cash and investment balances as well as increases in accounts receivable as a result of the growth in our business.

Our DSO was 42 days as of September 2006. That compares with 40 days for all of 2005. And our inventory turn for the year was 5.2 in the third quarter compared to 4.5 in 2005. And we continue to have no long-term debt on our balance sheet as of September 2006.

So, that concludes the financial update portion of the conference call and I'd like to now turn it back over to Shai.

Thank you, Brad. We are very pleased with our third quarter 2006 performance and consider it further validation of the in-office neuropathy diagnostic opportunity. Our neuropathy diagnostic solution is rapidly becoming a standard of care throughout the marketplace. The NC-stat System has FDA clearance as conventional instrumentation for the performance of nerve conduction studies, which serve as the gold standard method for evaluating neuropathies. The NC-stat System meets or exceeds the most stringent technical specifications for this type of medical instrumentation.

Furthermore, the diagnostic accuracy and clinical utility of the NC-stat System has been demonstrated in over 40 published peer reviewed articles, abstracts and posters. The NC-stat has also been used in FDA registration trials for pharmacological agents and in large-scale epidemiological studies encompassing thousands of patients sponsored by the NIH, the National Institute for Occupational Safety and Health, and the CDC. It is for all these reasons that the NC-stat System has become a standard of care in the evaluation and management of patients at risk for neuropathies.

In conclusion, we have now delivered nine consecutive quarters of strong top line growth. We have transitioned the Company to profitability and cash flow positive. Our customer base has grown approximately 50% in the last 12 months to over 4,500 active accounts, representing an estimated 13,500 physicians at the end of the third quarter of 2006. And we have advanced product development efforts in many areas including our third-generation device that I described earlier.

We look forward to keeping you updated on our progress as we continue to build the standard of care and expand into additional diagnostic and therapeutic applications. We believe that we are establishing NeuroMetrix as the premier brand in the assessment of neuropathies and neurovascular disorders, with a goal of ultimately being able to deliver products to treat neuropathies and related conditions.

As we transition to the question-and-answer session, I would like to note that we are pleased to discuss the third quarter 2006 business details and relevant metrics. However, we continue to maintain a policy of not providing specific guidance on future financial performance. We look forward to your questions.

[OPERATOR INSTRUCTIONS] And our first question comes from Bill Quirk.

Thank you. Bill Quirk, Piper Jaffray. Good morning and congratulations on the strong results guys.

Thank you Bill.

Thanks Bill.

Shai, firstly, appreciate your commentary around the NC-stat Advance. Just to make sure I heard you correctly, this device will accommodate needle EMG?

That is correct, Bill. It is consistent with our policy of providing all options to all physicians. So, this device will support needle EMG.

And then just a secondary question on that. Will a primary care physician be able to conduct this portion of the study or is this largely for the specialist market?

Bill, this would be primarily focused on the specialist market.

Okay, understood. And then, just touching base real quick on the reimbursement side. Obviously, there are a couple of policies out there, a couple of others in draft. Just wanted to see what type of feedback you are getting from your client base. Are we seeing any type of impact here? Are we continuing to see good reimbursement, etcetera? Thanks.

Sure, Bill. I will take that one. The reimbursement landscape today remains straightforward for the vast majority of our customers. And if you look at the areas where we have some draft LCDs in question, when you really distill it, it's a relatively small portion of the country. As importantly, it's only for Medicare, which we estimate to be less than 30% of the total testing that is done with the NC-stat System. So, as a broad sweeping statement, the landscape on reimbursement for our customers is straightforward and it remains so for nearly all of them.

As importantly and as you all know, many of these areas of question are just that -- still in question. And the LCDs are just that draft and not implemented. So, that gives you a little bit of a flavor but I think that the landscape has certainly got some elements in front it before us but nothing has been implemented and we have already given you some good flavor I believe on our view on this and how we are approaching it.

Understood. And then maybe just one last question on that. Given the wealth of peer reviewed articles that you have, both published from members from NeuroMetrix as well as outside parties, many of which come to same conclusion, i.e., 95% correlation with neurologists result. Presumably Gary, you guys have a pretty strong body of clinical data to go back to the payors. Can you just tell us -- I presume that they have been pretty receptive to this, if memory serves, particularly on the Medicare side, they have a duty to review pretty much all the peer reviewed literature that are out there?

There is clearly a requirement that exists for all CMS carriers to follow evidence-based guidelines in their decision making. As we have highlighted here, not only do we have an FDA approval and position that is very robust, but we also have, as Shai has indicated, over 40 published articles detailing the strong accuracy, validity and utility of the NC-stat System. There is no doubt if you are looking at evidence-based requirements that what NeuroMetrix and the NC-stat System delivers to any meeting that we might have with any individual whether it is a physician or a payor. You have to take full note of the portfolio and plethora of information detailing our technology and the strength of it.

Good to hear. Thanks guys.

Our next question is from Ryan Rauch of Jefferies.

Hi guys, congratulations on a good quarter.

Thank you Ryan.

Thank you Ryan.

It will get better, don't worry guys. I have just three quick questions. One, it seems to me this -- Shai, you tried to give a little bit more information but in typical fashion, I mean, you didn't give us probably as much as some would like. Can you explain how the next-generation NC-stat or the Advance and the next-generation biosensor will potentially align your interests with the neurologist? I think Bill's question sort of alluded to that but that seems to be the biggest issue here as a group of physicians who are clearly out to protect their take-home pay. And we are just curious how -- what exactly is the next-generation biosensor, how will that maybe get neurologists interested in your core technology? And do you think this next-generation NC-stat could potentially help you with some of your reimbursement discussions because you can perform needle EMG there as well?

Our approach in the next-generation system is to continue to expand its capabilities and one of the core directions in which we are expanding it is by supervision of, or allowing physicians perform needle EMG with that system. So, in that respect, it might be -- we would expect to be much more attractive to many neurologists and physical medical physicians who routinely do perform needle EMG. So, that is our thesis there. As far as the utility of this product, I mean, it is an extension of the NC-stat, it builds on the NC-stat and with the addition of needle EMG, we think it fulfils one of the key missing links for us in terms of getting into the neurology market. But, otherwise, we really see it as a continuation of our current platform.

As far as providing further detail, we are somewhat limited, Ryan. We are in the process of filing a large amount of intellectual property, some of which has been done, some of which is in process. So, we are somewhat limited in that respect.

Yes, the color I would add to it is that, as Shai has already indicated, the product is clearly a game changer and what it represents to our ability to effectively and appropriately market the utilization of our technology to physicians, the testers who utilize our technology and for the entire practices, the more advantage definitely [will be] a significant advance. Hence the name NC-stat Advance in our product portfolio and approach to market.

But I guess Shai, I mean the question on the day is do you think, I mean the noise surrounding your Company is clearly reimbursement. Will these new products, especially the NC-stat Advance, it seems to me could help you, as one of the issues is especially [FisCo] thinks you have to be more technologically advanced to use or to diagnose using the needle EMG. But with this product, will it give do you think carriers the confidence that primary care physicians can perform with the NC-stat Advance the same tests as with a needle EMG? I mean do you see what I am saying? Do you think this could help you going forward or do you not look at it that way?

We don't really look at it that way, Ryan. I think I know what you are getting at. Basically, the NC-stat System that's on the market performs gold standard nerve conduction studies. NC-stat Advance continues to build on that, but in no way does the current system have anything lacking. This is just a continued advance in -- some of you maybe overusing that term somewhat, but a 'continued advance' in the technology. It's got some additional capabilities, provides additional information, will support additional types of testing including needle EMG as well as other types of neuropathy tests which will be I think very attractive to the broad marketplace. We are not describing those in detail at this time, but we will over the next month.

So, this is not an attempt to change the reimbursement landscape by any means. The reimbursement landscape is what it is. This is a continued progression of our technology and continued innovation for the Company.

And then Brad maybe to ask you a question, your number of new accounts increased nicely in the quarter. I think it's one of the larger increases you had in a while or that I can remember, up to over 4,500. I mean a lot of these draft decisions that everyone is concerned about came out in June. And your sales force, maybe this is a question for you as well Gary, I mean what are your 46 people telling you in the field? Are the physicians themselves concerned over this reimbursement noise? Because the amount of new customers you brought on from June to now, the third week of October is significant. So, I am just curious, what are you hearing in the field with respect to all this noise? And it sure doesn't seem to be impacting the amount of new accounts or customers at all.

A strong observation Ryan. I will take that. The first thing is -- just so we are all on the same page. That growth in active customer accounts was just for the quarter. It was July 1 through September 30. So, your observation there and the continued progression of our base of customers who utilize our technology is spot on.

The second element is that our customers, first of all, the noise that we are referring to is not across the country, it is in select markets. And even in select markets, the noise is around draft LCDs and not LCDs that have been implemented. Our technology lists for $4,995 and the physicians who lock in on it say, "This advances my care clinically. And while we are at it, the capital investment is not so overwhelming that I won't recoup the investment in a reasonable amount of time."

So, the value proposition remains as robust as ever in the major portion of the country and even in areas where we have these draft LCDs in place, they are merely that, draft LCDs, at this point in time. So, I think that our sales force is as bullish as ever and has been as productive as ever and that's a strong testament to not only the technology we have, but the value that we deliver most notably on a clinical outcome basis for our customers who take advantage of this testing on a day-in, day-out basis.

Okay. Then two final questions. Is it fair to say, you are working on more business development deals like the one you announced yesterday that could leverage? I mean you have 13,000 physicians, 4,500 accounts and 46 sales people and a 1,100 independent reps. It seems like that's a pretty strong distribution network and fertile ground for cross-selling. Is it fair you hope to have more of these announcements going forward, like you had yesterday?

I think the safe thing to say -- well, first and foremost, thank you for recognizing. That's one of the things that we are so proud of in NeuroMetrix is that we have built this, for lack of other words, very, very strong Company. 4,500 practices, 13,500 physicians, nearly 50 highly-powered, highly-talented sales professionals, and a technology platform that is expanding and a business that is exuding operating leverage.

What I would offer is that the partnership with EyeTel Imaging makes a statement to, I believe, the entire market of a Company that came to NeuroMetrix and said, "We see what you have. We are very impressed with what you have. We want to partner with you." And we could not be more elated with what this does. I think what's important to note is that while we are very open to strategic alliances and business partnerships of this nature, and I think the EyeTel relationship makes a statement as to what we are doing on that front, what Shai has referenced is the power of this Company and that is our ability to develop and bring new and innovative products to market. And our product pipeline is as robust as ever and we are as excited about that as ever.

So, I think it's an "and-both" strategy, with a focus on our developing proprietary technologies, but also our radar screen is wide open as we consider and look at new opportunities to bring wonderful technologies to our customers.

Okay. And then finally, is it fair to say that -- I mean there has been some concern over your 10b5 and insider selling that at these levels, when exactly do your 10b5 plans exhaust themselves? And is it fair to say that they most likely wouldn't be renewed at current share prices? And thanks a lot.

Well, those are personal decisions, Ryan. We are not going to comment on that. But, thank you for bringing that up.

We are ready operator. Operator, are you there?

Our next question is from Jonathan Block of SunTrust.

Hey guys, how are you?

Good, thanks, Jon.

Hey, Jon.

Good.

Just a couple of quick ones. Number one, can you just touch trends in unutilized sensors in the quarter? I have it at about 19% of total sensors shipped and I think that has trended up slightly since 1Q. I am just wondering if it's a function of the strong customer adds that you have seen over the past couple of quarters.

Yes, you are absolutely right Jon. And if you look at this over the last say four to six quarters, it fluctuates up and down. But, it's in a range of [inaudible] quarters where it's been at this level. But, you are absolutely right in terms of the strength of customer accrual and that certainly being a factor.

Okay. And so, nothing there from PSS as well? Right, I just want to check that I have got it correct. In other words, PSS, the leads, etcetera, etcetera. But at the end of the day, it's you guys that are shipping all the biosensors.

Absolutely. We do not have any inventory in the middle of the channel. All of our product gets shipped directly from NeuroMetrix to our customer base.

Okay, great. That's very helpful. Just moving on to I guess a little bit of what Ryan touched on. Any slowdown that we have seen in some of these states with the negative drafts or at least out there? I mean I know it is a little bit early, we are probably only dealing with three or four months. But the customer growth has been tremendous in light of all these fears out there. If we sort of narrow it down to the couple of reasons that have negative drafts out there, is there a difference between Main Street and Wall Street would you say? Are the customer adds still strong in those particular regions?

The difference between Main Street and Wall Street can be very well pronounced at times. I think our Q3 results speak to that. We are not commenting specifically on market dynamics and our ability to grow in a select market under a draft LCD. But I think it is very safe to say that the CMS process is just that, a process. It's a draft LCD first. It's a comment period. It's a valuation of comments and then it's a direction by the carrier. And we have even seen draft LCDs come out where they go through the whole process and then they never act upon it and it goes away into the closet.

So, our physician customers see this all the time. They deal with many other technology platforms in many others areas of medicine, so I don't think that they are as potentially attuned to this on Main Street as may be Wall Street is. But, I would offer that the results speak for themselves and we remained focused on delivering clinical value to our customers on a day in, day out basis. And if we do that, our business will continue to move forward in an appropriate manner.

Okay, great. And just a couple more if I may. Share buyback at these levels, I mean here you are sitting with almost $40 million in cash at $3 per share. Any thoughts there?

That -- it's not in our current thinking. We feel that there are probably better uses of cash for a emerging and growth Company such as ours. But, we are always considering the best use of capital and we will always consider that as part of the equation. But, right now, we think that there are better uses of cash.

Okay, great. And just last one, your reimbursement team, how do they go about the challenge? In other words, if I'm on Neuro's reimbursement team and I have got Florida, what sort of mode am I in? Do I proactively point out a draft proposal that may be out there or like you said, Shai, is it just so part of the inherent CMS process that I may not go there? What are they told to say or not to say?

Our position whether it's in Florida or anywhere in the country is always to deliver the facts to our customer base. And our reimbursement team internally is counseled heavily on always delivering the fact and sticking to the facts and allowing the customer to be equipped with the information to be able to perform their own activities and billing practices. So, that's a requirement that we've held and continue to hold far from the past and well into the future.

Okay, great. Thanks very much guys.

Thank you.

Thank you.

Our next question is from Charley Jones.

Good morning guys.

Good morning.

First question, will the nEMG component be included in all your NC Advance Systems or will it be an additional software component that's available when requested? Is there any additional cost to that?

It would be an additional component and there would be additional cost. Our probable expectation is that we would not market it routinely and it would be something that will be -- it will be focused on the neurology and PMnR physical medicine market and those types of markets. But it would not be part of the normal package and there would be an associated expense with acquiring that additional component.

What's that expense looking like?

We have not determined that yet.

Okay. Are you planning any clinical trials for nEMG or any other multicenter postmarket studies for nerve conduction studies?

We have many studies in planning stages right now and others that are in process. The needle EMG capability is an exact replica of all devices on the market. Unlike nerve conduction where there are opportunities to automate, needle EMG is a very sort of manual and subjective process where you basically record the signals, you display them on a monitor and you feed them through a speaker so that the physician can hear the electrical activity of the muscle. You really develop the product based on technical specifications; there really isn't a study to be done. You really just demonstrate that you measure the signals appropriately and visualize them appropriately. So, there is probably not a lot to be done there from a clinical studies perspective.

Greg, I think a question for you. Can you share with us the important dates for the next steps from each of these four intermediaries that are at the Street here?

We would love to be able to share them with you but the reality is that the dates tend to fluctuate and as we mentioned earlier, we are really not going to get into the specifics of our strategies for any individual carrier or payor. But, the dates that have been put out there often close and I think that's based on the process that CMS is required to follow, which is issue a draft, gain comments, and then evaluate those comments. And I can tell you that from our vantage and from our understanding, when they issue these drafts, they capture a lot of comments from many parties and rightfully so. We do believe that TrailBlazer is assumed to issue a direction in November and if they adhere to that timeline, that will be obviously noteworthy for us. But, again, it only represents Medicare patients in the areas of TrailBlazer. So, we will see how that plays out.

Okay. Now, when will the EyeTel System be in your sales bag?

We are excited. It's, as of our announcement, it effectively is. We are going to train our sales force, select members of sales force, which our marketing team has aptly named them the visionaries, in the late-November timeframe. We have EyeTel's existing base of accounts that are going to be transitioned over to NeuroMetrix as the starting point. We do not anticipate a full market launch with our team until January of 2007.

Will you generate revenue, recurring revenue from those existing accounts?

We will.

Okay. Did you add any sales reps in the quarter? And how has the license agreement impacted your plan for 2007?

We are in the process of evaluating the expansion -- we did add a rep or two in a select area, kind of reshifted some boundaries. But, a real assessment of the expansion is underway at present. And the EyeTel relationship certainly has to be factored into our plans, as to where we go with our sales organization; no doubt it's an important advance to our portfolio. It creates a lot of opportunity and that has to be integrated into the overall plan.

Finally on that, our history has shown that we continue to progress in building our organization. And our view on the future remains in many respects as it has in the past.

Did any reps leave on their own in the quarter?

I am thinking here. No, we haven't -- our turnover is very, very minimal and I think that in Q3, there was absolutely no turnover. I am trying to think if there was any -- no, there wasn't to my knowledge any turnover. So, our focus with our sales team is that we've got a highly talented team. They are energized by our mission and the opportunities that we have in selling a new standard of care and they couldn't be more elated with the addition of major platforms such as the DigiScope to our portfolio.

Finally here, could you give us a little bit more detail on PSS, how they impacted your quarter? I think you said 25% of the reps actually generated a lead that generated a sale, or did you say 25% of the reps were trained?

No. Thanks for clarifying. We have trained the entire PSS team, plus or minus an individual or two. And over 25% of their representatives now have sold a unit and working in conjunction with a NeuroMetrix region manager. So, it's a strong start. But in many ways, we are just getting started and we look for this business relationship to flourish in the months and years ahead.

Thanks a lot guys.

Thank you.

Thanks, Charley.

Our next question is from [Marshall Levine].

Hi guys. Great job on the quarter and it looks like there is quite a lot of room to run here. I understand you are not going to do a stock buyback. You want to retain the cash for other uses I assume?

Yes, that would be correct.

Okay, makes sense. One thing is striking me as I am looking through numbers here, I see that your DSIs, you inventory days are down to about 71 days from 81 last year, which is really good. But assuming the price of your biosensors has been consistent for the past couple of years, backing into the number of sensors you have actually shipped versus the number that have been used, it looks to me like there is actually maybe some buildup of unused sensors in doctors' offices. I think the numbers -- it looks like there is about 27 tests worth of inventory in a typical doctor's office, up from 19 one year ago and up from eight the year before. Actually, it also looks like the number of biosensors shipped for installed units was 83 this quarter, down from 85 in the prior quarter. Are these numbers correct?

You are right. The inventory turn has actually increased. We have a target of maintaining two to three months of inventory here in our corporate headquarters. And that can vary from quarter-to-quarter. So, in terms of the inventory that we hold, that's the situation.

And our customer accounts -- again, I think we talked about the relationship between shipment and biosensor usage by our customers, and it's up and down quarter-to-quarter, but it has been in a fairly tight range over the course of, again, the last four to six quarters. And we really don't see a trend there that's different than what we have seen in the past.

I think there is something missing. If the price of the sensors has been the same for the past two years, which is what I think you said when we met a few weeks ago, it looks like you have shipped about 2.6 million probes over the last three years or was it four years and about 2.2 million have been used cumulatively. So, there is an excess of about 400,000 in inventory. Whereas one year ago this period, you had shipped a cumulative 1.37 million over your lifetime, 1.1 million had been used. So, it's an excess of 200,000. You just provide the number of doctors' offices, assume one of the four probes per test. Again, it kind of looks like there is an increase in the inventory in doctors' offices, as I said, up from 19 tests one year ago to about 27 now. So, I understand, maybe the inventory isn't building up in your own warehouse, but I am wondering if it's building up in doctors' offices?

First of all, thanks for taking the time to do a thorough analysis. From our vantage, you have to look at several things. Number one, the basic customer is growing, so that's going to have the aggregate number of biosensors out in the US expand. That's an important element.

The second element is that our customers, as always, have no incentives to load up on biosensors and have them sit on their shelves. These are private practices, typically with the individual who is ordering the test and interpreting the test and advancing patient care is also the individual who's responsible for signing the check. And they do not, I can assure you, load up on inventory when they are not utilizing a product. That's just not in the nature of physician practices and that's why our model is so simple. We are direct from NeuroMetrix to the customer with no, as Brad has mentioned, no intermediary in the channel to cause that relationship to go astray.

The last note is that we do have not only growing utilization amongst our customers, but we have a policy where if a customer utilizes the test and they gain a non-diagnostic result, they are credited for that biosensor. So, that may account for some of the analysis that you put into play here. But, fundamentally, the bottom line on all of this is, as Brad has indicated, our relationship between shipments and utilization has remained consistent with past quarters with our business.

And has there been any change in the average selling price either of the sensors or the diagnostic units?

Not at this point in time.

The sensors have very consistently been in average of $35, as a range, because we have a multitude of different biosensors. And the device pricing has gone up over the course of the last two to three years.

Okay. So, should we interpret this apparent -- this numerical buildup, this arithmetic buildup of inventory in the doctors' offices is just necessary for the growth rate in your utilization?

First of all, I would disagree with the assessment of buildup of inventory. That's not factual on a by-practice basis. If you take we are at 4,500 this quarter versus 4,100, yes, you are going to have more biosensors out there because they need biosensors to perform tests. But on a ratio basis, it's consistent with past quarters.

Thank you very much.

Thank you.

Our next question is from Juan Sanchez.

Good morning guys.

Good morning, Juan.

Good morning, Juan.

Can you guys talk on, a little bit on the timing and the magnitude of the expansion of -- on the next expansion of the sales force and also a little bit about the status of the self-delivering needles that you are developing?

Okay, I will take the expansion first, Juan. Thanks for the question. The first backdrop I would offer is, if you look historically at how the Company has grown over the past 4.5 years, we went from 7 to 10 to 16 to 22 to 30 to 46, which is approximately where we stand today. We have not decided when the next expansion would occur and what the level is. But, I think it's safe to say that albeit that we are only in 5% of the present potential US market opportunity, we in many respects are just getting started. So, it would make sense with the continued progression of our business to continue to expand our field sales organization.

So, I think we have to factor in all the good stuff which is where is our business today, what is the utilization per account, how many accounts do we have, what does the addition of the DigiScope and the EyeTel offering do to our portfolio, and as we have done in the many past quarters and years, assess where we are and where we need to go. And we definitely look to report on that in future quarters as we continue to build our business.

Juan, thank you for the question about the drug delivery platform. I don't have a specific update in terms of detailed milestones and so forth. However, the progress on the prototype device has gone very well. We are in late stages of that and our next step -- we hope to do that in the next several quarters -- is to move into preliminary clinical study in humans. So, it should move fairly rapidly. We hope to have a -- there are still some outstanding issues that could affect this timeline, but we hope that this a product that at least for the initial indication, which would be for Carpal Tunnel Syndrome, we would hope to see in the 2008 timeframe.

And this question is for Brad. How do you see the gross margins for the new NC-stat? What level do you think they are going to be about?

Initially, Juan, we anticipate they are going to be less than -- our margins this quarter were 84% on hardware that's outsourced to a third party. We do anticipate modestly lower margins on the launch. But, just like with the current device, we will leverage our activities there and we would anticipate over time those margins would come back. Now, whether they will get into the 80s or not, we don't know at this point. But, I would also tell you that given the fact that our device revenue is only about 14% of total revenue, the effect certainly will be muted.

I think we have come up to the one-hour time slot for the conference call. So, I would like to thank everybody for joining us today. And we look forward to updating you again early in the new year on our quarter four and year-end results.

Thank you very much.

Thank you everyone.

Ladies and gentlemen, this concludes the conference. You may now disconnect. Have a good day.