NeuroMetrix Inc (NURO) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 NeuroMetrix, Inc. earnings conference call. My name is Marcia and I will be your coordinator for today's call. (Operator instructions.)

I would now like to turn the call over to Mr. Joe Calo, Principal Financial Officer. Please proceed, sir.

Thank you, Marcia, and good morning, everyone.

Before we begin, I would like to briefly discuss the use of forward-looking statements on this conference call. The statements we make on the call may include statements which are not historical facts and are considered forward-looking within the meaning of 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 those forward-looking statements, as a result of a number of important factors, including those set forth in our earnings release issued earlier today; item 1a "Risk Factors" of our annual report on Form 10-K for the year ended December 31, 2007; and our other SEC filings. NeuroMetrix does not intend and undertakes no duty to update the information disclosed on this conference call.

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

Good morning, everyone. Thank you, Joe.

I would like to welcome you to the NeuroMetrix second quarter 2008 conference call. I'm joined today by Joe Calo, our Principal Financial Officer, and Mark Doucette, our Controller.

NeuroMetrix is a science-based medical device company advancing patient care through the development and marketing of innovative medical device products that aid physicians in the assessment and treatment of diseases and injuries of peripheral nerves and that provide regional anesthesia and pain control. Our goal is to develop into a diversified neurotechnology company with a primary focus on the peripheral nervous system.

We sell our products in the United States through a direct sales organization, which currently has 30 sales representatives. In international markets, we sell our products through a third-party distribution.

In this conference call, we'll discuss the following topics -- first, we'll review our financial and operating performance in the second quarter. Then I will update you on our neurodiagnostic business. Third, I will give an international sales update. Fourth, a product pipeline update, and then I'll conclude with a review of our business strategy going forward.

I will now turn it over to Joe Calo, our Principal Financial Officer, for a view of our financial results for the second quarter of 2008.

Thanks, Shai.

Here is a recap of our financial performance for the three months ended June 30, 2008, our second quarter of 2008. Total revenues for the second quarter of 2008 were $8.5 million, down 26% from the $11.5 million in the second quarter of 2007. Revenues in the second quarter of 2008 of $8.5 million were down 6.6% sequentially from $9.1 million in the first quarter of 2008.

Consumables revenues, which we previously labeled biosensor revenues, totaled $7.6 million, or 90% of our total revenue, in the second quarter of 2008, and medical equipment revenues, previously labeled diagnostic device revenues, totaled $512,000, or 6% of total revenues. This compares with $10 million in consumables revenues in the second quarter of 2007, or 87% of total revenue, and $1.2 million of medical equipment revenues, or 11% of total revenues.

Revenues for the DigiScope used by physicians for the detection of diabetic retinopathy were $365,000 in the second quarter of 2008, or 4% of the total revenues, compared with $204,000, or 2% of total revenues in the second quarter of 2007, an increase of 79%.

We acquired the EyeTel Imaging company in late December 2007 and previously had a sales and marketing license of EyeTel to sell DigiScope into the physicians office market.

Revenues for the six months ended June 30, 2008, were $17.6 million, a decline of 24%, from $23.2 million for six months ended June 30, 2007. During the second quarter of 2008, overall gross margins were 70.7%, compared with 72.6% in the first quarter of 2008 and compared with 73.3% in the second quarter of 2007. The gross margin for consumables was 72.5% in the second quarter of 2008, compared with 73.6% in the first quarter of 2008 and compared with 73.4% in the second quarter of 2007.

Device gross margins for the second quarter of 2008 were 58.8%, compared with 72.3% in the first quarter of 2008 and 80.7% in the second quarter of 2007. The decrease in the device gross margin percentage compared with the previous quarter and compared with the same period of 2007 was due to the lower average selling price of the devices and due to lower volumes. The decline in the selling price was partially affected by our introduction of the ADVANCE System and the transition of several of our existing customers to the ADVANCE System during the second quarter of '08.

Overall gross margins were impacted by the introduction of the customer transition of our ADVANCE System and by a 48.5% gross margin on DigiScope revenues, compared with 50.2% in the first quarter of 2008 and compared with 20.3% in the second quarter of 2007.

With the acquisition of EyeTel in December 2007, we expect the gross margins on DigiScope will increase in 2008 on a comparative basis versus 2007, as we will no longer be remitting a portion of revenues to the EyeTel Company, although we are recording depreciation of the DigiScope units as a cost of revenues.

Total operating expenses in the second quarter of 2008 were $9.8 million, compared to total operating expense for the first quarter of 2008, which were $17.1 million, including a non-cash goodwill impairment charge of $5.8 million and compared to operating expenses of $10.2 million for the second quarter of 2007. Operating expenses decreased in the second quarter of 2008 compared to the first quarter of 2008 and compared to the same quarter of 2007, mainly as a result of cost reduction efforts in the second quarter of 2008, including reduction in the workforce in that quarter.

The GAAP net loss in the second quarter of 2008 was $4.9 million, including the write-down of our investment in Cyberkinetics in the amount of $1.4 million, due to what we consider to be an other-than-temporary decline in the market value of this investment. In comparison, the net loss for the second quarter of 2007 was $1.3 million. The net loss for the six months ended June 30, 2008 was $15.7 million, including a goodwill impairment charge of $5.8 million and a write-down of $2.1 million of our investment in Cyberkinetics, compared with the net loss of $2.7 million in the six-month period ended June 30, 2007.

Basic and diluted net loss per share was $0.36 in the second quarter of 2008, including the impact of $0.10 per share for the write-down of the Cyberkinetics investment. The basic and diluted net loss per share in the second quarter of 2007 was $0.10 per share.

Basic and diluted net loss per share was $1.15 for the six-month period ended June 30, 2008, including the impact of $0.42 per share for the goodwill impairment charge from first quarter '08, and $0.15 per share for the year-to-date write-down of the Cyberkinetics investment, compared to a basic and diluted net loss per share of $0.21 for the six-month period ended June 30, 2007.

Turning now to our financial position as of June 30, 2008, cash and cash equivalents and short-term investments totaled $22.8 billion as of June 30, 2008, compared with the $29.7 million as of December 31, 2007. The use of cash was primarily driven by the net loss from operations, adjusted for the non-cash items including the goodwill impairment charge, investment write-down, and the stock-based compensation expense. Cash used in operations during the first six months was $7.9 million, after adjusting for all those non-cash items. This included an investment in inventories of approximately $800,000 and a decrease in accounts payable of approximately $1.1 million. We also had $1 million in cash that became unrestricted during the first quarter of 2008 as a result of favorable renegotiation of extension of our facility lease.

Working capital was $28.3 million as of June 30, 2008, compared with $33.3 million as of year-end 2007. The decrease in working capital was due to the decrease in cash and investment balances, offset partially by the investment in inventory of $100,000, and a $1.1 million reduction in the accounts payable.

Total assets were $43.8 million as of June 30, 2008, compared with $56.4 million at the end of 2007. The decrease was mostly related to the decrease in cash and investments and the write-off of goodwill.

DSO was relatively unchanged during the quarter at 54 days, as compared with 55 days in the first quarter of '08 and compared with 54 days in 2007. Our inventory turn rate per year was 1.6 times in the second quarter of 2008, compared with 1.8 times in the first quarter of 2008 and compared with 2.7 for the year ended December 2007. The decrease in inventory turn was due to our investment in inventories on ADVANCE, which was introduced commercially during the second quarter.

As of June 30, 2008, there were no long-term debts on our balance sheet other than the capitalized leased obligation, which is about $12,000.

To summarize, second quarter 2008 financial performance revenues totaled $8.5 million. We incurred a net loss of $4.9 million, including a $1.4 million write-down of our Cyberkinetics investment. And we ended the second quarter of 2008 with $22.8 million in cash and investments.

This concludes the financial update portion of the conference call. I'll now turn it back over to Shai.

Thank you, Joe. I'll start by providing an update on our neurodiagnostic business.

In the second quarter, we generated revenues from our neurodiagnostic products of $8.1 million, which was down 28% from the same quarter of last year. The breakdown was $0.5 million in medical equipment revenues and $7.6 million in consumables revenues.

The medical equipment sales consisted of both NC-stat and ADVANCE devices, as well as accessories for both. Consumables sales consisted entirely of our nerve-specific electrodes, which we formerly labeled as biosensors.

NC-stat sales were mostly into primary care physician practices. By contrast, ADVANCE sales were directed at specialist physicians with peripheral nerve expertise. This market includes neurologists; physical medicine and rehabilitation physicians, also described as physiatrists; neurosurgeons; orthopedic enhanced surgeons; and pain medicine physicians.

During the last quarter, our active customer account, which is a 12-month look back at accounts actively utilizing NC-stat or ADVANCE Systems, decreased by about 100 accounts to 5,480 physician practices and clinics as of the end of the second quarter of 2008. However, the average consumables usage per customer during the second quarter of 2008 was unchanged from the prior quarter. So we saw stable utilization, although a decrease in the total number of customers using the products.

We believe our revenues in the second quarter of 2008 were down from the same period of 2007 primarily due to reimbursement uncertainty surrounding the use of the NC-stat System, the reduction in our direct sales force from about 50 to 30 field sales representatives in the second quarter of 2008, and the termination of our independent sales agency relationships during the second half of 2007.

As an update on NC-stat reimbursement environment, on July 1st of 2008 the American Medical Association CPT Editorial Panel electronically published new Category III CPT codes on its public website. There were no Category III CPT codes published relating to nerve conduction studies performed using the NC-stat System. However, I know the editorial panel may decide to publish CPT codes or coding recommendations at a future date for nerve conduction study procedures such as those utilized with the NC-stat System.

The publication by the AMA of new CPT codes or other coding recommendations for nerve conduction studies could adversely impact reimbursement for procedures using the NC-stat System. Participants in the AMA CPT process must adhere to confidentiality requirements and, therefore, until the AMA CPT finalizes and publishes its positions, we are not in a position to comment further on the outcome of the June 2008 meeting.

We firmly believe that nerve conduction studies have an important role in primary care and will actively support the family internal medicine physicians currently using the NC-stat to optimize their clinical care of patients. However, until reimbursement clarity emerges on CPT coding, and through more favorable commercial insurer policies, we expect limited new sales of NC-stat Systems within this market.

We are now primarily focusing our medical equipment sales efforts on specialist physicians with peripheral nerve expertise. Consistent with that strategy, we launched the ADVANCE System into the neurology, physical medicine and rehabilitation, neurosurgery, orthopedic enhanced surgery, and pain medicine markets in late May following ADVANCE's 510(k) clearance by the FDA.

As a reminder, ADVANCE is a comprehensive platform for the performance of traditional nerve conduction studies and needle electromyography procedures. We are pleased that over 50 ADVANCE Systems were placed with new and existing NeuroMetrix customers in the second quarter of 2008 following the product's introduction.

Our update on international sales is as follows -- we are presently marketing NC-stat through third-party distribution into the UK orthopedic surgery market. Although revenues remain modest, we are pleased with the product's reception and our distribution partner's sales pipeline.

We recently announced that we completed the CE technical file for ADVANCE, and therefore we intend to market ADVANCE within the EU. As such, we are currently in the process of evaluating and signing distribution partners in the UK, Spain, and several other markets.

In terms of the product pipeline update, in the second quarter of 2008 we filed the 510(k) for our UNIVERSAL electrodes. These individually placed electrodes enable nerve conduction measurements from essentially any nerve end location. Pending 510(k) clearance and manufacturing ramp-up, we expect to market these electrodes for use with ADVANCE in the fourth quarter of 2008. We are developing additional UNIVERSAL series electrodes as well.

We have made good progress with our perineural drug delivery system. The term "perineural" stands for "near and around a peripheral nerve." We formerly were branding this product as NAVIGATOR, but decided against that for a number of reasons and we'll rebrand the product prior to commercial release. We are planning one or more FDA 510(k) submissions for this product this year, and expecting commercial launch into the regional anesthesia and orthopedic surgery markets in 2009.

To conclude with a discussion of our business strategy, our strategy going forward has four elements, as follows. First, we will actively support the over 5,000 US-based physician practices using the NC-stat System. We will work to bring clarity to reimbursement for nerve conduction studies using the NC-stat through our efforts with the AMA CPT Editorial Panel and by discussions with federal and commercial insurers. Through this we hope to eventually stabilize our core NC-stat business.

Second, we will seek alternative US markets for the NC-stat that are not dependent on third-party reimbursement. Through this we also hope to further stabilize the core NC-stat business.

Going forward, we will primarily focus our medical equipment sales efforts for ADVANCE and our pipeline products on specialists with peripheral nerve expertise. Again, as I previously noted, this consists of neurologists, physical medicine and rehabilitation physicians, neurosurgeons, orthopedic enhanced surgeons, and pain medicine physicians. We view this market as a growth opportunity.

And, finally, we will seek to expand our international presence for NC-stat, ADVANCE, and our pipeline products. We also view international sales as a growth opportunity. And with that, I will open it up to questions.

(Operator instructions.) Your first question comes from the line of [Sean Bevick] from SIG. You may proceed.

Good morning, guys. This is Sean in for Dave Turkaly.

Morning, Sean.

Morning, Sean.

Just one quick question -- where do you currently stand on the CPT codes in terms of what doctors are currently using? Are they still billing the old way or --?

At the present time, there are three different billings processes that physicians are using. They are -- many physicians are using the existing, traditional CPT codes, 95900 through 95904, as directed by their payers. Others are using an S code, if that's directed by their payers, primarily with respect to some of the commercial insurers. And then others are using the miscellaneous neurological code, 95999, if that's directed by their payers.

So there's really a variety of different coding approaches right now, and it depends on the specific insurer.

Though some insurers are still paying at the rate -- at the previous rate that they were getting before.

That's correct.

Until something is published with the AMA, it'll probably continue this way.

Well, we're not directly involved in reimbursement, obviously, so this is something between physicians and their insurers. But at this point, as I said before, there are those three different sets of codes, if you will. And any individual physician may be using one, two, or three of those, depending on the payer, and they all pay at different levels.

Okay. All right. Thank you.

Sure.

You're welcome.

(Operator instructions.) Your next question comes from the line of Erica Selin from Stanford Group. You may proceed.

Good morning. I just had a couple questions on ADVANCE. One question is if the sales force needs any additional training to go into these specialists. I know that they were addressing this market before, but is there anything that they need to refresh on?

So we--thanks for the question, Erica. We launched ADVANCE into the sales force in late May, and so there's obviously training around the technology, which again, is a traditional nerve conduction and needle electromyography systems--in that respect, some differences with NC-stat. Much of the specialist market--what we call the physicians with peripheral nerve expertise--are physicians that we were already selling into, particularly orthopedic surgery and neurosurgery. So it's a fairly familiar environment for us.

With respect to the neurology and physical medicine markets, we are training and prepping our sales representatives for those markets, and they're building their pipelines there. So there is some ramp-up there, both from an education/training and from a pipeline development perspective.

Okay, thank you. That was definitely helpful. And as far as disposables go for the ADVANCE, I assume that you're not selling anything yet. With the UNIVERSAL electrode, do you think that that'll be a premium-priced product? And also, do you have any timing on a needle for the needling EMG capability?

UNIVERSAL electrode -- premium as in premium relative to the nerve-specific electrodes, or biosensors?

No. Premium relative to UNIVERSAL electrodes from other manufacturers with other (inaudible).

Yes. We expect it to be at a significant premium because of the easy use of those electrodes, although it would be less--the selling price would be less, the list price would be less than the nerve-specific electrodes, because they don't have the same capabilities.

In terms of the needles, we haven't started selling those yet. We have a manufacturing partner and we're ramping up, and expect to see that either later this quarter or early next quarter.

Okay. And what are some of the things that differentiate that UNIVERSAL electrode? What makes it so much easier to use?

We're actually not releasing that information at this time. We're waiting till we receive 510(k) clearance, and then we'll talk more about the technology.

Okay. That sounds like a good plan. And are you still discounting the ADVANCE, or are you still up -- are you up to the full selling price at this point?

With ADVANCE, we are -- there's a variety of different selling approaches. It depends on whether it's new customers or existing customers which are interested in transitioning over to ADVANCE. So there's really, right now, a whole host of different pricing approaches, as you might expect when you launch a product and you have a large customer base. So definitely the--there's a wide range of selling prices at this point, and it's still--because it's so early in the process.

Okay, so they're still transitional pricing. And could I ask a second--

Yes, very much transitional pricing.

--on DigiScope as well? Have you started the sales into the optometry with DigiScope?

We have. We have started selling it to the optometry market in the second quarter, and I've started getting some optometry sales. There's actually about half-half between optometry and primary care in the second quarter.

Okay. That's very helpful. I'll hop back into the queue. Thank you.

Thank you.

And your next question comes from the line of Jonathan Block from SunTrust Robinson Hump. You may proceed.

Hi, this is [Maggie Lovett] in for Jon. I've got a couple questions. You typically give us the number of biosensors used in the press release. Could we get that metric for this quarter?

Yes, so the number was 222,000 now, which is down about 1% from the prior quarter. The reason we're going to stop giving that number going forward is because the consumables are going to get considerably more complex as we go forward with the multiple different types of consumables. So we'll really be talking about consumables revenues rather than utilization, because that simple metric won't be that meaningful as we go forward when you incorporate needles and UNIVERSAL electrodes of varying types.

But this quarter was 222,000. It was down 1% from the prior quarter.

All right. Thanks. And then for the ADVANCE, you said you placed 50. Could you give us an idea of how many were sold versus how many were placed?

We're not--they were both. The focus right now is primarily on--as you might expect, as we're building up our pipeline with new customers, the majority went to existing NC-stat customers that wanted to transition over to traditional nerve conduction and EMG. So that was the bulk, but at this point we really look at whether it's NC-stat, former NC-stat users, or new customers as relevant targets, and probably not going to--at least at this early stage--not going to differentiate.

Okay, and so do you have a swap-out kind of--?

Yes, we do. But only for those physicians that meet the target market characteristics, which are specialists who have expertise in peripheral nerves. So we're not swapping out, if you will, or transitioning non-specialists to ADVANCE.

So whether we're selling ADVANCE to somebody who's already using the NC-stat or already using another vendor's equipment--really, as long as they fit the target market profile, which, again, are specialists with expertise in peripheral nerve disorders--we're okay with that. And so, again, whether it's an NC-stat customer or another vendor or they don't have equipment.

Okay. And then just ASP for ADVANCE and ASP for NC-stat -- have those--or at least for NC-stat--is that declining? Is that stabilized? Any color on either?

Well, generally, gross margins on--well, ADVANCE really--we're not talking about ASPs 'cause, as you might imagine, there's this transitional pricing right now as we have a large base of existing specialists who want to consider using ADVANCE.

In general, we'll note that gross margins have come down on equipment and the contribution from ADVANCE, which has inherently lower gross margins than NC-stat. But we're doing more discounting both on equipment and on consumables with NC-stat for the obvious reasons that we're trying to address some of the concerns that physicians have about the uncertainty in the marketplace.

Okay. And then moving on to DigiScope, the gross margins slightly declined from 1Q. Just wondering what your thinking's going to change and how you expect that to increase throughout '08? What's the difference between 1Q and 2Q?

I don't really have a detailed answer as to why it dropped by I think it was a couple points. I think that's just small variations in the product line. We really don't see it really changing that much going forward, so it's probably in that 50% arena.

Okay. Going forward for the rest of '08?

At this point we don't see any specific drivers that would change that significantly.

Okay, great. And then just lastly on the codes, do you have an idea of if the Category III vote will come up again at the next CPT meeting?

We're not--well, really--nobody's privy to that. One has to wait until the agenda comes out for the October meeting to determine what will be discussed at the October meeting. At this point, it's unknown if it will come up at that meeting. That would be the next meeting, but whether it is or is not on the agenda, I think one has to wait and see what the editorial panel decides to do. And that would come out several weeks or maybe even a month before the meeting date.

Okay. Great. Thank you.

Sure.

And your next question comes from the line of Juan Sanchez. You may proceed.

Good morning, guys.

Good morning, Juan.

Good morning, Juan.

Will you give us some data on the [specialty] for the subpoena, and also what kind of level of legal fees do you have every quarter? And the second question is about the DigiScope and whether or not it has, per the facts, actually met your expectations or by this point it's a distraction for management?

Well, on legal matters, we're not commenting on any pending litigation, so I'm not sure if that's exactly what your question was. But as you know, we don't comment on that. In terms of legal expenses, all the --

The legal fees, Juan, in the second quarter--legal fees and professional fees for the second quarter were about $1.2 million, versus $1.1 million in the first quarter, versus about $1.9 million in the second quarter of '07.

Thank you.

And, Juan, on the issue of the DigiScope, I mean, clearly, as we said all along, the DigiScope is a secondary/tertiary detail for the company. Obviously, we're focused on peripheral nerve disorders and diseases with our core product lines and our product pipeline.

We are continuing to put sales force focus on that. Clearly, with 30 sales representatives instead of 50, and with introduction of a major new and very exciting product in ADVANCE, DigiScope is going to get less attention, at least in the near term. And then in terms of longer-term perspectives, I don't think I'm in a position right now to talk about how we view the original acquisition and our expectations. But the product is selling, and we are putting some attention into it, and we'll see where we go strategically in the remainder of the year.

Thank you, Shai.

Sure.

This concludes the Q-and-A for today's call. I would now like to turn the call back to Mr. Shai Gozani. You may proceed.

Thank you very much for joining us on our second quarter 2008 conference call. We look forward to updating you during the balance of the year on our strategy and our focus on the specialist market. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Good day.