NeuroMetrix Inc (NURO) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 NeuroMetrix, Incorporated, Earnings Conference Call. My name is Shakwana, and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to your host for today, Mr. Joseph Calo, Chief Financial Officer. Please proceed, sir.

Thank you and good morning. 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 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," and 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, 2008, and our other SEC filings. NeuroMetrix does not intend and undertakes no duty to update the information disclosed on this conference call.

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

Thank you. Good morning, I would like to welcome you to the NeuroMetrix Second Quarter 2009 Conference Call. I am joined today by Joe Calo, our Principal Financial Officer; Joe Warrino, our Controller; and Walter Christiansen, our Senior Vice President of Global Sales.

NeuroMetrix is a science-based health care company that is transforming patient care for neurotechnology. Our mission is to provide innovative products for preservation and restoration of nerve and spinal cord function and the management of pain.

We sell our products in the United States to three direct sales organizations, which have, in aggregate, approximately 36 sales representatives. Our neurology sales organization, consisting of six sales representatives, calls on neurologists and physical medicine and rehabilitation physicians. Our neuro interventional sales organization, consisting of 10 sales representatives calls on orthopedic surgeons, neurosurgeons and pain medicine physicians.

Finally, our physician office salesforce, consisting of 20 sales representatives calls on family, internal medicine physicians, endocrinologists, rheumatologists and certain other physician specialties.

In international markets we sell our products to third-party distribution. In this conference call we will discuss the following topics -- first, a review of our financial results for the second quarter; second, an update on our neurodiagnostic business; third, an international sales update; and, finally, a product and R&D pipeline update.

I will now turn it over to Joe Calo, our Principal Financial Officer for a review of financial results for the second quarter of 2009.

Thank you, Shai. Here is a recap of our financial performance for the three- and six-month periods ended June 30, 2009, as compared to the corresponding periods of 2008. Please note that certain line items of our 2008 results have been recast to exclude revenues and costs from discontinued operations resulting from the closure and sale of our Digiscope business.

Total revenues for the second quarter of 2009 were $6.8 million, down 17% from $8.1 million in the second quarter of 2008 and essentially flat with the revenues of the first quarter of 2009.

Total revenues for the six months ended June 30, 2009, were $13.6 million, a decline of 19% from total revenues of $16.9 million for the same period in 2008.

As a further breakdown of our revenues, consumable revenues totaled $6.1 million, and 90% of the total revenues in second quarter of 2009. And medical equipment revenues totaled $705,000, or 10% of the total revenues. This compares with $7.6 million of consumable revenues in the second quarter of 2008, or 94% of the total revenues, and $512,000 of medical equipment revenues, or 6% of the total revenues.

During the second quarter of 2009, overall gross margins were 71.4% compared to 71.7% in the second quarter of 2008, and 71.6% in the first quarter of 2009.

Total operating expenses for the second quarter of 2009 were $6.7 million compared to $6.1 million in the first quarter of 2009 and $8.9 million in the second quarter of 2008. Total operating expenses in the second quarter of 2009 when compared to the first quarter of 2009 increased $500,000 mainly due to increases in sales compensation, recruiting expenses, and travel costs resulting from additional hires in the direct sales personnel and increased stock-based compensation expense, and partially offset by decreased legal expenses.

Operating expenses in the second quarter of 2009 decreased by $2.2 million when compared to the same period in 2008, and for the six-month period, operating expenses were $12.9 million compared to $25.1 million in 2008.

The reductions in the operating expenses from the prior-year periods are mainly a result of our continued expense control efforts including a reduction of the workforce in the second quarter of 2008 and decreased legal fees.

In addition, the reduction in the six-month period included a goodwill impairment charge of $5.8 million during the first quarter of 2008.

The net loss at the second quarter of 2009 was $1.8 million compared to the net loss of the first quarter of 2009 of $1.2 million. The increase in the net loss in the second quarter of 2009 was mainly due to the increased operating expenses discussed previously. For further comparison, the net loss at the second quarter of 2008 was $4.9 million, which included a writedown of our investment in Cyberkinetics of approximately $1.4 million, and a loss of $700,000 related to our discontinued Digiscope business.

The net loss at our six months ended June 30, 2009, was $3 million compared to a net loss of $15.7 million for the six-month period during June 30, 2008. Basic and diluted net loss per share was $0.13 in the second quarter of 2009 compared to a loss of $0.09 in the first quarter of 2009, and a $0.36 loss in the second quarter of 2008, which included a $0.10 loss per share for the writedown of the Cyberkinetics investment, a $0.05 loss per share from the discontinued Digiscope operations.

Turning now to our financial position as of June 30, 2009, cash, cash equivalents, and short-term investments totaled $15.5 million as of June 30, 2009, compared to $19.8 million as of December 31, 2008. This represents a decline of $4.3 million during the first six months.

The use of cash of $4.3 million was primarily driven by a $3.7 million payment to the US Department of Justice to settle an investigation into certain of the Company's past sales and market practices and a $350,000 payment made for the purchase of certain assets from Cyberkinetics.

Working capital was $19.7 million as of June 30, 2009, compared to $21.6 million as of December 31, 2008. The decrease in working capital is primarily due to the decrease of cash, cash equivalents and short-term investments of $4.3 million, an increase in accounts payable of $1.1 million, and a decrease in inventory of $500,000 partially offset by a reduction in accrued expenses of $4.1 million included in the $3.7 million paid to the DOJ.

Total assets were $26.4 million as of June 30, 2009, compared to $31.4 million as of December 31, 2008. The decrease was mostly related to the decrease in cash. Day sales outstanding decreased to 47 days in the second quarter of 2009 compared to the 48 days in the first quarter of 2009 and compared to 57 days in the second quarter of 2008. Our inventory turnover rate per year was 1.5 times in the second quarter of 2009 compared to 1.4 times in the first quarter of 2009 compared to 1.5 times in the second quarter of 2008.

As of June 30, 2009, there was no long-term debt on the balance sheet other than the capitalized lease obligation of approximately $50,000.

And to summarize our second quarter 2009 financial performance, revenues totaled $6.8 million. We incurred a loss of $1.8 million, and we ended the second quarter with $15.5 million in cash.

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

Thank you, Joe. All right. So, first, as an update on our neurodiagnostic business, and this is a recap on some of the material that Joe just gave you -- in the second quarter we generated revenues of $6.8 million for neurodiagnostic products. These revenues were essentially flat with the first quarter of 2009 and about 90% of the revenues came from consumables with the remainder primarily coming from sales of medical equipment.

Medical equipment sales consisted of both NC-stat and ADVANCE devices and their related modules. Consumable sales consisted primarily of our nerve-specific electrodes but also included EMG needles and various other accessories.

The NC-stat sales were entirely into the primary care arena. ADVANCE sales were directed at specialist physicians with peripheral nerve expertise. This market includes neurologists; physical medicine and rehabilitation physicians, also called physiatrists; orthopedic surgeons; neurosurgeons; and pain medicine physicians.

We believe that the revenues from our neurodiagnostic products in the second quarter of 2009 were down from the same period in 2008 due to the overall reduction in health care, capital purchasing, the continue uncertainty surrounding reimbursement for the NC-stat system and also due to the 40% reduction in our direct salesforce that occurred in the second quarter of 2008.

As an update on the NC-stat reimbursement environment, earlier this year we noted reports of the CPT -- the AMA CPT editorial panel will establish a Category 1 CPT code for nerve conduction studies performed with pre-configured electrode arrays such as are utilized with the NC-stat system.

We are encouraged by this direction, and we believe that this CPT code, when issued, could streamline the process for obtaining reimbursement for nerve conduction studies performed using the NC-stat system.

The amount of reimbursement from Medicare that physicians will receive under the CPT code remains to be determined.

Further, medically appropriate indications for this code may be defined through local and national Medicare medical policies. In this respect, we are encouraged that multiple Medicare fiscal intermediaries have determined that nerve-conduction studies performed with the NC-stat are a covered service for one or more clinical indications.

The operational characteristics of the NC-stat business could change when physicians begin utilizing the new code in 2010. We believe that first-study reimbursement could decrease, which could necessitate concomitant reductions in nerve-specific electrode selling prices. However, we also believe that specific reimbursement codes and more favorable payor policies could lead to increased medically appropriate utilization. As such, we look forward to the opportunity to stabilize and eventually return the NC-stat business to growth.

We believe that nerve conduction studies have an important role in primary care and actively support the family and internal medicine physicians, endocrinologists, and rheumatologists currently using the NC-stat to optimize the clinical care of patients. We continue to believe that the annual primary care nerve conduction testing market opportunity US is several hundred million dollars and potentially larger as widespread testing for diabetic neuropathy is found to be clinically and economically valuable.

In addition to the NC-stat system, we are actively marketing the ADVANCE system into the neurology, physiatry, neurosurgery, orthopedic and hand surgery markets as well as the pain medicine market all through our direct sales organization.

Encouragingly, in the second quarter of 2009, about 15% of our revenue was derived from sales of ADVANCE equipment and related consumables. We are encouraged by the market reaction to ADVANCE, and customer feedback has been very positive. We have gained important insight into certain product enhancements that we believe could further accelerate adoption.

Moving on to international sales -- international revenues were small in the second quarter and derived primarily from our UK operations, which are focused on NC-stat equipment and the related consumables.

Nevertheless, we continue to believe that there are large international opportunities for ADVANCE and NC-stat, and we do expect to put more focus on international markets during the balance of 2009 as we go into next year.

In terms of the product pipeline update -- on the top-line basis, our core mission at NeuroMetrix is to develop and market innovative products for preservation and restoration of nerve and spinal cord function and the management of pain. Our products have a common core scientific theme, which is the measurement modulation, or repair of neural conduction.

Specifically, we are encouraged by the progression of our novel, nerve identification, and localization system called ASCEND, which we believe will be used to provide regional anesthesia, pain control, and will be used in the treatment of certain neuropathies. ASCEND has two components -- a precision nerve stimulation device and a nerve signal detection device.

The signal detection device recently received 510(k) clearance, and the stimulator component is presently under 510(k) review by the FDA. We are assessing a number of commercial launch strategies and business plans for ASCEND, and our current belief is that we will launch into the regional anesthesia market in 2010 and other peripheral nerve specialist markets the following year. Of course, all this is pending regulatory approvals and product ramp-up.

We are also developing the Andara device for the treatment of acute spinal cord injury. This is an investigational device designed to stimulate spinal cord repair and restore sensation in patients who have suffered a complete spinal cord injury.

The device is presently under review by the FDA under humanitarian device exemption, or HDE, application specifically for the treatment of acute complete spinal cord injuries. These injuries affect about 4,000 people annually in the United States. There are currently no approved devices or pharmacological agents that enhance post-injury spinal cord regeneration. Therefore, we believe that Andara, if approved, could experience rapid adoption.

In late 2008, the FDA posed additional questions as part of their HDE review. We recently responded to the FDA and expect that the FDA will review and provide initial response within several months. Beyond that, we are not positioned to provide further timeline detail at this point.

We also plan to explore international regulatory pathways primarily focused on Europe over the next couple of quarters.

In addition to Andara, we have an early-stage drug development program targeted at a chronic spinal cord injury. Due to acquisition of certain Cyberkinetics intellectual property, we acquired rights to several proprietary 4-aminopyridine, or 4-AP derivatives developed and studied by scientists at the Purdue University Center for Process Research and collaborators at other universities.

4-AP has demonstrated efficacy in enhancing neuroconduction after spinal cord trauma as well as in demyelinating diseases such as multiple sclerosis. However, the clinical use of 4-AP may be limited by side effects. Our proprietary 4-AP derivatives may address some of these limitations.

We are focused on three compounds, which we term Neuro 101, 102, and 103. Our lead compound, Neuro 101, is a t-butyl carbonate derivative of 4-AP. We are in the process of conducting safety testing required for an IND submission in a Phase 1 clinical trial.

Based on preclinical work, we believe that Neuro 101 has clinical potential for treating chronic spinal cord injury. Our current plant is to develop Neuro 101 through Phase 1 and then to evaluate partnership opportunities. We believe that our targeted drug development program has the potential to create value for NeuroMetrix and its shareholders.

And, with that, we'll conclude our prepared statements and would be happy to take questions.

(Operator Instructions) Bill Plovanic, Canaccord Adams.

Just a question on the NC-stat -- or -- the ADVANCE. I think you mentioned that it was roughly 15% of revenues in the second quarter '09. I was wondering if you could give us some historical perspective on that -- on maybe what that looked like in Q1 and then last year as well?

Well, it's been growing, Bill. The product was only approved in May of -- I think it was April or May of last year, and we really only started marketing it on a focus basis in summer of 2008. So we are in the third or fourth quarter, I would say, of marketing the product. So the rise has been pretty consistent from, obviously, zero percent, I would say, or very little in the second quarter of 2008 to the current 16% number.

I don't have that number in front of me for what it was last quarter, but it was undoubtedly less than 16%. So it's been a fairly consistent rise.

Okay, and just for clarity's sake, can you layout the timeline exactly on the coding and reimbursement and all that, just in simplistic form?

Well, the AMA is reported, created the code at their October 2008 meeting, and subsequently that code needs to go through a multi-step pricing process. There was a ROC meeting in early part of this year, and then some of the pricing detail was established at that meeting. And then that is sent over to CMS, which finalizes it over the course of the -- in spring and into summer. There aren't specific dates on that that we have access to, but it's a process.

And then, ultimately, the CMS will publish the code and its value when they publish the fee schedule, which is typically in late fall or early winter, and there is no specific date when that will occur, but it typically should be in the October/November timeframe.

So that would be the next piece of information, and that code, that price, is essentially a one-year -- it's a temporary value in that physicians can comment on it during the first year, and there could be changes made, usually, if it's felt to be too low. But -- and otherwise, it becomes permanent. But it's enacted for the first year.

So that's what we're waiting for now, and then the code would be effective January 1, 2010.

And I don't know if you want to comment on this publicly or not, but what do you feel is a -- kind of, in your eyes, they give you the code -- what dollar amount is a win; what dollar amount is a push, and what one is kind of a negative for you?

I'm not really in position to put numbers on it right now and define it in those terms, but I would say this -- I think -- we believe that the biggest concern our customers have had is just getting reimbursement stability and having a code that they're confident they're not going to have any reimbursement challenges with. So I think just getting a technology-specific code, which this is, and by that I meant specific essentially to the NC-stat technology, because there is no other competitive product. So it's essentially a code that's optimized for the NC-stat -- would -- should alleviate many of the reimbursement concerns that physicians have about using the NC-stat, and we consider that, at least in the long term, a win.

The economics -- our expectations is, as I noted, that because it's probably going to be somewhat benchmarked against other primary care procedures, it would be lower than the current reimbursement, and that may necessitate some adjustments on our part in ASP and so forth.

But that's really not our biggest concern. Our concern really is that physicians have the ability to do this procedure, and we think if you have a technology-specific code, which is clearly designed for primary care physicians, that will allow them the utilization to reach is medically appropriate levels, and that is the way we're looking for. As far as the exact economics, we'll have to see how that plays out.

Okay, and then just, lastly, the current users of the product -- how are they getting reimbursed for it?

They are using any of a number of different mechanisms. I mean, many insurers -- or some number of insurers still reimburse under the traditional nerve conduction codes including some number of the Medicare fiscal intermediaries are still using the existing codes until the new code is available. There are some medical -- Medicare fiscal intermediaries that reimburse under the miscellaneous code -- it's a category 1, miscellaneous code 95999.

Some commercial insurers reimburse under -- or suggest coding under the specific S code. So it's very varied right now. Some might be doing -- some of the physicians might be doing self-pay. So it's a very heterogeneous reimbursement environment, which is why we think that having a specific code could bring a lot of clarity.

(Operator Instructions) Juan Sanchez, Ladenburg.

The question is, once a new specific code is active next year, what's the strategy to dealing with private payors? I mean, what should we expect the private payor part of the equation to allow it, over time, once we get the new specific codes for NC-stat?

It's a good question, Juan. I think, obviously, there are hundreds if not as many as 1,000 private payors in the country, and there is no uniform process they use. Many of them essentially automatically adopt new codes, and have a procedure where they price it in some fashion relative to what Medicare has priced it at.

So we would expect that some portion of commercial insurers will essentially automatically adopt it. Others will put it through a valuation procedure, and assign it a value based on that. And then others may put it through a more rigorous medical policy development procedure.

So I think it ranges from automatic adoption to where, obviously, very fast and essentially it really would follow Medicare really quickly to a slower, more involved process. There is no way to know at this point what that looks like except that many of the insurers, particularly for codes like this, which are not outlier codes in terms of reimbursement values, tend to adopt them fairly quickly and automatically. But that's a generic statement. That doesn't necessarily apply specifically to this code but historically, that's been the case.

And the second question is about the ADVANCE. I know you have a strong presence with orthopedic surgeons. But the docs who are buying the device that are not orthopedic surgeons -- what do they like about the device versus other traditional equipment?

Well, I think the primary positioning of ADVANCE in the traditional neurology and physical medicine market is the mobility of the device. It's a technology that is, as you know, highly mobile. It's a PDA-oriented device versus a laptop or a PC-based device. It's entirely battery-operated, it's wireless. So it allows for physicians to quickly move around their office or move from office to office or from office to hospital in a very, very seamless fashion. The entire device fits into a small briefcase, which is not the case for the competitive devices.

So we essentially have defined the mobile, if you will, part of the market where increasingly neurologists and their counterparts in physical medicine will often have multiple offices or spend time at the hospital or even go and spend time at other physician offices. And this ADVANCE really suits their needs as they become more mobile. It fits that requirement.

So that's really the unique aspect of the technology, which is very desired by that part of the market, and that's the part of the market that we are pursuing.

Are the other doctor outside orthopedic surgeons buying the EMG equipment as well as, or not?

The question was who buys the EMG equipment?

Yes, yes, who is buying the electromyography part of equipment?

Well, all the neurology and physiatry customers, and many of the orthopedic customers, as well, are buying the needle EMG components.

(Operator Instructions) At this time, there are no further audio questions. I would now like to turn the call over to Dr. Gozani for closing remarks.

Thank you very much for joining us this morning for our second quarter 2009 conference call. We look forward to updating you on the balance of the year. Thank you.

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