NeuroMetrix Inc (NURO) 2009 Q3 法說會逐字稿

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

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Tom Higgins, Chief Financial Officer. Please proceed.

Thanks. On this call, we may make statements that 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 and include words such as "believe," "may," "will," "estimate," et cetera, 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 as a result of a number of important factors, including those set forth in our earnings release issued earlier today. The risks and uncertainties including the factors described under the heading, "Item 1A Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2008, and any updates contained in our subsequently filed quarterly reports on Form 10Q and other SEC filings. NeuroMetrix does not intend to and undertakes no duty to update the information disclosed in this conference call.

I'll turn the call now over to Shai Gozani, the President, Chairman, and CEO of NeuroMetrix.

Thank you, Tom. Good morning and welcome to the NeuroMetrix Third Quarter 2009 Conference Call. NeuroMetrix is a science-based health care company that is transforming patient care through neurotechnology. Our mission is to provide innovative products for preservation and restoration of nerve and spinal cord function and pain control.

I am joined today by Tom Higgins, our Chief Financial Officer, and Walter Christensen, our Senior Vice President for Global Sales.

In this conference call we will discuss financial highlights for the third quarter and recent business developments. I will now turn it over to Tom for a review of our financial results.

Thanks, Shai. Overall results for the third quarter were mixed. We made significant strides in strengthening our balance sheet ahead of 2010 while we contended with some slippage in sequential quarter revenues as well as a year-on-year decline in consumable sales. International business was a plus, which we hope to turn into a leading indicator, and we continue to manage cash tightly.

Revenue in the quarter of $6.3 million was down 11% from the comparable quarter last year, and it was down about 6% from the second quarter of the year. Broadly viewed NC-stat accounted for about 80% of revenues and ADVANCE was the remaining 20%.

Device sales were $700,000, up from about $400,000 in the prior year. Net new accounts or devices placed were at the highest level we've achieved in the past five quarters. In part, this reflected a $280,000 sale of ADVANCE systems to our UK orthopedic distributor who is enthusiastic about market opportunities in the UK. We have additional interest from other European sources, which we are pursuing.

Consumables of $5.6 million were down 16% from the prior year and 8% from Q2 of '09. The quarter saw a decline in patients tested and electrode usage from Q2 '09. In part, this reflected seasonal variation, as vacations and holidays interrupt testing. Also, based on a recent survey of customers, we've heard that physicians are seeing a drop in the number of patient visits. We believe this is due to higher unemployment and loss of insurance coverage.

Our gross margin of 71% was consistent with the prior year and with Q2 '09. Margins remained strong and product mix was constant.

Overall OpEx spending -- this is a combination of R&D, sales and marketing, and G&A -- overall OpEx totaled $6.4 million versus $7.3 million in the prior year, and $6.7 million in the second quarter. R&D and sales and marketing were flat with the prior year, G&A was down by $1 million due to lower legal spending following resolutions of issues with the DOJ and OIG earlier in 2009.

Moving down the income statement, we recorded a charge of $7.4 million on the revaluation of newly issued warrants at fair value as of the end of the quarter. It's worth spending a minute on this issue.

In early September we completed an equity financing, which raised $17.3 million net. Securities issued in the financing included common stock and warrants to purchase shares of our common stock. The warrants contained a provision where, on change of control of the Company, warrant holders could elect a cash settlement of the warrant value. Because of this feature, the warrants had to be valued and a liability recorded.

The accounting rules further require that at each reporting period, the warrants must be mark-to-market, and the change in liability value recorded within the income statement. This charge of $7.4 million, or $0.45 a share is the mark-to-market adjustment as of September 30, 2009.

Now, subsequent to the end of the quarter, we negotiated amendments to all of the outstanding warrants to adjust this cash settlement feature. After these amendments and final mark-to-market adjustments early in the fourth quarter, we will account for the warrants within stockholders' equity. In other words, this is a Q3 event, and it will go away in Q4. The Q3 charge, the $7.4 million, is, of course, a noncash charge.

Our net loss for the quarter was $9.3 million, or $0.57 a share. Excluding the warrant fair value adjustment, the net loss was a little under $2 million, or $0.12 per share.

Turning to the balance sheet, we ended the quarter with $32 million in cash resources and began the year with about $20 million in cash.

Receivables of $3.4 million declined from $3.7 million at the beginning of the year reflecting lower volume of Q3 business. The quality of receivables was constant with prior periods.

Inventory of $4.9 million was down from $5.6 million at the beginning of the year, as we managed down our device component stock.

Our operating cash burn for the quarter was $600,000. On a year-to-date basis, excluding one-time disbursements relating to the DOJ/OIG settlement, our cash burn was $1 million. Including DOJ/OIG settlement, the burn was $4.7 million.

Again, it was a quarter in which we strengthened our future operating capacity with the equity raise; had modestly down results on consumables usage; and continued to manage to minimize our spending and cash burn.

Those are the essential financial highlights. Shai, back to you for a broader look at the business.

Thank you, Tom. We made progress on several fronts during the quarter. We have continued to cultivate our US customer base, which consists of about 5,000 US and international physician offices, clinics, and hospitals using NeuroMetrix nerve testing equipment. This is a significant asset of the Company.

We saw a modest contraction in the utilization of nerve-specific electrodes in Q3 versus recent run rates. We thought this was probably due to a combination of seasonal and economic factors.

We have begun to expand our international presence. As Tom mentioned, we took a small but significant step in the UK with a large distributor sale of ADVANCE systems. We believe that international is a large untapped opportunity where we expect to devote resources in 2010.

With respect to our new product pipeline, VANTAGE, we made substantial progress in this next-generation product, which, again, is a successor to the NC-stat. Like the NC-stat, VANTAGE is designed to facilitate the performance of accurate nerve conductor studies by primary care physicians and other non-specialists. It is backwards-compatible with all of our current pre-configured electrodes, and it will also support new electrodes we are presently developing that we believe will provide enhanced clinical value.

VANTAGE also includes productivity-enhancing features such as a touch-screen interface, wireless data communication, and Web-based report management. Pending certain development and regulatory milestones, we expect to commercially launch VANTAGE in the first half of 2010.

As far as ASCEND is concerned, we received 510K clearance on the stimulator component. You should expect continuing development and additional regulatory submissions to expand indications for use leading up to commercialization, which we hope to target in the second half of 2010. We do know that revenue impact in 2010 will probably be not significant.

On the Andara device, which is our implantable stimulator for spinal cord repair after a spinal cord injury, the FDA recently provided greater clarity on the clinical requirements for approval. Our next step would be to design and conduct a clinical trial targeting the same safety and efficacy endpoints as the original study but with a larger sample size as desired by the FDA. If we choose to devote the necessary personnel and financial resources, we believe that we can complete this study and launch the product in early 2012.

Regarding our pharmacologic compounds for neuroconduction enhancement, we are developing our lead compound, NN101, for use in chronic spinal cord injury. Our plan is to move the compound through Phase 1 clinical trial and then evaluate strategic options. We are presently performing the pre-clinical work required to file an IND, which we hope to submit by the end of 2010.

These developments all help to position us for 2010 and beyond. Other steps we've taken in advance of 2010 include strengthening our management team with new leadership in sales and finance; shoring up our balance sheet with the $17 million of new cash from our Q3 stock offering; and also maintaining our focus on product application and geographic diversity.

Finally, consistent and adequate physician reimbursement for nerve conduction studies performed using NC-stat equipment is important for our efforts to build this market in the US, and thereby deliver the significant clinical benefits of this technology to patients.

As many of you know, CMS recently published a physician fee schedule for 2010. It contains a new Category 1 CPT code, 95905, that describes nerve conduction studies performed with preconfigured electrode arrays such as are used with the NC-stat device. This is an important development, as this code reaffirms the clinical utility of NC-stat and supports its use by primary care physicians when medically appropriate.

Naturally, as for any new code, adoption will take time and it may have some challenges along the way. However, we believe that physicians using the NC-stat will find this new code useful and supportive of their efforts to deliver optimal patient care.

As published in the fee schedule, 95905 has a reimbursement value of approximately $60 per billing unit. If Congress overrides the planned 21% decrease in the physician fee schedule, then this value would increase to about $70 to $75 per billing unit.

Unlike the current nerve conduction code but similar to many other diagnostic procedures, 95905 is built per limb tested as opposed to per nerve. Although practice guidance will vary, we believe that fewer units of 95905 will generally be billed per patient with the current nerve conduction study codes. Most evidence-based clinical testing protocols call for testing of about 2 to 3 limbs per patient study.

We view the establishment of a new CPT code as a positive and believe that it will help us build a successful NC-stat business. The reimbursement is within our anticipated range and, to the extent necessary, we have designed programs to help our NC-stat customers manage the transition. We also have initiatives underway to develop new nerve conduction study products and reduce our cost of goods sold.

Those are our prepared comments. We are pleased to entertain questions at this point.

(Operator Instructions) Juan Sanchez, Ladenburg.

A couple of questions about the quarter first. What was the net cash burn during the quarter? And the second question of the quarter is -- you said that one of the reasons the earnings were down could have been seasonability because of the summertime. Is October looking better, so you can actually have more confidence that some of the slow revenues of the last quarter were due to seasonability?

The cash burn for the quarter was $600,000, and as far as the seasonality -- as you know, Juan, we don't provide forward guidance or direction on the current quarter, so I can't really respond to your question directly.

But we have experienced seasonality every year since the NC-stat has been commercially distributed in the summer months for the obvious reasons that patient visits are down, and physicians are on vacation. So we didn't see -- and from that perspective, anything particularly unusual this year.

Back now -- a question about the CPT code -- when is the Congress making a decision on whether or not they want to override this 21% decrease in physician payments?

That's been discussed, and many commentators believe that the 21% decrease will be repealed. But as far as the exact timing of that, I think that's obviously a matter that is uncertain at this point.

But that's going to happen before January, right?

It doesn't have to happen before January. What they've done in past years, in some cases, is just kept the prior-year's values, and then adjusted them sometime during the year or done a retroactive reimbursement back to the physicians to make up for the difference. So there's been a variety of different approaches.

The key thing is this 21% reduction has been accumulating over the years, and every year it's been repealed. So there's really not a wide -- not much expectation that this year will be any different, but at this point what is published does include that, and therefore it's just important to keep that in mind.

And have you figured out your strategy to using this CPT code to existing accounts on future potential accounts? Or is that process still in the works?

Well, we don't introduce reimbursement codes to our customers. Reimbursement obviously is the job of the customers, existing or future, to study, and billing and so forth, is under their purview.

We provide basic information in the form of reimbursement brochures and, of course, when appropriate, we'll update our reimbursement brochure and reimbursement information to capture this code. We expect that physician offices will, fairly quickly, particularly next year, understand that this is a relevant code for them and proceed as appropriate.

Just to be clear, we don't market reimbursement code. That is something that the physician offices must be responsible for.

Bill Plovanic, Canaccord Adams.

Just a couple of questions here, Shai, if you could help us out. So on the current system, how many limbs are typically tested?

Most -- I think the way to look at that is based -- most customers test based on published clinical testing protocols, and that typically calls for about two to three limbs. Within a limb, you may be testing one to two nerves, typically.

So currently, today, a customer of yours is going to be testing two to three limbs and one to two nerves when they do utilize your technology, correct?

Yes, and it varies. But just to be clear, Bill, it varies widely depending on what you're testing for and what limb we're talking about. But, in general, if you look at how many limbs get tested, almost all nerve conduction studies include two limbs for comparison purposes -- in some cases, three limbs -- obviously, if it's a very broad adverse disease, you might be testing four limbs, but that's not that common.

And then within a limb, it depends on what the clinical reason for testing is. You may test one or two nerves. Rarely would you test three nerves, but it does happen.

And then, if you applied the new reimbursement code retrospectively to your business as it is, what type of reimbursement per usage does that [equivalate] to for the physician?

I think that there is -- again, it's a very hard question to answer because there is such wide variation. I would say that, on the whole, the physician economics will decrease per patient study, because of the limb versus nerve base testing. The extent to which is decreases will vary depending on the specific clinical indication how they test.

But, at the same time, I think that, particularly given where it's come down at this -- let's say with or without the 21% reduction in the 70% to 75% range -- it leaves a fairly attractive, in our opinion, economic opportunity for physicians although, by all means, less economic return than they had before. But, of course, what they're trading for that, presumably, is consistent and reliable reimbursement, which is very valuable for them.

You know, Shai, what I'm trying to get at, I know this is not an easy question to answer, but for the bulk of the business, does this mean -- I think you said 70%, 75% of the docs -- it kind of hit right in the wheelhouse -- does this equal to 100 per test, 120 per patient test, 150? Just a ballpark might be helpful.

Again, Bill, I can't -- I don't think that really can be answered, because it depends on how physicians are going to -- I understand what you're asking, but it really is not a question I can accurately answer. So I don't want to throw numbers out there because I think it depends on how they were testing today, what they were testing, how they're going to test in the future. I definitely believe that their reimbursement amount, on the whole for a patient, will go down for those patients they were getting reimbursed for.

Keep in mind, that they are probably testing a number of patients now for which they are not getting reimbursed, so whoever they are getting reimbursed on is being averaged down by non-existent or low reimbursement for those other patients.

So when you throw it all together, again, if they were getting paid today under the current codes, and they just map that over to the new code, there will be a reduction, and the amount of the reduction -- if I give you a number, it would be all over -- it would not be an accurate number for any specific case. So I'm not going to do that.

But it will go down, I just want to be clear. But at the $70 to $75 per limb, there remains very attractive economics, and, again, if they get consistent reimbursement for all the medically appropriate patients, I think that's a very compelling situation for our physician customers.

Okay. And then just to focus on the quarter a bit -- as you look at it, down sequentially, is that any one geographical pocket, or was that broad-based?

I think it was broad-based. We tend to see historically -- and I don't think this was any different -- more decrease in the South, particularly in Florida and so forth in the summer, as there is, obviously, a typical flight of people from those areas at that time. And then they come back.

So there's a little bit of geographic variability there, nothing unusual. As we noted, in addition to seasonality, there is this kind of macro effect -- unemployment, loss of benefits -- we have seen some evidence that that's more profound in Michigan, Ohio, and so forth, around the auto industry and certain other areas where unemployment is very high -- California, and so forth.

So there is this additional economic effect here that is super-imposed on the typical seasonality. It's hard to get a real accurate numerical sense of what's going on. But we've done surveys of our customers, which pretty, I think, robustly confirm that there is an overall economic downturn that's affecting the number of patient visits, which translates to testing opportunities.

Okay, and then, yes, it sounds like normal seasonality in macro. And then just a last question, I promise -- how does this reimbursement stack up against what you're hoping for in terms of any scenario -- good, bad, or ugly -- and then how does this change your strategy or what is your strategy into 2010 now that you at least have a framework for what the dollar amount is tied to your product?

As far as where it fits in within our range, it's at the high end of our range that we were anticipating. So -- we're quite pleased with where it ended up and believe that Medicare really looked at the data, looked at the users, listened to the appeals from the family practitioners and other professional societies that were supporting this code and generated very fair value. So we're quite pleased with that.

As far as strategy, we feel that basically it allows us to maintain a very similar strategy to what we have today. We may have to add some new sales programs, and we definitely believe there could be some pricing pressure that we'll have to adapt to. But, on the whole, we feel that the business model can largely move forward intact, obviously, with some tune-ups, to address the somewhat different economics. But, more or less strategically, it's really an extension of what we've been doing for the past several years. Although now, hopefully, with a much more robust and consistent reimbursement for our customers.

Ted Huber, Deerfield.

On the international business, would you characterize -- was the 280 order of the UK the whole international or are there other components there?

There was other business -- the 280 was a part of it. The reason we called it out was that it's one of the larger international orders that we've had -- the largest that we've had. But we have a little more international business than that.

320 was the whole international revenue?

It was a little bit higher than that. There was an additional $40,000 or $50,000 from other sources. I think what was also important that order, Ted, was that it was -- I believe it was our first ADVANCE order into the UK. And, again, in the UK, right now, we're almost -- we're exclusively, really, into orthopedics and, to a lesser degree, neurology. So we were very encouraged by that, and, obviously, the distributor there is hearing very good things about the utility of the product and its acceptance, as well as its reimbursement in order to place that kind of order.

I guess it was -- you'd think about it as a stocking order, right? And related to that, do you have any sense of what kind of revenue run rate you're at in the UK or internationally, when you ex out what you're stocking distributors at?

It's not entirely a stocking order, because we have an existing customer base there in the orthopedic market, and so they're servicing those customers. They were using NC-stat, so part of this is a transition of the NC-stat to ADVANCE. They weren't coming at it from scratch. There's actually 10 or 12 accounts there, or more, and growing.

I think the run rate is hard to pin down at this point because we are building distributor relationships. So a lot of what we're doing right now is somewhat stocking orders and buildup of inventory with distributors. I don't know if it's fair to take that $300,000 and multiply it by four. But it's becoming more substantial, Ted, and I think as we get into 2010, we'll be able to look at it as a real business and track it that way.

Do you have expectations just based on the regulatory and reimbursement environments that you see that you'll be able to add other meaningful countries in the next couple of quarters? Or does it seem like a longer-term proposition to build the international business?

No, we think that in Europe, absolutely, in 2010 we're in a position to get substantial revenue along these lines because we have the regulatory approvals necessary that the product is seen marked. Particularly, in orthopedics and neurology, it's a fairly clear runway with respect to reimbursement. But we're also looking to build a primary care business as well. I think that might take a little bit longer, but we're starting to make some inroads there in the UK.

And if I remember correctly, you do have distributors in place in most of the rest of Europe at this point. Or is that something you're still working on?

We have six distributors. Our most productive distributor is in the UK, but we actually have six good distributors throughout Europe. We have a lot of confidence in the ability to build strong markets in the Far East. We are still going through the regulatory channels there in Japan, China, India, and so forth. So -- when those flip over, potentially, some of them in 2010 or latter part of 2010, then we might also start seeing revenue in those markets. But that's really what's been holding us back there -- the regulatory pathway.

Okay. Back on the US -- a quarter or two back, you implemented a new sales structure with individuals focused on the different end markets, I think, of neurology, orthopedics in the primary care. What's your assessment of that structure at this point, and, I guess, particularly thinking about your ability to sell into this neurology base. Is it still viable, still working?

We're very encouraged, and I think the breakdown into selling to the primary care market with one salesforce, and the specialist market, which includes neurologists with other salesforces, is a good one. I think the call point is different, the messaging is somewhat different. So we're very encouraged by that.

I think we're starting to make very good inroads into neurology and physical medicine, which are the two traditional buyers of nerve conduction and EMG equipment. It's slow. We're dealing with very good competitors who have been in this market for 20, 25, 30 and in some cases 40 years with very established brands, excellent products. ADVANCE has a very good profile in terms of its mobility, its ease of use, and so forth, that we're finding a lot of interest in, but it's definitely -- we're starting to get very positive reaction. This past quarter, we were at several of the major neurology and physical medicine conferences, really, for the first time, and got very positive feedback.

It's translating into sales. It's a slow process, but I think we are definitely very encouraged about what that could represent for us and definitely plan on continuing with the separation of the salesforce in this way. And we're starting to get the kind of results that we expected. But it is a slow process.

Okay. And then, lastly, what's the [N] that the FDA is looking for on Andara? And what will that cost you if you decide to proceed with that?

It's still up in the air, but the original study was 14. We haven't locked it down, but we're probably talking, I would say, on the low end between 40 and on the high end 80. But there's some flexibility within that. And as far as cost and time, I think you're talking about -- you're definitely talking about a study that would be several million dollars, particularly if you conducted it in a short period of time. So we're just looking at that. We're still talking with the FDA, trying to pin down the specifics and then price it out and then make a good business decision.

And when you say "several million," you could charge for the devices in the study, is that right? Or can't you?

I think that's unclear at this point. But that's not the driving factor for the costs of the study.

Kurt Krueger, Krueger Capital.

As I try to work the numbers here and model this, I'm trying to run a line of the boxes and the disposables and further to try to understand -- if you want to call it, the throw-off per box. I'm working it all out, and it seems as though this may have dropped to a level of around, say, two per week per box -- a little bit above two per week per box -- and do you feel as though I might be on the right track with that? And can you tell me how prices may have trended during the quarter so that I can better try to model this any other revenue production?

Kurt, I'm not quite sure how you did the math for the two, but rather than trying to work that out here on the call, I would suggest that you maybe give Tom or myself a call later, and we can see how you came up with that and see if we can't try to help you out.

But -- as far as prices during the quarter, we really didn't see much change in ASP. Our ASP has been fairly consistent at 35 now for, really, at least the last five or six years as far as I can recall. So we didn't really see any erosion there or any -- really any substantial gross margin erosion, if that was the question you were asking. So we're still -- as far as discounting, for example, we're really not doing an extensive amount of that.

That's great -- no, that's helpful. That's what I really was asking about -- the price per disposable but then also the price per box. Has that been staying fairly consistent as well?

I think we probably -- that the -- you're talking about the new systems sold?

Yes.

I think it's probably trended down a little bit over the last several quarters. It gets a little bit complicated because we also have some types of transactions where they can purchase electrodes. If an adequate number, we would include a device in that at no charge, and then we have allocations and so forth that make that rather complicated. But I guess, on the whole, I would say that we'll probably -- at least for NC-stat -- the price of the device has probably trended down a little bit but not much. ADVANCE has actually been going up. On ADVANCE, we keep on raising the price, actually.

So NC-stat, stable, I would say maybe a tiny bit down; ADVANCE going up.

Again, I didn't mean to put out a number of the throw-off per week per box or per center or per doctor, but maybe you could just talk about that broadly because I feel like that's such an important factor in modeling the Company's revenue, going forward. Are you sensing that you're finding the bottom here of the swamp in terms of how productive each box is or each center is? You could just speak about it broadly, you don't have to give me a number.

Yes, I think the last several quarters it's been broadly flat, maybe slightly up. Again, it's a little complicated to look at because of seasonality and these other factors, but we haven't seen dramatic trends.

The big order in the UK, was that box heavy or -- it was a mix of box and disposables, I take it, but -- ?

That's right. It was 24 devices and a lot of consumables. It was an aggregate order, so we're going to put it all together. It was quite a large order both in devices and consumables.

And one last question -- you may have touched on this before, and I may not have focused on it -- but with those new reimbursement rates, could you just give us a sense of what the doctor sees in terms of what he can make, if you will, per procedure? How beneficial is that to him or her as he does a nerve -- ?

I think there is so much variation in what type of testing, physicians do -- per practice-to-practice clinical indications and even the number of limbs that they would test and so forth. So I really am going to avoid putting down hard numbers at this point because it would be pure speculation versus data-driven unlike, say, in a couple of quarters where we actually have real data. So I don't want to speculate.

But, again, I could make a couple of generic points. One is, relative to what they make today, if they are getting paid today, and they use entirely the new codes versus the old codes, it will go down somewhat. In some cases, it may be more significant; in some cases it may be very little. It really depends on the exact mix and match, and it's really -- there are a lot of variables in here.

But, on the whole, we do expect their economics to tighten. But I would match that with two points -- one is the stability of reimbursement is critical; meaning that right now they're only getting paid on one out of two patients. Then, obviously, they're getting 50% per patient. So stability, consistency, predictability, we believe eventually all of those will come along with a new code, and that is a lot of value to the physician.

And the second point I would make is, particularly in a primary care setting, we believe that the kind of incremental revenue when they test appropriate patients, is attractive. They don't have a lot of procedures they can perform. This is a procedure -- now, clearly, CMS has said is appropriate within the primary care setting, and, really, that's a -- it held a unique position then within primary care. So I think it's more important to focus on those factors than the exact dollar amount, but there is no doubt it will be an attractive procedure within primary care.

Shai, that's really helpful, because that's the same kind of economics that drove your sales to the high level that they were three or four years ago. It was an economically advantageous procedure for the physician. So it sounds like that's supported by the new reimbursement.

Number one, the sale has to be driven, the use has to be driven, obviously, one, two, and three reasons why the clinical utility value to the patient, how it adds to patient management. Of course, it has to be economically reasonable and feasible within the practice for the time spent on the investment and the equipment and so forth. And our overall assessment is that that will hold quite nicely with this new code, and I think that was -- CMS was cognizant of those factors, and that's why they ended up with this range of values.

John Borzilleri, GRT Capital.

Congratulations on getting a code that's acceptable. Shai, I have to ask you the obvious question, having owned this stock for a while. The code came out with the reimbursement level on October 30th, yet you guys decided not to say anything until this morning. And I think everybody views it as a material event, so I guess I wanted to get a sense of why that was, because communication is an important part of Wall Street.

The code -- it was public information. We had access to it just like everybody else did including investors, physicians, so on and so forth. Knowing that we had a call within several days, we felt it would be better just to -- given that it was public information -- to have the conversation at the time of the earnings call.

Okay, although that information is not the easiest to discern for the average person, and I've been at this a long time. The direct $75 -- I had a lot of trouble actually finding it anywhere in the CMS or the fee schedules or anything like that. So I just say it because it's important, and I think it creates uncertainty that you don't need at this point, or nobody needs at this point. Anyway, enough on that.

I wanted to ask you -- in terms of going forward now -- you said that the average person is one to two nerves and two limbs. How many sensors are used for the average limb?

Well, the testing is really guided by published clinical testing protocols, and most of those protocols typically end up involving two to three limbs. Again, these are evidence-based, for the most part, based on published studies, and so forth. Within a limb, whether you test one, two, or three nerves depends on the exact clinical circumstances and what the question the clinical physician is seeking to find out.

But they're typically testing one to two nerves. Electrodes and nerves are basically one and the same at this point. So if you test two nerves with our current electrodes, you would be using two electrodes.

Okay, and I wanted to get a -- you know, at $35, I wanted to get a sense of what kind of pricing flexibility you can have with -- going forward, with greater volume? I think your overall gross margin is 71%. I'm not sure how the sensors compare to the boxes, but how much pricing flexibility do you have and how much ability do you have to more efficiently produce things with higher volume?

Well, I think we obviously have attractive gross margins today, so that gives us some flexibility to do things. We, historically, have not put significant -- we put some focus but not our primary focus on cost reductions. Obviously, if we experience some pricing pressure, going forward, it would make sense for us to put more resources into -- on the cost side more than we have in the past, and, in fact, as we noted in the script, we have started putting more focus on that.

We feel that our cost structure gives us a lot of flexibility. Our R&D efforts can be directed towards cost reduction. So we are -- on the whole, again, we are very optimistic about being able to build a very good -- and eventually growing business -- around primary care nerve conduction testing with these kinds of economics.

The new sensor that you're working on -- is that something that is made -- it sounds like it's easier to use and all that. Is it meaningfully more -- I'm trying to get the clinical significance of it, or is it something that's going to be considerably cheaper to make so the profitability will be better?

I think you're referring to the new device, VANTAGE, not the new electrode -- or -- just so I'm clear on that.

I thought you said you were working on a second-generation NC-stat electrode?

A second-generation NC-stat -- next-generation NC-stat device.

Oh, the machine itself, okay.

Yes, the machine itself, yes. We are also working on -- we have a -- it's called VANTAGE, and that's our next-generation device, and I think it does have -- it has improvements on NC-stat in a number of areas. Of course, NC-stat is almost, really, a decade-old technology, and it's held up very well. But, obviously, there's been a lot that's gone on in the last 10 years that we can benefit from, both in terms of, basically, electronics as well as our expertise in the area. So that comes into play with VANTAGE.

We are always developing new electrodes, better electrodes, trying to develop lower-cost electrodes, electrodes that do more clinically, and that's an ongoing process for us.

Okay, and we should still be thinking of it in terms of being sold in the $5,000 range?

Well, we haven't set the price, but it wouldn't be lower than -- we wouldn't expect it to be lower than NC-stat, naturally, because it has more functionality.

Okay, the last question is -- now, can you give any ballpark on the transition of the CPT code to somewhat broad availability of reimbursement of private insurers?

The adoption by primary care -- by private insurers of the new code -- is that what you're asking?

No, I'm just wondering -- the process of getting a reimbursement code at private insurers. And I'm not even sure -- do you -- at this point do you know how much of your volume is Medicare versus private insurers?

Yes. Right now, it's been fairly consistent for quite a few years, depending on the practice, 30% to 40% is Medicare. And then about 50% would be commercial, and then 10% would be worker's compensation and various other types of insurers. So that's a typical breakdown. Of course, it varies somewhat by market and physician profile.

Private insurers, their adoption of new CPT codes varies widely. Some do it essentially as automatically as Medicare, whereby new codes are just inserted into the system, and it becomes available. That would be true, particularly, of those that also have significant Medicare Advantage type businesses.

Others, on the far extreme, review every code and may not insert it for half a year or nine months, and may debate it and build policies around it and so forth. So it's really quite varied and somewhat hard to predict. Generally speaking, lower dollar codes tend to move faster than big dollar codes, for obvious reasons. But I think, as a general point, it's not as automatic as Medicare, by any means, and it's something one has to watch. And in some cases you have to motivate it by talking to the insurers. And, of course, we'll be keeping close tabs on that and communicating with them as necessary and providing them with the necessary information.

Okay, and I had asked Tom the other day, neurologists are still biding this in their minds, anyway, and is there anything you can do to diffuse that issue a little bit? Tom told me basically those are just not the primary targets and it may not be necessary. But what can you do to prevent them from doing some of the things they did in the past?

Well, I think that a couple of things -- one is we are now also, of course, marketing actively into neurology and physical medicine with our ADVANCE system and really bringing to them -- many of the -- our technology and our expertise, and so they are benefiting now from what we have been able to achieve in this arena through ADVANCE, and I would say it's been well received, and they're pretty excited by our contribution to the area. So I think that's a positive.

Look, at the end of the day, when the code was affirmed and was voted positively on by the neurology societies so they, one way or another, they decided that this was a good resolution of their debate with primary care physicians.

So I don't know that we'll see the same level of issues that we have in the past, because now we have basically two codes -- one for specialists, one for primary care physicians, and hopefully everybody can just move on now and focus on taking care of patients. So I think it's a somewhat different setting than it was in the past.

(Operator Instructions) Juan Sanchez.

One short question related to the last one. The rollout for local Medicare carriers is automatic? I mean, what happens to all of these outstanding LCDs? They are disposed automatically or each one of those local Medicare carriers have any say in this? And the second is, when it comes to the private payors that currently do reimburse, how do they change and how do they adapt to the new code?

Well, I think Medicare automatically implements new codes in the fee schedule, and eventually they may add the -- they'll probably add the code to the LCDs. Right now, to our knowledge, all Medicare LCDs cover -- treat the NC-stat as a covered service either under the existing nerve conduction codes or under miscellaneous codes. So this would just combine them all, whether they are miscellaneous or existing codes, they are going to all be combined into this code. So we believe that should be, to the best of our knowledge, should be fairly straightforward.

Undoubtedly, all CPT codes have appropriate ICD9 codes and may have some policy constraints, and so forth, and they should. You should have limitations on the number of times you can test the patient in a year and all those things, and those will eventually either just be mapped from the existing codes or will be refined for this specific code. But, generally speaking, it's a fairly automatic process.

As far as, again, commercial insurers, it's really very hard to predict. Again, you've got, literally, 700, 800, maybe 1,000 different commercial insurers -- obviously, some bigger ones and some smaller ones. Many of them are fairly fast in automatically adopting this, and others will review each code with a policy review team and, as a result, it could take a long time, and we don't necessarily expect every private insuror to adopt this in 2010, and it will take some time to convince them. But we, obviously, hope that the bulk of them, over the balance of the year, and so forth, will adopt the code and see it as valuable for their physicians and patients.

Yes, but my question is, if I am a physician, and I am billing to a private payor, using the prior CPT codes, and I'm getting my money, and now they send you a CPT code, and the private insurance doesn't change their policies, what do I do, as a physician?

Well, I think you communicate with your insuror -- and say I'm doing nerve conduction using this equipment, how should I bill for it? They all communicate with their insurers and find out, a, whether they can do the procedure and on which patients in which clinical indications and then how to bill for it. And there will probably be a fair amount of variability initially. But it's something that individual physicians have to discuss with their insurance companies and figure out what makes sense. It's not something that NeuroMetrix gets involved with.

Kurt Krueger, Krueger Capital.

This is probably a question for Tom. Can you give us some guidance as to how we should show the shares outstanding to give -- reflect the offering in the next quarter? I guess you're showing $16.2 million this quarter. Could you help me understand that and what we should use, going forward?

Yes. So the $16 million, that's the weighted average shares for the quarter. I don't have in front of me the total outstanding, but it's about $22 million, $23 million after the 8.5 million shares that we issued in the pipe. So, looking forward, you probably want to consider in the fourth quarter that it's in the $22 million, $23 million weighted average shares.

Well, great. I think that takes up our time. I wanted to thank you all for participating on this call. We believe that we have made strong progress in 2009 and are well prepared for the upcoming year. Of course, there will be challenges in 2010, but we believe that we can start putting the Company back on track for growth, and we look forward to reporting on our progress. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.