NeuroMetrix Inc (NURO) 2009 Q4 法說會逐字稿

Good morning and welcome to the NeuroMetrix fourth quarter 2009 conference call. My name is Amika and I will be your moderator on the call. NeuroMetrix is a science based healthcare company that is transforming patient care through neurotechnology. The company's mission is to provide innovative products for preservation and restoration of nerve and spinal cord function and pain control.

On this call, the company may make statements which are not historical facts and are considered forward looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are predicative 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 infer forward looking statements. Any forward looking statements reflect current reviews of NeuroMetrix about future results of operations and other forward looking information. You should not rely on forward looking statements because actual results may differ materially as the result of a number of important factors, including those set forth in the earnings release issued earlier today. The risks and uncertainties include the factors described under the heading item 1A, Risk Factors; the company's annual report on Form 10-K for the fiscal year ended December 31st, 2008; and any updates in subsequently filed quarterly reports on Form 10-Q and other SEC filings. NeuroMetrix does not intend to and undertakes no duty to update the information disclosed on this conference call.

I would now like to introduce NeuroMetrix's Chairman and CEO, Dr. Shai Gozani. Dr. Govani?

Thank you, Amika. I'm joined on the call today by Tom Higgins, our Chief Financial Officer; and Walter Christensen, our head of Global Sales. In this conference call, we will discuss financial highlights for the fourth quarter and recent business developments. Following our prepared remarks, we are pleased to respond to your questions. Tom, I'd like you to take us through the financial highlights, please?

Thanks. At a top level, there were no surprises in the fourth quarter. Financial results were in line with our internal expectations. Revenues were essentially flat with the prior quarter. Margins were consistent. OpEx spending continued under control and cash burn was where we expected it. Underlying the financial results, Q4 utilization within our install base -- in other words, nerve conduction and needle EMG studies done with our technology -- was down 10% from the third quarter. This is a similar pattern to prior years where the combination of Q4 holidays and weather conditions causes a drop in physician visits from the fall. In spite of the drop in utilization, consumables revenue was consistent with the third quarter. This indicates a build in inventory at our customers which could adversely affect Q1 revenue.

Turning to the Q4 highlights in the income statement that was attached to the press release, total revenue was $6.2 million versus $7.2 million in the fourth quarter of 2008. The more relevant comparison is Q3 2009, and in comparison with Q3, the fourth quarter was within $100,000 of that previous quarter. The revenue split was 9% device revenue, 91% consumables. And if you recall, in Q3 we had a large stocking order from our UK orthopedics distributor in the amount of $280,000. If you adjust Q3 revenue for that stocking order, Q4 revenue is in fact, up about $200,000 from the third quarter. Device sales were $600,000 versus $1 million in the prior year and $700,000 in the prior quarter. The majority of new device accounts were NC-stats sold through the physician's office channel. This is consistent with the last few quarters. Also, we booked an initial order from our distributor in the Netherlands, who was enthusiastic about opportunities in that market. Consumables revenue was $5.6 million, down from $6.2 million in the prior year and level with the previous quarter. Consumables are primarily preconfigured electrodes used for nerve studies. The electrode mix was consistent. Electrode ASP dropped to about $32 per electrode versus $35 in the prior quarter, reflecting end of year promotions.

Moving down to our gross margin, that remains strong at 71.5%. In fact, it is an improvement from 67.8% in the prior year and down slightly from 71% in the third quarter. Gross margin dollars were down $500,000 from last year's Q4. Over the past two years, margins have been tightly clustered around 70% and have ranged between 67.8% and 73.5%. We do expect downward pressure on revenue and margins in 2010 following adoption of the new Medicare reimbursement code, which I will be addressing in a moment.

Total OpEx spending -- OpEx includes R&D, sales and marketing, and G&A. Total OpEx spending was $6.3 million versus $5.7 million in the prior year, excluding one time charges, and $6.4 million in Q3. So our programs and run rates were consistent over the second half of the year and Q4 was about right on Q3. If you look at OpEx on a full year basis, 2009 OpEx spending was $25.6 million, and that was down by $6.7 million from $32.3 million in 2008, again setting aside one time charges in 2008. So this reduction is as we scale back the business, particularly sales and marketing in 2009 and settled several long outstanding issues.

In 2010, some of that spending will be restored, likely in the range of $3.5 million to $5 million increase in open expending. This primarily reflects critical investments we intend to make in our sales channel and new product launches. Broadly talking about OpEx, in R&D we will be completing development and clinical work on Vantage and Ascend for nerve localization. Both Vantage and Ascend are targeted to launch this year. We will also invest in clinical studies supporting the neurodiagnostic business and continue preclinincal work on our nerve regeneration compound, MN101. Within sales and marketing, we are fielding a new clinical educator team to support customer utilization within our install base. In addition, we will be providing increased marketing support to the two new product launches, modestly increasing sales support staff, and adding a small dedicated staff focused on international markets and international opportunities.

Returning to the P&L in our Q4 results, our operating loss was $1.9 million versus an operating loss of $800,000 in the fourth quarter of 2008, excluding one time charges, and an operating loss of $1.9 million in the third quarter. So Q4, Q3, operating loss of about the same level. Below operating loss, we recorded a credit of $2.2 million, to adjust to fair value warrants that were issued in the Q3 financing. These warrants have contained a cash settlement feature which required measurement and recording of a warrant liability. The warrant terms were modified in the fourth quarter. As a result, there was a final mark to market adjustment and that is the $2.2 million. And the related warrant liability, which totaled $19.7 million, was then reclassified as paid in capital. That is the final accounting for the warrants that were issued in the Q3 financing. That warrant credit contributes to net income for the quarter of $363,000 or $0.02 a share. If you exclude the warrant credit, we incurred a loss of $1.9 million or $0.08 a share.

Moving down to the balance sheet highlights, we ended the quarter with $30 million in cash, after beginning the year with about $20 million in cash. We raised $17.5 million during the year and we burned about $6.9 million. The cash burn included $3.2 million in operating burn plus $3.7 million in litigation settlement. Our Q4 cash burn was $1.6 million. Other current assets primarily consist of receivables and inventory. Receivables of $3.3 million and inventory of $4.6 million were under good control and they presented no year end valuation issues.

So in summary, the quarter's financial results were in line with forecast. There were no surprises. We enter 2010 with a strong balance sheet. Those are the highlights, and Shai, back to you for a broader look at the business.

Thanks, Tom. As Tom noted, Q4 results were consistent with our expectations. As we have previously discussed, consistent and adequate physician reimbursement for nerve conduction studies performed using our neurodiagnostic devices is essential to our efforts to build our US business and thereby deliver the significant clinical benefits of this technology to patients.

A positive step was taken in reimbursement in the fourth quarter when CMS published in its physician fee schedule for 2010 a new category 1 CPT code, 95905, which described neuroconduction studies performed with preconfigured electrode rays such are used with the NC-stat device. This is an important development, as this code reaffirms the clinical utility of the NC-stat and supports its use by primary care physicians and internal medicine specialists when medically appropriate. As for any new code, adoption will take time and may have some challenges. However, we believe that physicians using the NC-stat will find this new code useful in support of their efforts to deliver optimal patient care.

Unlike the preexisting Medicare nerve conduction codes, but similar to many other diagnostic procedures, CPT 95905 is billed per limb tested as opposed to per nerve. Although practice [plans] will vary, we believe that fewer units of 95905 will generally be billed for patients under the existing nerve conduction study codes. Lower physician reimbursement under CPT 95905 could affect testing patterns, and in the near term we expect will put downward pressure on our revenues and margins. Looking out further, however, we believe the new CPT code may be a positive influence in reimbursement by commercial insurance. It is difficult to predict adoption and utilization of the new CPT code in the near term, as there are many factors in play. However, we believe that ultimately the effect will be positive and allow us to return the company to a growth track.

In the meantime, we see a period of readjustment that could span several quarters or perhaps longer. Our hope is that we will begin to see signs of return to stability in the second half of 2010. During the readjustment period, revenues may not be the best barometer for emerging trends in the overall health of the business. We are closely monitoring trends in our install base and our testing activity and will report some of these metrics. Specifically, we will be reporting on our total number of active customers and on studies performed within these accounts. We feel these are relevant indicators of our business. As a point of reference, active customers at the end of 2009 -- this is a 12 month look back at customers using our technology fell to 4,493. There were 35,649 studies performed in the fourth quarter of 2009. These are patient studies with any of our consumables using our information technology systems. We believe this is an accurate estimate of the number of studies performed with our technology.

We have anticipated this period of readjustment. To position ourselves, we have taken several important measures. First, we have rebuilt our senior management team with new leadership in both sales and finance. We have strengthened our balance sheet, adding $17.5 million of new operating resources within equity financing in the third quarter. Importantly, we have revamped our sales organization and customer interface, including the following. We've organized North American sales into two groups dedicated to physician office market and the neurointervention market. Physician office market is primary care physicians, internal medicine, endocrinology, and rheumatology. Our neurointerventional market is neurology, physical medicine and rehabilitation, orthopedics, and pain medicine. We have initiated a clinical educator program which supports our physician office sales and provides direct clinical support to our customers. We have refocused our physician office sales representatives on new account acquisition. We have merged our customer service and account management organizations into a single customer support entity, and we have sharpened our European focus with an on-site employee in the UK and extended customer service hours. Finally, we have focused our R&D pipeline with multiple product launches in 2010 within the neurodiagnostic and nerve localization markets. We are developing several clinical outcome studies related to the use of preconfigured electrode rays which we will be launching this year.

Although we see business challenges in 2010, we believe we have the right organization strategy to be successful in the long-term. Our goal is to exit the year showing meaningful improvement in key business metrics which point us to a return to growth. Those are our prepared comments. We would like to take questions now.

(Operator Instructions). Your first question from Bill Plovanic with Canaccord Adams. Please proceed.

Good morning. Just a housekeeping question to start out with, Tom, what was the actual shares out for the quarter and for the year? It wasn't in the press release.

So at the end of the quarter and the year, was about 23 million. Did you want the weighted average for the year too?

Actually so we can plug them into our models, because like I said, we didn't have the exact number in the press release. If you have a more accurate number, that would be great.

Sure. The weighted average shares outstanding in the quarter were 22.966 million. The weighted average shares outstanding for the year were 16.784 million.

Thanks. I was wondering -- a little more color on the distribution channels in terms of the sizes, and if there is any granularity you can give us on new product introduction timelines, when does the Vantage come out? Is it second quarter event, first quarter event? When do you expect all the submissions and the 510(k)s, approvals, or what have you?

I will start this question. We have essentially three field organizations in North America. We have the physician office sales force. That is at fully staffed, 21 sales representatives. That is supported by the clinical educator group, which will be staffed at 10 supporting that group. And then we have our neurointerventional group, which is 12 sales representatives, and in Europe we have one full-time employee and we go through distribution of course.

In terms of product launches, we have two major product launches planned for the year. We have not announced specific timelines for those. We do expect both to be this year. One is Vantage, which is the next generation nerve conduction platform that would be sold primarily to the physician office channel, but also to a more limited extent to the neurointerventional channel. We have not so much regulatory hurdles there, but product ramp up, product development. It is definitely a 2010 launch. And Ascend, which is our nerve localization platform which we will be launching into the anesthesia market, looks like a second half of the year launch. There is a -- we already have several 510(k)s for that product. In terms of the full range indication of use we are looking for, we want to achieve one more 510(k). And that's probably a third quarter type of timeline, so we are looking for the second half of the year for that launch.

Then with the changing in the codes and how they are reimbursing per limb rather than per test, does the current electrode configuration that you sell address the new codes in reimbursement? Or do we really need the Vantage to get the go where you are selling a product that addresses the reimbursement codes as they stand now?

That is a good question. They don't line up as neatly as they did under the prior codes. As a limb based reimbursement, obviously you get paid per limb regardless of the number of nerves you test. In some cases you need to test multiple nerves and the reimbursement we see is fixed per limb. This is not uncommon. For example, needle EMG testing is done the same way, per limb, and many other kinds of procedures. That is part of the transition and part of the realignment. We have been able to adapt the current -- customers are adapting their utilization to the new codes. Obviously it is very early. We are only five weeks into the new codes. We will probably have more to say about this after the first quarter. We are looking and we are in the process of developing combined electrodes. We have talked about those a little bit, and those will be launched later in the year, which I think would fit more neatly with the current reimbursement structure

And then just for clarification, really the Vantage system is a replacement, next generation NC-stat. Is that how we should look at that?

Well, it has a broader array of functionality, so it would work with both preconfigured electrodes but also conventional electrodes. It would be a replacement for the NC-stat in many cases, but also an expansion in functionality.

And then --

We will not continue selling the -- we will transition from NC-stat sales to Vantage sales. We don't expect for beyond a quarter or two to have parallel sales.

I'm sorry, you were speaking quickly. The Q4 metric that you said you had about 4,493 active customers, and how many studies were performed?

About 36,000 studies. These are patient studies of any type. So that could be using one or more of the nerve specific electrodes or neurologists using it with needle electrodes and conventional electrodes. It is the universe [of activity] with our products. Obviously the bulk of that is with more specific electrodes.

And the way to think of it again -- this is almost 36,000 studies, would be basically 36,000 patients?

Correct.

We think that's the most important metric for the business because it speaks to how many patients are being tested, and as the utilization -- in a sense addressing your question earlier -- as the number of electrodes or types of electrodes are adjusted to fit with the current reimbursement and clinical utilization, the way a study is implemented may change. What is important is that the activity in terms of patient studies is stable and starts to go up. That will reflect the growing business.

Great. Thanks a lot.

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

Thank you for joining us on this conference call and we look forward to reporting on our progress as we move through this important year. Thank you very much.

Ladies and gentlemen, this concludes the presentation and you may now disconnect. Thank you and have a good day.