NeuroMetrix Inc (NURO) 2010 Q1 法說會逐字稿

Good morning, and welcome to the NeuroMetrix first quarter 2010 conference call. My name is Chanel, and I'll 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 nerves 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 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' future results of operations and other forward-looking information.

You should not rely on forward-looking statements because actual results may differ materially as a result of a number of important factors, including those set forth in the earnings release issued earlier today, the risk and uncertainties included in the factors described under the heading item 1A, risk factors in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2009 and any updates contained in subsequent SEC filings. NeuroMetrix does not intend to and undertakes no duty to update the information disclosed on this conference call. I'd now like to introduce the NeuroMetrix President and CEO, Dr. Shai Gozani. Dr. Gozani?

Thank you. I'm joined today on our call by Tom Higgins, our Chief Financial Officer, Walter Christianson, our Senior Vice President of Sales and by K. Balachandran, who recently joined as Senior Vice President and International General Manager. In this conference call, we will discuss financial highlights for the first quarter and recent business developments. Following our prepared remarks, we'll be pleased to respond to your questions. Tom, please take us through the financial highlights.

Thank you, Shai. In our first quarter results, we saw the step decrease in revenue that we had anticipated and previously advised. This relates primarily to introduction of a new reimbursement CPT code and a 2010 Medicare physician's fee schedule. The new CPT code addresses nerve conduction studies, performed with pre-configured electrode arrays, such as those used with our NC device. The new code both defines nerve test procedures and assigns value on a different basis than pre-existing codes. The net result is lower physician reimbursement per nerve study.

In addition to the direct effects of the new code, the drop in revenue we saw in Q1 was likely exacerbated by two factors. The first was a general environment of uncertainty surrounding healthcare reform and how it would be financed. Anecdotal evidence suggests that this may have had an unfavorable effect on new technology investment in our target market for primary care physicians in small private practice. The second was more tangible; electrode sales and consumption patterns in the fourth quarter of 2009. During that quarter, quarter-end sales promotions resulted in sales of 29% more electrodes than were consumed by fourth quarter patient studies. Typically, we have seen excess sales in the range of 5% over consumption. This higher sales rate was unusual. In the first quarter of 2010, the pattern reversed itself, where we sold 8% fewer electrodes than were consumed.

While it is difficult to parse this data between the recurring activity and our install base and electrode sales to new accounts, it appears that there was some inventory buildup at continuing accounts in Q4, which was drawn down and not replaced in the first quarter. This likely served to depress Q1 revenue levels. However, without specific data on customer inventory levels, it is not possible to accurately estimate the financial effects of Q4 and determine whether the situation was fully corrected in Q1. Turning to the Q1 highlights and the income statement, total revenue was $3.7 million versus $6.8 million in Q1 '09, a drop of $3.1 million, or 46%. On a sequential quarter basis, we had reported $6.2 million in Q4 '09 and were down $2.5 million, or 40% from that number. The overall revenue split was 14% device, 86% consumables.

Device sales were $600,000 versus $700,000 in Q1 '09, and about flat with the fourth quarter of '09. We shipped 86 devices net in the quarter. This was up from 73 net devices in Q1 '09 and from 75 devices net in Q4 '09. Of the 86 new device placements in Q1, 74 were traditional sales and 12 were under a new subscription pilot program, where the customer pays a flat monthly amount for use of the device and a specific number of patient studies. The total new placements, 77% were NC-stat, 23% were ADVANCE. The ADVANCE sales included five international sales to a new distributor in Ireland.

Consumables revenue was $3.1 million, down from $6.1 million in the prior year and from $5.6 million in the fourth quarter. Consumables are pre-configured electrodes, primarily pre-configured electrodes used for nerve conduction studies. Coinciding with the new CPT code, we introduced uniform electrode pricing for customer convenience, which resulted in increases for some electrodes and decreases from others. Overall, our electrode ASP was $27.46 in Q1, reflecting mix, new pricing and incentives. This is a 12% decline from electrode ASP of $31.31 in Q4, and is down from $35.50 ASP in the year earlier quarter, Q1 '09. On a sequential quarter comparison with the fourth quarter, the $2.5 million drop in consumables revenue consisted of the 12% decline in ASP, which reduced consumables revenue by about $800,000, and the 31% volume drop, which reduced revenue by $1.7 million. We believe that the change in customer order patterns between Q4 and Q1, which I just mentioned, contributed to these volume effects.

Gross margin was 2.4 million versus 4.9 million in Q1 '09. Gross margin rate, 64.1%, was a decline from 71.6% in Q1 '09, and from a little over 70% in the fourth quarter. Contraction in the gross margin rate was primarily the result of the decrease in electrode ASP. Total OpEx spending was $7.1 million versus $6.2 million in Q1 '09, an increase of $900,000, or 14%. Increased spending in R&D and sales and marketing were partly offset by lower G&A costs. R&D spending, which was up $350,000, reflects development work on ASCEND, a nerve localization device for delivery of anesthesia and therapeutics. Ongoing developments efforts on ADVANCE and next generation electrodes, and preclinical work on NM101 .

Sales and marketing spending, up $750,000, includes costs of fielding a new team of clinical educators, new international employee costs, and beginning of year training meetings. Our net loss was $4.7 million in Q4, or $0.20 a share, that was based on 23 million shares outstanding. Turning to the highlights on the balance sheet, we ended the first quarter with $25.8 million in cash, and that reflects an operating cash burn of just under $4.7 million during the first quarter. Accounts receivable contracted to $3 million from $3.3 million at the end of 2009. This was a smaller reduction than might have been expected, given Q1 revenue. It reflects our initiative to offer 12-month installment terms to new customers who place a sizable order of consumables along with the device. As of the end of March, the end of the quarter, we had 1 million in receivables outstanding under this program.

Inventories grew to $5 million from $4.6 million at the end of 2009 as a result of the decline in electrode sales. We've taken steps to lower incoming electrode supply over the coming two quarters and we expect to bring this asset better in line with operations before the end of the year. Those are the financial highlights. Shai, back to you for a broader look at the

Thank you. So, as Tom pointed out, we are clearly disappointed, but not surprised with Q1 results. We previously noted that consistent and adequate physician reimbursement for nerve conduction studies performed using our nerve diagnostic devices is essential for efforts to build our US business, and thereby deliver the significant clinical benefits of this technology to patients. A significant positive step was taken on reimbursement in the fourth quarter of last year, when CMS published in the physician fee schedule for 2010, a new Category 1 CPT code with the number 95905, that describes nerve conduction studies performed with pre-configured electrode arrays, such as are used with the NC-stat device. This was an important development, as this code reaffirmed 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 takes time and is challenging.

However, we believe that physicians using the NC-stat are finding this new code useful and supportive of their efforts to deliver optimal patient care. Unlike the pre-existing Medicare nerve conduction CPT codes, but similar to many other diagnostic procedures, CPT 95905 is billed per limb tested as opposed to per nerve. Although practice patterns will vary, we believe that fewer units of 95905 will generally be billed per patient under the pre-existing nerve conduction study codes. We saw limited evidence of such a trend in Q1. As we have stated, lower physician reimbursement under CPT 95905 could affect testing patterns and put downward pressure on our revenues and margins. It is difficult to predict adoption and utilization of this 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 terms of Q1 developments, we now believe that the majority of Medicare fiscal intermediaries are covering medically necessary nerve conduction studies billed under the new CPT code. It is a credit to Medicare that so many of the intermediaries have recognized the clinical value and patient convenience delivered by this diagnostic technology to Medicare beneficiaries and the physicians that take care of them. However, it is also our current belief that the majority of commercial insurers are not consistently covering this procedure, similar to the NC-stat reimbursement situation in prior years. We have initiatives under way to improve reimbursement for the new CPT code, particularly focused on commercial payers. As is typical for reimbursement, we expect these efforts to proceed at a slow rate and the ultimate results are not necessarily predictable. The primary operating metrics that we monitored did not provide a clear sense of direction in the first quarter. We saw continued contraction in our install base, as we ended the quarter with a count of 4,309 active customers based on our 12-month lookback. This was down 4% from the fourth quarter counts of 4,493 accounts. However, patient studies performed on NC-stat or ADVANCE increased by 2.5% to 36,529 studies from 35,649 studies in the fourth quarter. Clearly, after a single quarter, this change could not be labeled the beginning of a trend.

By the end of the first quarter, we had fielded a team of 10 clinical educators and anecdotal feedback has been encouraging. Over time, we believe that field clinical and technical support to our install base will improve satisfaction with technology, as well as its utilization. Given the short timeframe of the single reporting period quarter and the mixed indications from our metrics, we intend to continue forward with our current overall market strategy. This is a strategy based on sales representatives focused on new account acquisition and clinical educators providing after-sale support. We do, however, intend to modify the implementation of the strategy. Previously, our direct channel included separate physician office and neuro-interventional sales forces. We have now decided to merge these two into a single group. This should allow us to more efficiently cover the US geography without the overlap we were seeing previously, as well as to improve overall productivity. We do not intend to lose specialist talent in this realignment. Where specialist knowledge is needed at a specific account, we will identify the best available resource from across the sales force and draw that talent in for support. Otherwise, individual sales representatives will cover both physician office and specialist accounts within their geography.

On the financial side, the realignment will allow us to reduce sales force head count by at least five positions at an annual savings in excess of $1 million. On the R&D front, our goals have been to launch both VANTAGE, our next generation physician office nerve testing device, and ASCEND, our device for nerve injections and regional anesthesia prior to the end of this year. For both devices, we are progressing through developmental and regulatory milestones that were known in developments to Q1 to report. Our ability to meet launch stage in 2010 is uncertain at this point primarily due lack of clarity and timing of the regulatory process. We are also continuing our preclinical work on NM101, a small molecule compound which may have the efficacy improving function in patients with chronic spinal cord injuries.

To date, preclinical work has encompassed both in vitro and in vivo work, recently including toxicology studies, dose (inaudible - technical issues) and preliminary clinical efficacy studies in canines with naturally occurring spinal cord injuries. Preliminary results are encouraging on both the safety and efficacy fronts. Our current plan is to continue development of this compound while looking for a corporate or financial partner to collaborate in the process. In conclusion, we are disappointed with the financial results for the quarter. The drop in revenues was related to anticipated and necessary changes to the business. However, we were encouraged that despite these substantial changes, our core operating metrics of patient studies and customer accounts were largely preserved. We believe we have an effective strategy in place, but it may take several quarters to see meaningful trends emerge. Those are our prepared comments. We would be happy to take questions now.

(Operator Instructions) And your first question comes from the line of Bill Plovanic of Canaccord. Please proceed.

Hi. This is Mark Quick on for Bill. Good morning.

Good morning, Mark.

Good morning.

Ladies and gentlemen, please stand by.

Hello?

Bill, you may proceed.

Okay. Sorry. I'll start again. What happens if a physician bills under the old code currently? Is it -- are they still reimbursed the old amount, or is it pushed back to them? What's going on when they do that?

Sure. Well, for Medicare, they should be billing under the new CPT code, because all of the Medicare intermediaries have determined that CPT codes covers neuroconduction studies performed with the type of electrodes used with anti-statin. So, they would be building under this new code and should not be billing under the old codes. With respect to commercial insurers it's a more variable situation. Some don't have any policy on the new code, in which case they may be covering it under the old code. In some cases, they're covering it under the new code. So, it really depends on the particular insurer in that case.

Okay. And then as far as your clinical educators, currently you said you have 10. What do you think is the optimal number right now for coverage of all of your territories? And do you have a specific goal to get up to? And then a second, follow-on to that, what is the ramp-up time required for them to get up to speed and to understand the changing reimbursement environment?

Sure. I'm going to turn that question over to Walt, who obviously runs the sales organization.

Good morning. Great question. When we looked at the numbers, the goal was to be able to touch every customer in a single quarter. So, to meet that end, we'll ramp up to 16 clinical educators. We were already in the phase of getting to 13, so we're talking about an incremental -- we didn't have the 13 filled yet. We're up to 11. We'll have -- the 16 will be filled by the probably middle of May. I'm sorry, the end of May to beginning of June and fully trained by the end of June. So, it will be a phase-in between the 10 we have completely trained and the remaining six, somewhere between end of May, depending on when they were hired, all the way to the end of June, that we would have 16 fully staffed and fully trained. I think the other part of the question was how much reimbursement questions they were receiving, was that it?

No, just ramp-up, as far as how long does it take them to get up to speed?

Okay. It's about a four-week ramp-up time with training. That's from the day they start until the day we run the two training classes, field rides, and that's been pretty consistent.

Okay. That's it. Thanks, guys.

Sure, thank you.

(Operator Instructions) And your next question comes from the line of Juan Sanchez of Ladenburg. Please proceed.

Good morning, guys.

Good morning, Juan.

Good morning.

The first question is whether or not we should expect more biosensor price reduction in upcoming quarters. And the second question is what trends in April have you seen some stabilization of certain measurements? And where do you see volume, in terms of biosensors per test going forward?

Okay. So, with respect to pricing, as I said, we started to go with a uniform price as of the beginning of this year and that entailed increases and decreases with a net drop in ASP, as Tom noted, of 12%. Our expectation is that we will not do any further changes in pricing, definitely not in the downward direction. The whole point was to make it straightforward and simple for our customers, so we just decided to do it all at once at the beginning of the year. But our expectation is that will be stable going forward.

In fact, we have also eliminated any type of discounting, promotional discounting or otherwise. So, this is -- it's a very simple, fixed price model for our customers, with really no variation. And again, the absence of the promotions in this quarter, as Tom noted, just to remind everyone, was one of the major changes between the fourth and first quarters. The next question you were asking is on utilization. We have seen, as we expected, a drop in the number of electrodes used per study, and we think that is tied to the reimbursement structure now being on a per limb basis versus a per nerve basis. It's been very modest to date, down just 5% to 6%, down to about 3.75 or so electrodes per study from about four. So, very modest drop to date. We would expect to see that continue to drop towards three electrodes per study. Where it will settle in between this level and three, we really don't know. We wouldn't ever expect it to go below three. In response to your question was --

Do you expect --

I'm sorry. Go ahead, Juan.

Yes. Go with the April question and the other question is whether or not you think people are migrating to -- towards testing for Carpal Tunnel Syndrome and giving up testing for the lower extremities?

Well, on April, I think we have -- we don't want to jump into the second quarter results at this point, but we haven't -- in general, we haven't seen substantial changes in the business. So, I think it's a long -- the point being, this is going to be a long, drawn out process. As far as testing habits, we haven't seen per se a trend towards more Carpal Tunnel testing versus lower extremity. Really, the reimbursement works out about similar. If anything, I think the reimbursement for Carpal Tunnel, relative to what it was before, has dropped, whereas in the lower extremities, it's -- the change hasn't been as great. So, we wouldn't expect to see dramatic changes, at least in the short-term in the pattern of usage, in terms of clinical indications.

Got it. Thank you, Shai.

Sure.

(Operator Instructions) And there are no further questions. I would now like to turn the call over to Dr. Shai Gozani.

Thank you. Well, thank you for joining us on this first quarter conference call. We look forward to reporting to you as we progress through the year. Thank you very much.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.