NeuroMetrix Inc (NURO) 2010 Q2 法說會逐字稿

Good morning and welcome to the NeuroMetrix second quarter 2010 conference call. My name is Veronica 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 predictive in nature, that depend upon or refer to future events or conditions that include words such as belief, may, will, estimate, continue, anticipate, intend, expect, plan or other similar expressions are forward-looking statements.

Any forward-looking statements reflect current views of NeuroMetrix about future results of operations and other forward-looking information. You should not rely on forward-looking statements, because 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, our form 10Q for the period ended June 30, 2010, which was filed today with the SEC, the risks and uncertainties, including the factors described under the heading item 1A, Risk Factors, in the Company's Annual Report on Form 10K for the fiscal year ended December 31, 2009, and any updates contained in the subsequent SEC filings. NeuroMetrix does not intend to, or undertakes no duties, 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, Veronica. I'm joined on the call today by Tom Higgins, our Chief Financial Officer, Walter Christensen, our Senior Vice President of Sales, and by Kay Balachandran, our Senior Vice President and International General Manager.

In this conference call, we will discuss financial highlights for the second quarter and recent business developments. Following our prepared remarks, we will be pleased to respond to your questions. Tom, can you please take us through the financial highlights?

Thanks, Shai.

Let me start with a few points of contact -- context on the quarter's results. First, during the second quarter we identified several sales transactions, mostly from Q1, which had been misrepresented by two of our sales reps in order to secure sales commissions. The total revenue related to this in the first quarter was $146,000.

The amount was clearly immaterial, and the reps involved were immediately terminated. We have improved our internal controls to prevent a recurrence. Our devices and electrodes were recovered, and our economic loss after insurance was less than $10,000.

Given the close attention we are paying to business trends, we elected to adjust our Q1 results, so that we'd be dealing with clean accounts in both Q2 and Q1. We filed our Form 10Q this morning, and the adjustments we made to the Q1 numbers are clearly laid out in the table in footnote one to the financial statements. My comments on sequential quarter comparisons will be based on the adjusted clean numbers.

Second, it's become increasingly clear from the start of 2010 that we are in a new, quite different business than the historical NeuroMetrix. The effects of the new Medicare code 95905 on our market have been profound. We're dealing with a new set of economics, particularly a smaller pie of available margin to be shared, and with heightened focus on electrode cost and testing efficiency.

Our customer base today is more stable than immediately following introduction of the new code, but it continues to be in some turmoil regarding nerve conduction testing reimbursement and physician economics. This is a new business, a new market since the beginning of the year. In most cases, financial comparisons with prior year results are not particularly relevant.

Our Q2 business metrics were mixed. Active accounts, which we measure on a 12-month look back, were 4,167. This was down 3.3% from the first quarter. The encouraging indication here is that this is the lowest rate of quarterly erosion that we've seen over the past four quarters. Patient studies were 34,368, down 5.2% from Q1.

A decline was expected because Q1 typically has higher testing, following the Christmas New Year holidays. We also expect to see lower patient studies during the summer months of Q3.

Correspondingly, patient studies per active account were down about 2%. An encouraging sign is that studies in our new accounts since January are running at about two times the testing rate of the overall installed base. Partly this may reflect enthusiasm of new clinical technology and recent training. However, with our field clinical educators and regular customer touches, we believe we can sustain higher testing rates in new accounts. Hence, the importance of this new business.

Another encouraging sign is international. During 2009 we averaged about 500 patient studies per quarter. In Q1, that increased to 770 studies and then crossed to 900 studies in Q2. We expect to pass 1,000 studies in the third quarter.

These testing accounts are concentrated in the UK and the Netherlands, and the growth has come since we added a European sales manager in Q1. We recently added a field clinical educator to further support this market.

Electrode shipments in Q2 exceeded electrodes used in patient studies by about 6%. This appears to indicate that the Q4 electrode inventory overhang in customers, which contributed to lower shipments in Q1, has been diminished or absorbed.

Turning to our financial results for the quarter, I'd like to focus on Q2 versus the Q1 sequential quarter comparison. And again, these comments are based on Q1 clean numbers as we presented them in footnote one to our Form 10Q this morning. Total revenue was $3.9 million, versus $3.6 million in the first quarter and $6.8 million in Q2 of 2009. Revenue grew 8% on a sequential quarter basis. Similar to Q1, the revenue split was about 13% device, 87% consumables.

Device sales were $500,000, almost identical with the first quarter, and in comparison with $700,000 in Q2 2009, essentially flat across all periods. We shipped 77 devices net in the quarter. This was up from 75 net devices in Q1 and 74 net devices in Q2 2009.

Of the 77 new device placements in Q2, 68 were traditional sales and nine were under a subscription pilot program where the customer pays a flat monthly amount for use of the device in a specific number of patient studies.

NC-stat ASP was about $2,000. It was about the same in the first quarter. ADVANCE was about $4,400. Consumables revenue was $3.3 million, versus $3 million in the first quarter and $6.1 million in the prior year. Consumables are primarily preconfigured electrodes used for nerve conduction studies.

Overall, electrode ASP was $27.63, similar to $27.46 in the first quarter. All indications to date are that our uniform electrode pricing of $27.50 is holding. Electrodes sold were up 8% over Q1 2010.

Gross margin was $2.4 million, versus $2.3 million in the first quarter and $4.8 million in the second quarter of last year. The gross margin rate was 63.5%, similar to 63.7% in Q1. Looking forward, we believe that our margin will remain at about this level during Q3, and then decline by approximately 10% in Q4 and in early 2011. This will reflect higher supply costs for electrodes, as we reduce our purchasing volume in order to better manage electrode inventory and working capital.

OpEx spending was $7 million, essentially flat with $7.1 million in the first quarter and $6.7 million in the second quarter of 2009. We recently took steps to reduce our head count by about 25%, and to reduce program spending. We believe this will reduce costs by over $2.5 million on annual basis. In Q3, we will record a charge of approximately $300,000 for severance-related costs.

Our net loss was $4.5 million in the second quarter, $0.20 a share, and that's based on $23 million shares outstanding.

Turning to the balance sheet, we ended Q2 with $21.6 million in cash. Our cash burn in the quarter was $4.2 million, and that was an improvement from $4.6 million in the first quarter. Accounts receivable was reduced to $2.8 million from $3 million at the end of Q1. Of that $2.8 million balance, approximately $1.3 million relates to 12-month installment terms to new customers who made a large initial purchase.

Inventories were $4.9 million, down from $5 million at the end of Q1. As I mentioned, we've taken steps to lower incoming electrode purchasing volume to bring this asset better in line with operations. At these lower purchasing rates, our per unit vendor cost will be about 20% above current prices, and that will remain until we resume purchasing at the higher volumes we had in Q1 and earlier.

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

Thanks, Tom.

We made some progress in the second quarter, as Tom carved out in the financial highlights. However, given our market opportunities and available resources, we believe we are not moving forward at a fast enough rate. Although new customer acquisition has been stable for the past four quarters, it is lagging our goals.

In our US nerve testing business, we recognize that our products need broader market exposure for growth. Today, we sell to new customers in the physician office market through a direct sales force. We plan to supplement the direct team with about 25 independent sales representatives. Our sales force will be comprised of 15 direct top performers, who will be assigned to key market areas, with the independent representatives covering the remaining geography. In total, we expect to have about 40 sales territories.

For the orthopedic, neurology and pain markets, today also covered by our sales force, we intend to use regional distributors to expand coverage. The transition to a hybrid, direct distribution model is underway and will continue in the third and fourth quarters.

After-sale support for all new and existing customers will be provided by our team of field-based clinical educators. We believe that this team is positively impacting customer testing by providing high quality technical and clinical support. And therefore we plan to slightly increase its size in Q3 and possibly again in Q4.

It is still early, but the Q2 statistics on testing activity in territories where there was an established clinical educator were positive. There does seem to be a one or two quarter lag between assigning a clinical educator to a new territory and there being a measurable impact on testing rates in that territory.

In addition, our clinical educators have been spending a great deal of time addressing reimbursement and testing economic issues related to the transition to the new CPT code, which has limited the time available for clinical topics.

On reimbursement, we believe that physicians are generally receiving reimbursement under the new category one CPT code, which is 95905, from Medicare for medically necessary nerve conduction studies performed using preconfigured electrode arrays, such as with the NC-stat device.

We also believe that physicians are receiving reimbursement for CPT 95905 from a small number of commercial insurers. On that front, we are working with reimbursement experts to expand coverage for this code.

We recently narrowed the focus of our protect development efforts. We are implementing several modifications to ADVANCE which enhance the ability of physicians to customize reporting of test results, and should make the device more attractive for use in the physician office market. Once the modifications are complete, it is our intention to introduce ADVANCE into that market.

ASCEND, our development-stage product for therapeutic nerve injections and regional anesthesia, will be deemphasized in the near term, which will postpone its development and regulatory process leading to product launch. We will not initiate new work on our spinal cord injury programs, which is NM101, the drug and [Endara], our implantable device. We'll hold off on these in the near term, although certain important animal studies for NM101 will continue to completion early next year.

We see a significant opportunity to expand utilization of our nerve testing technology in individuals with diabetes. Currently, about 25% of the tests performed with our NC-stat and advanced devices are targeted at diagnosis of large fiber diabetic peripheral neuropathy, or DPN, in patients exhibiting clinical symptoms of that condition.

Nerve conduction studies, or NCS, are the gold standard for diagnoses of DPN. However, cost and limited access have prevented utilization of NCS for widespread screening, which is essential for early detection of DPN and prevention of its complications, such as foot ulcers.

We believe that our rapid, low-cost point of care test for DPN represents an attractive US and international market opportunity. We have made development of a low cost version of NC-stat, and a low-cost disposable electrode for this application, an R&D priority. It is early in our market assessment and product design development efforts. However, we do look forward to updating you over the next several months.

Assuming that we continue to believe in that opportunity and reach our project milestones, we believe we have the capability of launching this product in the US and several international markets in the second half of 2011. In order to resource these product and sales initiatives, and to conserve operating funds, Tom mentioned that we recently implemented a reduction in force that resulted in the elimination of approximately 25 positions, or about 25% of our workforce, as well as other cost saving initiatives.

We estimated that this should reduce annual spending by about $2.5 million. During the third quarter of 2010, we expect to record a restructuring charge of about $300,000, primarily related to severance.

These steps are never easy to take, and I want to sincerely thank all those affected for their efforts on behalf of NeuroMetrix. Unfortunately, this reduction in force was essential to our business.

Those are our prepared comments. We would be happy to take questions now.

(Operator Instructions)Your first question comes from the line of Kurt Kruger from G2 Capital. Please proceed.

Hi Shai, and Tom.

Good morning, Kurt.

Can you give us a sense of the timing of the new version for the diabetic market? Is that dependent on any kind of FDA approvals or any kind of testing? Can you just flesh that out a little bit for us?

Sure. Our current -- well, it is NC-stat, which is cleared for testing of the specific nerve that we would proceed with. So, it's really just a reformulation of the NC-stat and should be a direct pathway from both a regulatory and developmental perspective. And there are already published studies showing the NC-stat's usefulness in this application.

So, we look at it as a fairly low-risk development effort and are encouraged that we can bring this product to market next year.

That's great. Just a follow up question too. I was really quite encouraged by the fact that you had sequential growth. Can you give us a sense of the pace, I think you said there seemed like a lot of moving parts, in terms of all of the various factors looking forward here in fourth quarter. Are we likely to have reached the bottom here and see either flat or improving sales in the third and fourth quarter?

Sure. Kurt, this is Tom. So, it's hard to predict whether or not we've hit bottom, but what does seem to have occurred is that the rate of account erosion has been reducing. So that's an encouraging sign. And we see good testing rates and activity in international and in the new accounts that we've sold since the first of the year. So, those are good signs.

The third quarter, as I understand seasonally, has been a down quarter in terms of testing activity, because of the holidays in July and August. So I'm not sure the third quarter is going to be a good indicator, but hopefully by the fourth quarter we'll see a clearer sense of a trend developing. Is that helpful, Kurt? Is that pretty much what you --

That does. I realize that the third quarter -- it's unfortunate that there are a couple factors that would -- that may reduce the third quarter. But, sure, that's helpful. Thanks so much for taking the questions, and good job.

Okay.

Thank you, Kurt.

There are no further questions. I will now hand the call back to Dr. Shai Gozani for closing remarks.

Well, thank you very much for joining on this call. We, obviously, have a number of areas that we will update you on as we go through the rest of the year, and we look forward to commenting on our progress as we go through it. Thank you very much.

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