NeuroMetrix Inc (NURO) 2010 Q4 法說會逐字稿

Good morning and welcome to the NeuroMetrix fourth quarter and full year 2010 conference call. My name is Peggy 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 the preservation of nerve function.

On this call, the Company may make statements which are not historical fact and are considered forward-looking within the meanings 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 the 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 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 and the risks and uncertainties, including the factors described under the heading, "Item 1A, Risk Factors" in the Company's annual report on Form 10-K for the fiscal year ending 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, please proceed.

Thank you, Peggy. I am joined today on our call by Tom Higgins, our Chief Financial Officer. In this conference call we will discuss business developments and our financial highlights for the fourth quarter of 2010. Following our prepared remarks we will be pleased to respond to your questions.

First I'd like to discuss our diabetes focus. Four weeks ago we discussed our shift in business strategy to focus primarily on diabetes. We are all aware of the evolving worldwide epidemic in diabetes, particularly Type 2 diabetics or diabetes. Peripheral nerve disease, called diabetic neuropathy, is a common complication of diabetes, affecting 50% to 70% of diabetics. Nerve disease can lead to foot ulcers and amputations, increased risk of falling, reduction in mobility and substantial pain.

Today, there is no objective and standarized test for diabetic neuropathy widely available at the point-of-care. The American Diabetes Association, or ADA, and other organizations recommend at least annual evaluation of all people with diabetes for diabetic neuropathy. Due to costs and availability, this screen is typically performed with a simple monofilament. This subjective method identifies late-stage neuropathy where intervention is generally limited to foot care.

Experts in the field agree that there's an important unmet need for a practical objective and sensitive tests for diabetic neuropathy that can be widely deployed in the regular care of all people with diabetes. We are developing NC-Stat-SL to address that need. This device measures nerve conduction in the sural nerve. Nerve conduction studies are now widely considered the gold standard test for diabetic neuropathy and have become primary end points in Phase III clinical trials for neuropathy therapeutics. Nerve conduction abnormalities, in the sural nerve in particular, are considered the earliest and most informative indication of diabetic neuropathy.

Our NC-Stat-SL device is easy to learn and operate. A test only takes about 30 seconds to perform. We have also focused a great deal of effort on making the test uniquely cost effective and we believe that we have succeeded. We are currently conducting extensive marketing studies to finalize pricing for both the consumables and the devices, as well as payment and reimbursement approaches. We believe we can achieve attractive gross margins at launch that will improve further with volume.

We do not expect significant third party reimbursement initially. However, given the low cost and tremendous upside of this test to people with diabetes and to physicians caring for them, we expect that in the short-term a combination of physician and patient out-of-pocket payment will fund the testing.

Concurrently, we are planning the type of clinical outcome studies that will lead to broad third party coverage, but, realistically, do not expect that to develop for several years. NC-Stat-SL is a modification of our well-established, general purpose NC-Stat device and has the same clinical indications with respect to diabetic neuropathy. Product development has been moving rapidly. We have taken this through product feasibility and now have working prototypes.

In parallel with product development, we are addressing market strategy with the help of outside experts in the field. At this point we expect to launch the product into the U.S. endocrinology market. We hope to build on success in endocrinology when we extend distribution to U.S. primary care physicians. That market, we believe, represents our largest opportunity and is a market in which we have relevant experience from our neurodiagnostic business. Our goal is to launch NC-Stat-SL at the June 2011 American Diabetes Association meeting, followed by direct customer rollout in the third quarter. This is an ambitious but attainable timetable.

Now, with regards to our neurodiagnostic business. After concluding that reimbursement challenges facing neurodiagnostics will not resolve soon, we implemented a restructuring in early January to focus on our active installed base while managing for positive net cash generation. We have signed new leadership, expanded our U.S. direct sales force in favor of independent distributors, consolidated our in-house customer support functions and narrowed our product offerings to a single system, which is ADVANCE. We have accelerated efforts to transition our NC-Stat accounts to ADVANCE during this year.

We are also continuing to build our international sales channel of independent distributors. These actions eliminated 21 positions, about 27% of our headcount, and should reduce annual spending by approximately $4.0 million. Importantly, we believe that the Company is now appropriately configured to aggressively pursue the diabetes opportunity, while continuing a high level support of our installed neurodiagnostic base in order to optimize cash generation for our neurodiagnostic products.

We'll turn now to the financial results for the quarter. Tom, please take us through the financial highlights.

Thanks, Shai. The overall message in the numbers is that we've continued strong progress in lowering spending, shifting costs from fixed to variable, lowering our cash burn and more tightly managing our balance sheet. The restructuring was an important and natural progression of what we've been working on. Our ongoing financial initiatives have been closely tied to the top line results we've seen in neurodiagnostics, as well as to our diabetes initiatives.

Our results for Q4 are closely in line with the financial highlights that we pre-released a few weeks ago on January 4th. Total revenue was $3.1 million, our Q4 cash burn was $1.9 million and we ended 2010 with cash resources of $17 million. For the full year 2010 our cash burn was $13.4 million.

In connection with the January restructuring, we recorded charges that totaled $2.3 million. These charges covered $1.8 million for inventory and $500,000 for severance. Of that total, $2.0 million was recorded in the fourth quarter and the remainder was recorded in the first quarter of 2011. The amount recorded in 2011 relates to severance, where employee notification occurred in early January and, in accordance with GAAP, related severance cost was booked in the period of notification.

The inventory charge of $1.8 million was non-cash. It related primarily to ADVANCE units in stock, plus some excess parts that we will use to transition our high volume NC-Stat accounts to the newer ADVANCE technology.

Our Q4 business metrics reflected a combination of lower patient visits, weather conditions, and continued account erosion, all of which depressed testing activity. Our active accounts during were 3,875. This was down 4.2% from Q3. Patient studies in the quarter were 28,041, down 12.5% from Q3. We placed 64 devices net in Q4 versus 85 in Q3. Most of these new accounts came through our direct sales force. Our U.S. independent distributors, who were brought on and trained early in Q4, had only a minor effect on the numbers.

Turning to the financial results we reported and particularly focusing on sequential quarter comparisons, the total revenue generated by neurodiagnostic products of $3.1 million was compared with $3.4 million in Q3 and $6.2 million in Q4 '09. So revenue was down 10% on a sequential quarter basis. Approximately $400,000 of that revenue was associated with new customer accounts and the balance of $2.6 million coming primarily from electrode reorders by our installed base.

The ADVANCE value program represented the majority of the 64 new accounts acquired in the quarter. Under this program, which is a combined device rental and electrode sale, the average deal price was $6,000. Electrodes sold in the quarter were approximately 106,000; that was down 12% from Q3. Our electrode ASP was $27.79.

Looking forward through 2011, our revenue forecast for neurodiagnostic products is $9.0 mm to $10 million.

Our gross margin in the quarter was $65,000 versus $2.1 million in Q3 and $4.4 million in Q4. The gross margin after adjustment for the inventory restructuring charges was $1.9 million. That represented a gross margin rate of 62.1%. That was up from 60.5% in the third quarter and lower than the 70.5% in the fourth quarter of last year.

During 2011 we forecast gross margin on neurodiagnostic sales to be in the mid-50% range due to higher electrode purchase costs resulting from lower volumes.

OpEx spending in the quarter was $4.5 million, a reduction of $1.1 million, or nearly 20% down from the $5.6 million we spent in the third quarter and from a run rate of about $7.0 million in the first half of 2010. That's $7.0 million per quarter. For 2011, we forecast total Company OpEx spending in the range of $17 million to $18 million.

In the quarter we also reported other income of $253,000. That included an R&D grant. This is a federal grant of $244,000 under the QTDP, the Qualified Therapeutic Discovery Program.

Our net loss for the fourth quarter was $4.2 million, $0.18 per share, based on $23.1 million weighted average shares outstanding. Excluding the $2.0 million restructuring charge, the fourth quarter loss was $2.2 million. That compares with a loss of $3.4 million in the third quarter and net income of $400,000 in the last quarter of 2009. The last quarter of 2009 had an unusual gain of $2.2 million that related to marking-to-markets on outstanding warrants.

Turning to the balance sheet, we ended the fourth quarter with $17 million in cash. Our cash consumption in Q4 was $1.9 million. That was an improvement from $2.7 million in the third quarter, which, in turn, was lower than $4.2 million in the second quarter and that, in turn, was lower than $4.6 million in first quarter of the year. So, progressively, quarter-by-quarter we have reduced our cash burn.

Looking forward to 2011, we forecast total Company cash consumption of approximately $10 million and that will be trending downward toward the end of the year. Our accounts receivable will reduce to $1.6 million from $2.3 million at the end of Q3. That balance still includes accounts related to the 12-month financing program that we ran in the first half of 2010, so there's still about $650,000 related to 12-month financing accounts to come in.

Excluding these financing effects, financing accounts effects, our normal accounts receivable DSOs were 40 days at the end of 2010 and that's an improvement from 48 days at the end of 2009, nearly a 17% improvement. Inventories at the end of the year were $2.4 million. Again, that's after the restructuring charge to inventory of $1.8 million and based on our Q4 sales volume, the represented a turnover rate of about 3.5X, in comparison with 1.6X at the end of 2009.

And so, Shai, those are the financial highlights, back to you.

Thank you, Tom. Those are our prepared comments, so we'd be happy to take questions at this point. Thank you.

Thank you. (Operator Instructions) Susan Cole, Ladenburg Thalmann Financial Services Inc.

Hi, can you hear me?

Yes. Good morning.

Hi. This is Susan with Ladenburg. I was wondering if you could refresh us on the timeline for your development in commercial plan for the DPN test?

Yes. The development is well underway and currently our plan is to launch the product at the ADA meeting, American Diabetes Association meeting, which is in late June and then to commercially ship product in the third quarter. And our target, initially, will be the U.S. endocrinology market, so endocrinologists who obviously see a high number of diabetics per physician.

Right and will you be utilizing your current sales force or what are your commercialization plans with that?

Well, we don't have a -- we disbanded the direct sales force as of the end of the fourth quarter, so we do have a field team of clinical educators, about 15, so we will be using the clinical educators. In the endocrinology market it's a fairly small number of physicians, about 3,000 target physicians. So there are a variety of ways to get to those physicians without using a direct sales force, such as through various kinds of marketing campaigns, and then the deployment will come through our clinical educators.

When we move beyond endocrinology and to the much larger primary care market, we're looking at a variety of different approaches, mostly, indefinitely, in the long-term centered around third party distribution.

Okay, great. Thank you, guys.

Sure.

(Operator Instructions) Bill Plovanic, Canaccord Genuity Corp.

Great, thank you. Good morning. Shai, I know you talked about launching the product at ADA. Just from a product development standpoint, do you have final form of the product and are you currently building inventory, or kind of where are you in the process with that?

We are well on our way to final form, Bill. We have working prototypes that are being used extensively in validation and so forth, but we're not in production yet. That would probably come -- start probably producing in the March/April timeframe. But we're very far along and of course this is built on NC-Stat, so we have quite a head start.

And in terms of the cost structure, are you still confident that you'll be able to make it for --I think you were talking somewhere in the range of $9.00 to $11.00, is that still the belief?

The target price would be in the $10.00 range, plus-minus. The cost of the consumables, yes, we're quite confident those will be under $2.00 and the cost of the device in the vicinity of $250. Obviously there's still kind of final production and packaging, those sorts of issues that we have to work through, but yes. We have a high degree of confidence around the cost structure of the product.

Great. Thanks, Shai.

Sure.

(Operator Instructions) Jonathan Rothschild, Arterio, Inc.

Hi. I'm a private investor and been with the company a while. My question is are you going to file under a PMA or 510(k) for this? And my second question is how do you tend to address the delisting issue coming up?

Sure. Let me take the first question and then I'll have Tom address the delisting matter. This product is a modification of our currently cleared and marketed product, the NC-Stat, and within the FDA's product modification guidelines. They produce guidelines that suggest whether modification requires or does not require a subsequent filing of a 510(k) and we do not believe that it requires a 510(k) because it falls within the indications for use and the product design of the already-cleared product. So we don't intend to file for this particular version of the product a 510(k). If future versions add new technical features, we will address it at that time.

And then, with the matter of the delisting, I'll turn it over to Tom.

Sure, Shai. So in terms of the delisting, there's actually a time period that we can work with that extends until late August, early September next year. It's a two-step process, so in our current status with NASDAQ, where we are on the NASDAQ -- I think it's the NASDAQ general market -- we'll continue that listing, even with no change in our share price, through about the end of March.

If, by the end of March we haven't complied with the minimum bid price, we then have the option -- of course with NASDAQ's agreement, which is normally given, we have the option of slightly changing the classification within NASDAQ to a related market, which has really no effect on testing, no effect on the stock's symbol, the listing, etc.

So, when we look at our timeline to return to compliance, it's from now through basically the end of August next year and to return to compliance, the issue is we have to perform. And so we think we've got the strategy in place that sets us up for that performance with our movement into diabetes and our change in strategic focus and we're going to work to get recognition in the stock price for that.

One more question. Are there any effective treatments for diabetic neuropathy? I know there's a lot of development work going on by biotech companies, but there are so many refractory conditions. The reason I'm asking is this would dovetail, of course, with the diagnostic end.

Sure. There are no specific treatments for diabetic neuropathy that are disease-modifying agents for neuropathy at this time.

There is a drug in late Phase III clinical trials, an aldose reductase inhibitor, by ESI Pharmaceuticals, which is a large Japanese pharmaceutical company, and that drug looks quite promising and in fact, nerve conduction is the primary end point. That data will come -- that trial will complete and the data will come out in a few years, and then there's a couple of drugs in late Phase II and earlier and again those will be disease modifying agents.

In terms of therapies that are brought to bear on patients with neuropathy, there are a couple of drugs to treat the symptoms of neuropathy, Cymbalta and Lyrica by Lilly and Pfizer. Those are very popular drugs and require essentially a diagnosis of neuropathy, so there are symptomatic treatments.

And then in terms of treating the underlying disease indirectly, it's very well understood now that lowering a patient's A1C, or their blood glucose levels, as well as their triglycerides, have a profound affect on neuropathy. And then, so, indentifying neuropathy early and influencing the patient and the physician to really get the glucose under control is very important and we see that as a key driver for adoption of the diagnostic. But, specifically, to treat the underlying neuropathy in a target fashion, that is still in development.

Thank you.

Sure.

Thomas Walstrom, NeuroMetrix

Good morning. I was wondering about the addition of Nancy Katz to the Board of Directors. Has she been a primary driver in the focused change over to the diabetic field?

Well, Nancy is a longtime, highly recognized marketing expert in diabetes, having worked at Johnson & Johnson's LifeScan division as well as Bayer and really ran Bayer's diabetes business. The diabetes focus occurred before Nancy joined, but the addition of Nancy to the board reflects our commitment to the diabetes arena and our efforts and she's been of great value and very helpful as we've moved forward.

Okay and you mentioned, last quarter call, about a panel, an expert panel that you would be creating?

Yes. So we have put together, and I expect we'll announce the details of the panel, but it's a scientific advisory board. We're just finalizing the last few members, but yes. It's an advisory panel of U.S. and international experts in diabetic neuropathy to help guide us in the development of the product, the clinical trials, and ultimately the adoption of the product. So I would expect, by the end of this month, we will put out a release identifying the individuals and their backgrounds and expertise.

Of the remaining employee staff that you have, could you comment on what types of employees these would be? Would they be production people, shipping people, or just exactly what?

Sure. Yes. We have a remaining headcount of in the range of - I think it's about 55 people. So, as Shai mentioned a minute ago, 15 of them represent our field clinical educators, so these are folks that have a clinical background, typically a nursing background, that are calling on our installed base of testing accounts.

In addition to them, we have a group of folks in R&D who are working on two things, primarily. One is the new diabetes product, the NC-Stat-SL, as well as some who are giving support to our existing diagnostic products, ADVANCE and NC-Stat.

Beyond those, we have an in-house customer service organization, which, well, provides customer service, takes orders, deals with issues that come up with customers. We have shipping and logistic folks and we have support G&A functions.

We don't have any production people because we outsource the production of our electrodes and of our devices. So, in short, it's a combination of field clinical educators, its R&D, its customer service and then it's the normal G&A functions that you'd expect.

What country do you outsource production to?

Well, it's all done domestically by two manufacture concerns in Massachusetts.

Okay and I noticed that we had a Form 4 SEC form issued yesterday regarding Walter Christensen. Could you explain what was in that Form 4?

Sure. That Form 4 was simply a notice that Walt, who had been one of our executive officers, ended his employment with the Company as of January 1st and so, since you were on our last call, you'll recall that we disbanded our direct sales force in exchanging for independent distributors, domestically. Walt led that direct sales force and so he has left the Company along with those remaining direct sales reps.

So these are share or options that are just being cancelled or what?

Well, sure. What happens is that Walt had an equity position in the Company in terms of options and restricted stock. Any unvested options and would be forfeited at the time he leaves. Any restricted stock that he held that had not yet vested would be forfeited and the options that had vested he would have a 90-day period in which to exercise. So we'll have a lot of this information in our 10-K, which will be filed within the month.

Okay, last question. You have a person who's out there investigating global sales with his expertise in global marketing. Has that person indentified any global markets and possibilities?

Yes. So his name is K. Balachandran and he now has two responsibilities. One is continued work in global markets, which is done through independent distributors, as well as operating as the Chief Operating Officer of our neurodiagnostic business.

But in terms of activity outside of the U.S., today it's primarily concentrated in the UK and the Netherlands where Bala has done a very good job in promoting growth in that area. He has also organized new distributors in several other countries - in Northern Europe, in Australia, in South Korea -- and is in active discussions with distributors in India and other places.

So this, as you know, it takes a while to get traction in global markets, but we are getting traction in Western Europe and we think that there are some good possibilities for our products in other parts of the world where physician compensation is more attractive than it is here.

And ladies and gentlemen, we have no further questions. I would like to turn the call back to Dr. Gozani.

Well, thank you very much for joining us on this conference call and we look forward to updating you on our progress as we move through the year. Thank you very much.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect. Have a great day.