NeuroMetrix Inc (NURO) 2011 Q1 法說會逐字稿

Good morning, and welcome to NeuroMetrix's first-quarter 2011 conference call. My name is Veronica, and I will be your moderator on the call.

NeuroMetrix is a science-based health care company that is transforming patient care through neural technology. 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 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 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. The risks 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, 2010, 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, Veronica. I am joined on the call today by Tom Higgins, our Chief Financial Officer.

In this conference call, we will discuss business developments and our financial highlights for the first quarter of 2011. Following our prepared remarks, we'll be pleased to respond to your questions.

During the first quarter of 2011, we continued to make good progress in transitioning our business towards a primary focus on the diabetes market. This direction makes a great deal of sense for NeuroMetrix. There is a worldwide diabetes epidemic, particularly of Type II diabetes. The CDC estimates that there are over 200 million people worldwide with the disease.

In the U.S., there are about 25 million people with diabetes and another 57 million with prediabetes.

One of the most common complications of diabetes is peripheral diabetic neuropathy, or DPN. The prevalence of DPN is estimated over 50% if sensitive detection means are used, such as nerve conduction studies. DPN causes pain syndromes, increases the risk of falling in the elderly, and, most critically, leads to foot ulcers that result in lower extremity amputation. In fact, the number one cause of lower extremity amputations in the U.S. is diabetic foot ulcers, and foot ulcers are the leading reason for diabetes-related hospitalizations.

Overall, DPN has an estimated annual cost of $11 billion in the U.S. alone.

DPN is often underdiagnosed by physicians, leading to missed opportunities to intervene for the benefit of the patient and to lower treatment costs. The American Diabetes Association, or ADA, recommends annual screening and monitoring for DPN.

The most widely used physician detection tool is the monofilament test, which detects late-stage neuropathy after the foot has lost protective sensation. Although effective at detecting feet with high near-term risk of ulcers, the monofilament test is subjective, lacks standardization, and is not useful in early detection and monitoring when progression of DPN to loss of protective sensation may be arrested through various interventions, including better glycemic control, lowering of triglyceride levels, and eventually neuroprotective drugs, at least one of which is in Phase III clinical trials.

Further, many people with diabetes do not receive an annual foot exam by any technique. Experts in the field agree that there is an important unmet need for a practical, objective, and cost-effective test for DPN that can be widely deployed in the regular care of all people with diabetes.

We are uniquely positioned to address this unmet need. Nerve conduction studies are considered the gold standard test for DPN. Specifically, nerve conduction abnormalities in the sural nerve are one of the earliest and most informative indications of DPN.

We have 15 years of experience designing and commercializing point-of-care nerve testing devices. We are bringing that experience to the aforementioned unmet need through the NC-stat DPNCheck, which is a rapid, quantitative, point-of-care test for the evaluation of systemic neuropathies such as DPN. Our test measures sural nerve conduction velocity and amplitude, which are standard biomarkers for both subclinical and symptomatic DPN.

It is compact, handheld, and the clinical interpretation is straightforward. NC-stat DPNCheck is a modification of our well-established, 510-K-cleared NC-stat system. For more information, I encourage you to visit the diabetes page on our website, which includes a video demonstration.

During the first quarter of 2011, we made good progress in our NC-stat DPNCheck program. Specifically, product development is on schedule. We conducted third-party market research among U.S. endocrinologists, which indicated encouraging product interest and confirmed our pricing models. We finalized our scientific advisory board, which includes international leaders in the detection, management, and treatment of the neurological complications of diabetes.

The product was successfully previewed at the annual conference of the American Association of Clinical Endocrinologists, or AACE, on April 14-16 of this year, and product launch is scheduled for the annual conference of the American Diabetes Association, or ADA, in late June, specifically June 22-24. And evaluation in commercial use should begin shortly thereafter, as soon as the third quarter.

We are particularly pleased with the reception for NC-stat DPNCheck at the recent AACE conference. Many endocrinologists had a chance to view a live demonstration. The product's ease of use and quantitative assessment of DPN seemed to resonate with the attendees. Importantly, many physicians signed up for device evaluations when they are made available.

The conference was also instructional for us as we prepare for our next final milestone, which is product launch at the ADA in late June. Following ADA, we will commercialize the device in the U.S. endocrinology market through a small, focused direct sales organization comprised of seven to 10 sales representatives, which we are currently constructing. After establishing market adoption within this initial market, we will seek to expand into the broader U.S. primary care market, as well as select international markets.

As we have previously noted, the product will be priced at approximately $15 per biosensor, which is single-patient use. The devices will be provided at no charge. Our market research suggests that at least half of U.S. endocrinologists are willing to adopt the product under a patient-pay model and will likely charge the patient in the vicinity of $25 to $30 for the tests.

We're also beginning our efforts to develop third-party and managed care coverage for this procedure. It is our hope that some reimbursement will develop in two to four years. In the meantime, we believe that a substantial business could be created through patient pay due to the low cost and tremendous benefits of this test to the patient and physician.

Turning now to our historical neurodiagnostic business, we reported in January of this year the steps we have taken to restructure the business to reduce costs and optimize cash flow. This was accomplished successfully, and we are seeing improvement in financial performance. In the first quarter of 2011, our neurodiagnostics business generated positive net cash flow to the Company.

With that, I will now turn it over to Tom for financial results in the quarter.

Thanks, Shai. This morning, we reported Q1 revenue of $2.9 million, a loss of $2.7 million, net cash consumption of just under $2 million, and we ended the quarter with $15.1 million in cash. These results were in line with our operating plan.

In addition to progress on our diabetes program, as Shai has just outlined, our goals for the quarter included the smooth transition of our historical neurodiagnostic business to a new organizational alignment, uninterrupted support of our install base, and positive cash flow from neurodiagnostics. We accomplished all of these.

The new structure was in place in early January, and customer support was steady. Nerve testing registered an increase from the preceding quarter, and there was no interruption in electrodes supplied to our accounts.

On the financial side, we used an incremental or a bolt-on system to measure the neurodiagnostics impact on the Company, and as Shai mentioned, this indicated positive net cash flow in Q1, and that's including spending relating to the restructuring.

Another goal was to accelerate the shift of our customer accounts to the ADVANCE system. Physicians will benefit from improved functionality and customization features -- customizing features, and we will benefit from a single technology platform to support. Our intention is to discontinue support for the predecessor NC-stat system at the end of this year.

During Q1, our clinical educators installed ADVANCE devices at 359 existing accounts and for the month of March, over 50% of the nerve conduction studies performed on our technology were performed on the ADVANCE device. That's exactly on our goal.

We also renewed for another year our $7.5 million revolving loan facility with Comerica Bank, and this will provide us with some liquidity options as we launch NC-stat DPNCheck.

We transferred the listing exchange of our common stock from the NASDAQ Global Market to the NASDAQ Capital Market. Our stock symbol is unchanged. This shift within NASDAQ afforded us an additional 180 days, to September 19 of this year, to regain compliance with the $1.00 minimum bid rule.

In connection with this, we are seeking shareholder approval in our current proxy for a reverse split, which we would intend to execute only in the event we haven't regained compliance by late August. This was a requirement imposed on us by NASDAQ in connection with the shift in exchanges and in getting this additional grace period.

Now turning to our financial results, and particularly reviewing sequential-quarter comparisons, revenue is derived solely from our neurodiagnostic products. Revenue totaled $2.9 million in the first quarter. This was a slight decline of about $200,000, or 5%, from the fourth quarter, which was anticipated following the termination of our direct sales force.

We placed a net of 26 devices with new accounts versus 62 in the fourth quarter, and about 70 -- and 70 devices in the first quarter of 2010. Sales of consumable electrodes totaling $104,000 were down slightly, about 1% from the fourth quarter, in spite of a 6% seasonal gain in nerve conduction studies. Following this Q1 seasonal effect, we do expect patient studies to be lower in the second quarter.

About 4% of the Q1 studies were performed by international accounts. ADVANCE device ASP was $3,600 and electrode ASP was $2,750.

Our forecast for full-year 2011 neurodiagnostics revenue is $9 million to $10 million.

Gross margin in the first quarter was $1.6 million. This was a rate of 56.8% and was down from 62.1% in the fourth quarter, if you exclude inventory write-downs we took in that quarter. The margin contraction was anticipated -- has been anticipated for the past two quarters and is due to higher consumable electrode costs corresponding to lower production volumes. We expect our margins to be in the mid-50% range during 2011.

OpEx spending was $4.4 million, including $200,000 in severance charges. Excluding this severance, OpEx of $4.2 million was about $300,000 below Q4. Lower OpEx was most pronounced in sales and marketing. That reflects the consolidation of our neurodiagnostics functions, elimination of our direct sales force, and concentration of our R&D efforts on diabetes.

For the full year, OpEx should be in the range of $17 million to $18 million. This will trend up from Q2 through the end of the year as we launch DPNCheck into diabetes.

Our net loss was $2.7 million, or $0.12 per share, on 23.1 million weighted average shares outstanding. This compares favorably with a $4.2 million loss, negative $0.18 per share, in the fourth quarter and a loss of $4.8 million, or $0.21 a share, in the first quarter of last year.

Turning to the balance sheet, we ended the first quarter with $15.1 million in cash. Our cash consumption in the quarter was $1.9 million. That included about $600,000 in benefits from working capital management, primarily receivables and inventory. We also burned about $1.9 million in the preceding quarter, and our cash consumption in the fourth -- in the first quarter of 2010 was $4.6 million. For the full year, we forecast net cash consumption of approximately $10 million.

Within working capital, receivables were reduced to $1.3 million, and this balance includes about $120,000 relating to a financing program that we ran in 2010. Excluding the financing program, days sales outstanding were 35 in the first quarter. Inventories were $2 million at the end of the first quarter, and our inventory turnover rate was 2.3 times.

Those are the financial highlights. We achieved our Q1 financial goals and we are maintaining our 2011 financial forecast. Back to you, Shai.

Thank you, Tom. Those are our prepared comments, and we'd be happy to take any questions now.

(Operator Instructions). Paul Nouri, Noble Equity Funds.

Were all the cost-cutting initiatives effective in the first quarter? Should we expect more cost savings throughout the year, or --

This is Tom. So, there is a tale of two cities here. What happened in the first quarter was a reduction -- was a restructuring of our historical neurodiagnostics business, and when we did that, which included taking out our direct sales force, we saw over the course of a year about $4 million in cost savings. So, that's pushing the spending level down.

However, on the other hand, with our focus on diabetes and with the launch of DPNCheck starting in late June, we are going to be spending up not only in product development, but also in marketing efforts, preparing for the launch and into the launch, and in bringing on a direct -- a small, direct, dedicated sales force.

So, the short answer is that when you put all that together, we expect that OpEx for the year is going to be in that total range of $17 million to $18 million, and that our cash burn for the full year will be about $10 million. So, that's consistent with what we reported earlier.

Can you break down the consumables versus the device sales for the quarter?

We have gotten away from doing that. Historically, we did break it down, but the problem in splitting out device from consumables is that you end up making a lot of accounting allocations of combined new sales. And so, the number became not only meaningless, it became a little bit misleading.

So the short answer is that we're not doing that anymore. The little more sophisticated answer is that we had 26 net device sales to new customers in the quarter. The device component of those sales was about $3,600, so you can roughly get a sense of the device revenue, the new device revenue.

Okay. But going forward, it will only be the one number?

Yes, just the one number. And going forward, we are looking in that historical business primarily to revenue from our install base through the reorder of consumable electrodes.

Juan Sanchez, Ladenburg Thalmann & Company Inc..

My question is whether or not the sural nerve testing is bilateral, and whether or not testing this nerve alone without correlating it with results from another nerve is good enough in terms of sensitivity and specificity.

And the second question is, I understand that your first target physician is the endocrinologist. So, what percentage of endocrinologist actually is on path for neuropathy at this point, with other technologies? And when I think about PCPs, I see how they can change medical conduct, but what about endocrinologists, as I believe most of those really have or try to have tight control of diabetes with the patients, you know?

Let me take the first question. The decision whether to test unilaterally or bilaterally of the sural nerve is up to the physician. The biosensor is single-patient use. So they can test both limbs with the same biosensor, in other words, for the same cost.

So, the only reason not to test the second limb would be time, and it's a very, very -- obviously, a very fast test, so if they felt that the first nerve left some ambiguity, they could easily test the second nerve and help resolve any such ambiguity. And that would be the protocol.

But in most cases, you'll probably find testing a single nerve, but again, you could test both nerves. Again, it would probably be more of a clinical decision than anything else. It really doesn't have anything to do with cost.

As far as the utility of the sural nerve and the need to correlate it with other nerves, clearly -- the sural nerve is very sensitive and very specific for peripheral neuropathy. The sural nerve is really not affected by almost any other disease, other than peripheral neuropathies. But there is -- the standard protocols, if you're doing a diagnostic test, there is benefit in doing additional nerves. But if you're looking to screen and monitor, then a single nerve is adequate, and many clinical trials are based on single nerves.

So, I think in its role, a sural nerve is more than adequate. There have been plenty of studies looking at the sensitivity and specificity of the sural nerve alone, including for the NC-stat, and it typically generates both in the vicinity of 90%, high 80s to 90%, so very effective.

And then, on the -- I'm sorry, what was the second question? It was -- remind me again, please.

Yes, about targeting endocrinologists (multiple speakers)

Oh, endocrinologists, yes. Endocrinologists -- many endocrinologists, probably over 50%, maybe three-quarters, are doing monofilament testing at least on some patients, but not all patients, not all the time.

And when you look at patients getting foot exams or neuropathy testing, it's -- by some studies, it's as low as 25%, and in many studies, it's 50% or below. So, there's definitely a gap there.

In our market research -- so we had a pretty extensive third-party market research conducted, and although many endocrinologists, and I say, most endocrinologists do some level of monofilament testing, they widely understood and believed that it was -- it had limitations, which are obvious. It's a very late-stage test. It's highly subjective. It has limited sensitivity and has even some specificity issues.

This -- the way to think about this, though, Juan, is it's not -- this is not so much whether -- it's not our placement for monofilament or monofilament is not the competition. Monofilament is a useful test in its role, which is late-stage -- detection of late-stage neuropathy and near-term risk of foot ulcers. The challenge here is to get earlier detection and monitoring of neuropathy, and that's what this product would provide.

(Operator Instructions). At this time, we have no further questions. I would now like to turn the conference back over to Dr. Gozani for closing remarks.

Thank you for joining us on our conference call today, and we look forward to updating you as we move through the balance of the year and launch NC-stat DPNCheck. Thank you.

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