NeuroMetrix Inc (NURO) 2011 Q2 法說會逐字稿

Good morning and welcome to the NeuroMetrix second-quarter 2011 conference call. My name is Tanya, and I will be your moderator on the call. NeuroMetrix is a science-based healthcare company that is improving 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 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, 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 ended December 31, 2011, 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 would now like to introduce the NeuroMetrix President and CEO, Dr. Shai Gozani. Dr. Gozani?

Thank you very much and good morning. I'm joined today on our call by Tom Higgins, our Chief Financial Officer.

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

The second quarter of 2011 saw significant progress in virtually every aspect of our business. Our top priority is to successfully bring to market NC-stat DPNCheck, which is our initial diabetes-focused product. NC-stat DPNCheck is a fast, accurate, quantitative point of care test, which we believe may address the need for cost effective tools for the detection of systemic neuropathy such as diabetic peripheral neuropathy.

NC-stat DPNCheck measures sural nerve conduction velocity and amplitude, which are standard markers for diabetic peripheral neuropathy often abbreviated as DPN. The device is a modified version of the widely-used NC-stat device, which has been shown to accurately detect DPN.

We achieved a major milestone in the second quarter with the marketing launch of NC-stat DPNCheck at the American Diabetes Association 71st scientific sessions. This was the realization of the goal that we set for ourselves in the second quarter of 2010. Our ADA reception was very positive. Booth traffic was strong, and we performed numerous live demonstrations of the product. A large number of US-based endocrinologists expressed an interest in evaluating the product within their practice.

We also received substantial international interest, particularly from physicians in Western Europe, India, Australia, and Mexico. In fact, the reception at ADA exceeded our optimistic expectations.

In addition to ADA tradeshow activities, we met our clinical and scientific objectives for the meeting. We had a positive informative meeting of our Diabetes Scientific Advisory Board, which includes international experts in diabetic neuropathy. The Advisory Board helped us develop plans for clinical studies that we believe will support expanded market adoption and may eventually lead to reimbursement coverage by commercial and governmental payers.

Also, we presented to scientific posters relative to the NC-stat DPNCheck program.

An important event during the second quarter was our joint announcement with Nipro Diagnostics to evaluate the market opportunity for NC-stat DPNCheck in retail medical clinics. Retail medical clinics are one of the fastest growing provider segments of the US healthcare system. Clinics are often featured in the major chain drugstores and department store pharmacies. Many clinics are beginning to provide expanded services for certain disease states, such as diabetes. Nipro has an established position in supplying blood glucose smears to chain drugstores and other retail outlets.

The market evaluation phase may include market studies, focus groups, pilot programs, data gathering and analysis, and related activities. We anticipate this will be completed during the second half of 2011. Depending on the results, a commercial partnership may be an outgrowth of this joint market assessment.

We remain confident with the economics for NC-stat DPNCheck. You will recall that this product will initially be offered primarily under a patient pay model until the point where third-party reimbursement may be widely available. Market studies have indicated that physicians might price the test to their patients in the range of $25 to $30.

We are refining our thoughts on product pricing to physicians, but believe that our average selling price for the single patient use biosensors, which have consumables, should be in the vicinity of $15. At this level we believe the economics work for physicians and NeuroMetrix should generate attractive consumables gross margins.

The NC-stat DPNCheck device will be provided at no charge when a medical practice adopts the technology.

In addition to the financial aspects, the technology is designed to fit smoothly into the workflow for a typical medical practice.

Our efforts are now focused on the successful commercial launch of NC-stat DPNCheck. There are many elements involved. Marketing exposure will continue through the summer with tradeshow presentations at the American Podiatric Medical Association in July, the American Association of Diabetes Educators in August, and other meetings. We've also started to advertise in leading endocrinology and diabetes journals.

Early physician requests for device evaluations are being qualified currently with scheduling soon to follow. We have built a small direct sales organization of eight representatives dedicated to the endocrinology and podiatry markets. We plan to complete training for this group during August so that they are prepared to take the field in September. Our existing back-office operations, including customer service and product fulfillment functions, are being leveraged to support NC-stat DPNCheck.

We are also in the final stages of transferring the engineering designs into production with our contract manufacturers, and we hope to have commercial product available in September. Although we have a great deal of work in front of us, we are focused on getting all these tests right in order to deliver the best possible patient and physician experience from the start.

I will now turn it over to Tom for the financial results for the quarter.

Thanks, Shai.

This morning we reported second quarter revenue of $2.6 million, a loss of $2.4 million, and a net cash consumption of $1.5 million. We ended the quarter with $13.6 million in cash, and these results were in line with our financial guidance and with our operating plan.

Shai reviewed progress on our diabetes program. The other part of our Company, our legacy neurodiagnostics business, is continuing to meet its primary goal of generating cash flow. We use an incremental or bolt-on system to measure its impact on the total Company. For the first six months of 2011, neurodiagnostics generated over $1 million in positive cash flow. This was primarily due to reduced working capital employed as we effectively managed our inventory and accounts receivable investments. We're getting close to an optimal level of working capital and expect to see lower cash flow benefits in the second half of 2011. However, we expect this business to be cash flow positive for the full year.

Neurodiagnostic patient studies declined 7% from the seasonally high Q1 testing levels. Compared with the more normal run rate in the fourth quarter of last year, the decline was about 1%. Since we disbanded our neurodiagnostics salesforce at the beginning of the year, accounts and testing erosion is not being offset by new account additions. We anticipated this when we restructured the business earlier this year, and our actual Q2 testing results are in line with plan.

Our second goal for neurodiagnostics was to shift our customer accounts to the ADVANCE system. Physicians will benefit from improved functionality and customizing features, and we benefit from a single technology platform to support. Our intention is to discontinue support to the predecessor NC-stat system at the end of the year. And during the first half of 2011, our clinical educators installed advanced devices at 567 existing accounts, and in June nearly 65% of our nerve conduction studies were performed on ADVANCE.

These numbers would have been higher except for a supply interruption by our advanced contract manufacturer, which essentially shut down the transition program during June. We expect supply to restart in August and believe that we will still hit our full-year goal of 80% of patient studies on ADVANCE in the month of December this year.

With our stock trading around $0.50 share, we are not in compliance with the NASDAQ minimum bid price rule of $1 a share. We have a grace period until September 19 to regain compliance. In connection with this, our shareholders approved in May a reverse split in a range between 1 to 1 and 1 to 8. We would intend to execute a reverse split in the event we haven't gained regained compliance by mid to late August.

Turning to our financial results and particularly looking at sequential quarter comparisons, revenue, which is derived from our neurodiagnostic products, totaled $2.6 million in Q2 versus $2.9 million in Q1 and $3.9 million in the second quarter of last year. This decline of about $300,000 from the first quarter and $1.3 million from the prior year quarter reflects our business strategy, which deemphasizes new account acquisition in favor of support to our installed base and generating cash flow.

Approximately 95% of second-quarter revenue was derived from consumable electrode reorders. The balance consists of shipments to international distributors and new domestic orders. About 4% of the Q2 studies were performed outside the US. Our forecast for 2011 neurodiagnostics revenue is in the range of $9 million to $10 million.

Gross margin was $1.5 million in Q2 versus $1.6 million in Q4 and $2.4 million last year. The gross margin rate was 56.8%, which is spot on the Q1 margin rate, but below 64% in the second quarter of last year. The margin contraction has been anticipated for the past several quarters due to higher consumable electrode costs corresponding to lower production volumes. We expect our margins to be in the mid-50% range during 2011.

Total OpEx spending was $3.9 million in the quarter. Now this included a non-cash impairment charge of $192,000 to write off intangible assets relating to NM101, which was a drug development program that we decided in the second quarter to discontinue. Excluding the impairment charge, OpEx of $3.7 million was $650,000 below spending in the first quarter and $3.3 million below the spending rate in the second quarter of last year. Lower OpEx is most pronounced in sales and marketing. It reflects consolidation of neurodiagnostic support functions, including elimination of the direct sales force and concentrating our R&D efforts on the diabetes program.

Over the full year, OpEx should be in the range of $17 million to $18 million, trending up from Q3 through the end of the year as we launch NC-stat DPNCheck.

Our net loss was $2.4 million or $0.11 a share based on 23.1 million weighted average shares outstanding. This compares favorably with a loss of $2.7 million or $0.12 share in Q1 and a loss of $4.5 million or $0.20 per share in the second quarter last year.

Turning to the balance sheet highlights, we ended the quarter with $13.6 million in cash. Our cash consumption during the quarter was $1.5 million. This included about $350,000 in working capital benefits, primarily from reductions in receivables and inventory. It compares with cash consumption of $1.9 million in the preceding quarter and $4.2 million in the second quarter of last year.

For the full-year 2011, we expect net cash consumption to be approximately $10 million.

Within working capital, receivables were reduced to $1.1 million from $1.6 million at the start of the year. Days sales outstanding were 38 days in the quarter, similar to the fourth quarter of last year, inventories were $1.7 million, down from $2.4 million at the start of the year, and our inventory turnover is currently 2.4 times per year.

And those are the financial highlights. We achieved our Q2 financial goals and are maintaining our 2011 financial forecasts.

Back to you, Shai.

Thank you, Tom. So those are our prepared comments, and we would be happy to take questions at this point.

(Operator Instructions). Bill Plovanic, Canaccord Genuity.

Just a couple of questions. So the sales force is hired, and at this point you're getting final manufacturing -- you are finishing up the manufacturing for the product, and you think that it will be done in September. What is the probability that that is completed by September and ready for commercialization?

And then just on the same manufacturing, just with the ADVANCE system, it shut down in June, it's going to be back up in September, and do you have enough supply to keep it going through the near term?

Sure, Bill. We have high confidence that we will have NC-stat DPNChecks for shipment in September. We're now going through the final stages. It has actually been transferred into production. Obviously, a lot of different components have to come together, and whenever you start a new product line, there is a lot of testing and validation and so forth. But all of that is underway. So we have high confidence, and our expectation is that, unless we run into some unforeseen issue, we will be shipping commercial product for evaluations and potentially for purchase in September. So we have good confidence. Of course, considering there is always a possibility of unknowns when you bring up a new line.

As far as ADVANCE, there were some critical parts -- some special parts that go through a special screening process, and that got hung up in a manufacturing plant in China, I believe. So that pushed back the continued production in ADVANCE. That has now been largely resolved, and we're actually I think now getting ADVANCEs and will the continuing to get ADVANCEs through August. So that's back up, and we should be good to go there.

And so, Bill, that doesn't affect our continuing business of supporting the installed base. What it did do was it slowed down the transition program where we're trying to replace NC-stat devices at existing customer accounts with new ADVANCE devices. So we basically had to hold off on shipping any new ADVANCE devices to that transition program for the month -- well, the month of June and most of July.

So it is the handheld.

That's right.

And then on the pricing, I think you said you think you'll be on DPNCheck you are $15 to the physician now? I think originally I think you were thinking more closer to $10. Just any color around the change in the thought process there.

There hasn't been a change in the thought process. It's just a -- we're still locking down the final pricing. The price will be dependent on volume. So it would drop potentially below $15 for high volume accounts; kind of mid-level volume would be around $15; and then lower volume would be even higher than that.

So it really hasn't changed. I think if anything the feedback we've obtained in these various tradeshows and so forth has been very encouraging. And we thought we could be -- consistent with our models on pricing, we felt confident.

So if anything, we got more confident about the pricing as we went through these trade shows and got more exposure to the market. But I don't think there's really been a change in the thinking.

Great. Thank you.

[Thomas Walstrum].

It looks like you have been pinching down pretty good on the cash flow, continuing in that direction. And I was curious to know about the sales force a little more, what kind of an arrangement do you have for reimbursement to them as far as are they working on a percentage or a fixed basis or what? And where will the sales force be located -- in bigger cities around or what?

Thanks for the question. The salesforce that we have, we are starting out with eight sales representatives. They will have a base salary, as well as a commission. It's approximately 50/50, a a little bit more weighted to base. So it's pretty standard kind of I would say entry-level or early-stage medical device rep compensation structure. So there's definitely an incentive component, as well as a base.

As far as their locations, we are targeting about 30 states initially. And the map there is, those states that have high levels of diabetes but also somewhat higher end of the income scale because the product will be primarily patient pay. So we kind of looked at the two maps of diabetes prevalence and income levels and decided on that basis where to place our reps initially.

Now we will cover the other 20 states, but that will be done through a combination of our existing clinical educator team, as well as corporate resources. But we decided to focus on 30 states where we felt we had the best opportunity for the product as it is currently configured.

And as far as the DPNCheck ADVANCE, do you have any commercially ready units in stock yet?

You talking about the NC-stat DPNCheck, the diabetes-focused products?

Yes.

We do not have products in stock at this point. We're still in the ramp-up process, but expect to have -- start building up inventory toward the end of August, looking toward September shipments.

So with the startup of the sales of it more in September, that would probably predict not a big impact in the third quarter. Any impact would be noted more in the fourth quarter. Is that the way you see it?

That's correct. And so our sales pipeline process for this product is primarily one where the physician or clinician evaluates the product for 30 days to confirm that it works in their practice, it fits into their workflow model, that they are comfortable with the economic model of primarily patient pay.

And then they proceed from a 30-day evaluation into purchasing, we feel that's the most efficient sales model. So, on that basis, if those evaluations are starting in September, for the most part, the initial closed conversions from valuations to purchasing would occur in the fourth quarter, beginning of the fourth quarter. So we should have some sense of level of evaluations and interests, commercial interest in September. But you're correct. We would not be looking to report much revenue in the quarter.

And also, you presently have no salesforce for outside the US. What does it look like as far as getting that up and running?

So, are you referencing, again, the legacy neurodiagnostic business or the newer diabetes DPNCheck business?

Yes, diabetes DPNCheck.

Thank you. The plan internationally is to use distributors, and we will use the second half -- we are using the second half of the year to evaluate various markets and identify the best markets to launch the product. And we've been looking to launch it internationally, probably not this year, but in 2012. We have obtained a lot of feedback from international physicians through the American Diabetes Association meeting, which actually about 50% of the attendees were international. And then we are going to be going to the two primary international meetings, the [EAFE] meeting in Lisbon and Portugal in September and then the International Diabetes meeting in Dubai toward the end of the year.

And we are really in a market investigation, research and distribution recruitment phase internationally and will look for initial launches in 2012.

And, as far as your cash that you have, is that still projected to be around $10 million at the end of the year?

No, it is projected to be lower than that. I think what you are referring to is we've talked about a $10 million cash consumption during this year, which would have resulted in us having about $7 million at the end of the year. So we continue to believe we will be in the $7 million -- probably higher than that, maybe $8 million cash by year-end.

That answers my questions. Thanks a lot, fellows.

(Operator Instructions). And I'm showing we have no additional questions at this time.

Well, thank you very much for joining us on our second-quarter 2011 conference call. We look forward to reporting on our progress as we proceed through the remainder of the year. Thank you.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect, and have a great day.