NeuroMetrix Inc (NURO) 2011 Q3 法說會逐字稿

Good morning and welcome to the NeuroMetrix third-quarter 2011 conference call. My name is Larry and I will be your moderator on the call.

NeuroMetrix is a medical device company focused on diabetes and treatment of the neurological complications of diabetes. The Company currently markets products for the detection, diagnosis, and monitoring of diabetic neuropathies such as diabetic peripheral neuropathy and median neuropathy, carpel tunnel syndrome.

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 depends 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, Risks, 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 would now like to introduce the NeuroMetrix President and CEO, Dr. Shai Gozani. Dr. Gozani?

Thank you, Larry. I am joined on the call today by Tom Higgins, our Chief Financial Officer, and K. Balachandran, our Chief Operating Officer. In this conference call we will discuss business developments and financial highlights for the third quarter of 2011. Following our prepared remarks, we will be pleased to respond to your questions.

I am pleased to report that on September 19, 2011, we shipped our first commercial NC-stat DPNCheck devices. This was a major milestone capping a year-long development process that we have been tracking with you in our quarterly earnings calls and in other forums. We are quite satisfied with the results thus far. The product meets all of our performance goals and cost targets that we set in mid-2010 when the project was launched.

NC-stat DPNCheck is a fast, accurate, quantitative test for the evaluation of nerve disorders, such as diabetic peripheral neuropathy, which goes by the acronym DPN. DPN affects over 50% of people with diabetes. It causes significant morbidity including pain, increased risk of falling, and is a primary trigger for diabetic foot ulcers which may require lower extremity amputations.

Management and treatment of DPN and its complications are very costly and have been estimated at over $11 billion annually in the US alone. NC-stat DPNCheck is a modified version of the widely used NC-stat device which has been shown in clinical studies to accurately detect DPN.

The device measures sural nerve conduction velocity and amplitude, which are sensitive biomarkers for DPN. It may aid in the early detection, confirmation, and monitoring of DPN leading to earlier clinical intervention and potentially lower overall healthcare costs when incorporated into a prevention program.

As a reminder, we provide NC-stat DPNCheck devices at no cost with initial purchases of the single-patient-use biosensors. Our current pricing on the biosensor ranges from $15 to $20 each depending on the number purchased. We believe that the test is properly described by CPT Code 95905, which is for nerve conduction studies using preconfigured electrodes. However, due to limited third-party coverage, the test is primarily a patient-paid procedure at this time.

Commercial launch in September was a culmination of an intensive effort spanning product development and market preparation, realignment of our internal operations, and coordination with outside manufacturing contractors. Activity was particularly heightened during the third-quarter.

Importantly, we placed a new sales force of eight direct representatives which were hired, trained, and deployed during the quarter. This team is focused on the US endocrinology and podiatry markets which are comprised of about 15,000 clinicians. Presently, this team covers 30 states with the highest near-term sales potential.

Our field clinical team of nine nurses was also trained and will provide sales support in the remaining 20 states not covered by the direct team, as well as to the primary care market in all geographies. Longer term we expect to penetrate the primary care market through distribution. At that point, the field clinical organizational will transition to post-sales clinical and technical support for all markets.

All shipments in the third quarter were made under terms of 30-day no-cost evaluations, the initial step in the sales process. Because at this time we do not have revenue numbers for NC-stat DPNCheck, this quarter we will provide some visibility into our sales pipeline. Starting in the fourth quarter we will return to a traditional reporting of unit sales and revenue.

Our sales pipeline currently contains about 600 expressions of product interest generated by marketing efforts and field sales calls. About 230 of these are active sales opportunities. Each opportunity represents an office or clinic, typically with several clinicians per site. Of these sales opportunities, about half have initiated or signed an agreement for a 30-day evaluation. Most of the current sales opportunities are either endocrinologists or podiatrists.

As the wave of 30-day evaluations complete in the coming weeks we will begin to see the conversion of evaluations to customer orders. This conversion rate will be a key to understanding the rate and obstacles to market adoption. It is too early in the launch process to have meaningful data to report at this time.

In addition to building the NC-stat DPNCheck market, we are rationalizing our R&D efforts around our core focus on the diabetic neuropathy vertical. We look forward to updating you in the near future on new diagnostic and therapeutic products under development that will expand our product footprint in this large and important market.

We will now turn to the financial results for the quarter. Tom?

Thanks, Shai. This morning we reported third-quarter revenue of $2.6 million, a loss of $2.4 million. Net cash consumption of $1.9 million and we ended the quarter with an $11.7 million in cash. There were several financial highlights.

First, we addressed a NASDAQ compliance issue by executing a 1-for-6 reverse stock split. This was effective on September 1, 2011. We have since received formal notification from NASDAQ that we are in compliance with all requirements for continued listing on the NASDAQ capital market.

Per share amounts in the earnings release and in our Q3 financials have been restated to reflect the effects of the reverse split.

Secondly, we achieved a positive contribution of $1.3 million in cash flow from our legacy neurodiagnostic business year-to-date in 2011. This was measured on an incremental or bolt-on basis. The results reflect a combination of spending rationalization and working capital management.

While we expect a net investment in working capital during the fourth quarter, we should end the year with at least a $1 million positive contribution from the legacy business.

Third, we have balanced the cost pressure of new product launch with efforts to minimize cash consumption. During 2011 we have consumed $5.3 million in cash for a quarterly average of about $1.75 million. In contrast, during 2010 we consumed in $11.5 million in cash through three quarters for an average of about $3.8 million per quarter. In other words, we are consuming cash at a rate of less than half that of 2010.

Turning to our financial results, revenue totaled $2.6 million in Q3, which was down from $3.4 million in Q3 of last year and was flat with the second quarter of this year. Revenue continues to be derived from our legacy neurodiagnostics products. NC-stat DPNCheck shipments in Q3, which Shai just discussed, were under terms of no charge evaluation agreements. No revenue was recognized on these transactions.

The decline in revenue of about $850,000 from the third quarter of 2010 reflects our neurodiagnostics business strategy, which deemphasizes new account acquisition or growth in favor of supporting our installed base and managing for cash. Approximately 91% of third-quarter revenue was derived from consumable electrode reorders. In part reflecting seasonal summer affects, patient studies declined by 11% from the second quarter and about 5% of the studies in the third quarter were performed by international accounts.

We forecast total revenue for 2011 of approximately $10 million.

Gross margin was $1.4 million in the third quarter, down from $2.1 million in the third quarter of last year and slightly below the $1.5 million we reported in the second quarter of this year. The gross margin rate in the third quarter was 54.8% in comparison with 60.5% in the third quarter last year and 56.8% in the second quarter of this year. The gross margin rate in the third quarter was reduced by 320 basis points as a result of increased sales to new international distributors at lower margins.

Excluding these transactions, our Q3 margin would be 58% or 1.2 percentage points higher than in the second quarter of this year. We expect full-year 2011 gross margin rate to be about 56% to 57%.

OpEx spending was $38 million in the quarter compared to -- sorry, $3.8 million in the quarter compared to $5.6 million in Q3 of 2010 and $3.9 million in the second quarter 2011. The current quarter included the cost for two months of our new endocrinology and podiatry salesforce and other costs related to the NC-stat DPNCheck launch.

Lower third-quarter spending by $1.8 million versus the third quarter of last year reflects consolidation of neurodiagnostic support functions, elimination of the neurodiagnostic salesforce, narrow focus of our R&D efforts on diabetes, and G&A spending reductions. We expect that full-year 2011 OpEx should be about $16 million to $17 million.

Our Q3 2011 net loss was $2.4 million, or $0.63 per share, based on 3.9 million weighted average shares outstanding. This compares with a loss of $3.4 million or $0.89 per share in the comparable period in 2010. The net loss and per share amounts are virtually identical with what we reported in the second quarter of this year.

Turning to the balance sheet, we ended Q3 with $11.7 million in cash. Our cash consumption in the quarter was $1.9 million. For the full year 2011 we forecast net cash consumption of approximately $8 million and should end 2011 with about $9 million in cash.

Within working capital, accounts receivable was reduced to $1 million from $1.6 million at the start of the year. Our days sales outstanding were reduced to 36 days from 67 days in the third quarter of last year. Inventories were $2 million at September 30, 2011, versus $2.4 million at the start of this year. And our inventory turnover is currently 2.5 times per year.

Those are our highlights. We continue to be on track to meet or outperform our 2011 financial goals. Back to you, Shai.

Thank you, Tom. Those are our prepared comments. We would be happy to take questions at this time.

(Operator Instructions) [Thomas Wahlstrom], NeuroMetrix.

Good morning, fellows. I appreciate the fact that you are ramping that loss, cash loss down, and while we are going through this start up on the DPNCheck. The questions that I would like to have you talk about is, first of all, have you had anyone requesting replacement or further stocks of the usables?

Are you referring to the advanced legacy business or the DPNCheck business?

The DPNCheck business that you have just had your 30 days or more working with. Has any of your sales contacts got to the point where they have requested more disposables?

So the way the process works is after the 30 days they make a purchase decision where they would buy some number of the consumable biosensors, at which point they would get a device. So they would return the evaluation kit and then would buy a box of 50, 100, or 200 biosensors at which point they would get a device, and that would be the purchase point.

So we are at the point right now where those 30-day evaluations are wrapping up and that initial wave is now faced with a purchase decision. It's very early so we are not really looking at trends, but, yes, we absolutely have had customers who have made purchase decisions.

In your report this morning you mentioned that you had 230 active contacts and half of them were buying. Is that the way you report it?

No. So we are just trying to give some visibility on the pipeline because we don't have revenue numbers or unit sales specifically to report until next quarter, until the fourth quarter.

230 buying opportunities, those are -- we define as customers or prospective customers that have expressed definitive buying interest at various stages in the purchasing decision. Of those, about half have requested to do evaluations and either have those evaluations ongoing or they are scheduled to occur in the near term, to start in the near term.

I see, okay.

And many of the other half either haven't yet scheduled an evaluation or don't need an evaluation. They just need a demonstration of the product to make their purchasing decision. So those sales opportunities are late-stage part of the pipeline.

I also noted we have an even larger number of what we call qualified leads, some 350 or so, and that is expressed interest in the product but hasn't reached the point of a buying decision. So we are just trying to give some visibility into this pipeline which has really just been constructed over the past month and a half. So we are encouraged by what we have seen thus far in the endocrinology and podiatry markets in terms of interest.

Yes. I am aware that you have also got an initiative for upgrading the NC-stat ADVANCE. Can you give us some color on how that is working?

Right, so NC-stat, that is the original product, we are basically ceasing support for that product at the end of this year. And so we have gone back to our customer base and have either upgraded ourselves, if they are large customers, or offered them an upgrade path if they are less frequent users of electrodes.

That has gone well; we are about 75% there, sort of 70%, 75% of the way there. We hope to capture a good part of that by the end of the quarter.

Okay. Last question, Shai, could you comment on foreigns -- foreign interest, foreign sales?

Well, we continue to be interest in foreign -- in international markets, both for ADVANCE but in particular we are looking forward to launching in 2012 NC-stat DPNCheck in various international markets. We did launch ADVANCE in India this past -- in the third quarter and we will see how that goes.

But again, most of our focus is really on NC-stat DPNCheck and our international efforts will be around that product and looking at what are the best markets for it in the international domain.

Okay. Thanks a lot, Shai.

Absolutely.

(Operator Instructions) [Ken Bolt].

Hello. Thank you for the great results this quarter. I was wondering in June of this year you entered into a collaboration with Nipro Diagnostics and I was wondering if there is any results from that collaboration at this point.

Thank you for the question. We do, we have an ongoing collaboration with Nipro Diagnostics to explore the retail medical, retail pharmacy space for DPNCheck. We don't have any results to report yet.

We have had a lot of discussions. We are talking with potential retailers to do pilots, but at this point we can't -- we are not at the point where we can announce any pending pilots. Nevertheless, we are encouraged by the potential in that sector, but we are probably looking at next year if those pilots are to occur.

Okay, thank you.

Sure.

With no further questions I would like to turn the call over to President and CEO Dr. Shai Gozani for closing remarks.

Thank you. Thank you for joining us on the conference call today and we look forward to continuing to update you on the NC-stat DPNCheck rollout through the remainder of this year and into next year. Thank you very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a great day.