NeuroMetrix Inc (NURO) 2011 Q4 法說會逐字稿

Good morning, and welcome to the NeuroMetrix fourth quarter 2011 conference call. My name is Towanda 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 media neuropathy (carpal 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 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 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 Risk Factors and the company's final prospective under the heading Risk Factors filed with the SEC on February 8, 2012, in connection with the company's public offering and available on the company's Investor Relations website at www.neurometrix.com, and on the SEC's website at www.sec.gov 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,you may proceed.

Thank you, Towanda

I'm joined on the call today by Tom Higgins, our Chief Financial Officer. In this conference call we will discuss our business strategy, recent developments and financial highlights for the fourth quarter of 2011. Following our prepared remarks, we will be pleased to respond to your questions.

Our strategy for building shareholder value is based on three core initiatives. First is to grow our nascent NC-stat DPNCheck business. NC-stat DPNCheck is a fast, accurate, and quantitative tech for systemic neuropathy such as diabetic peripheral neuropathy or DPN. It provides clinicians with a way to detect DPN in its earliest form to stage disease severity, and has an emerging role as a general marker for morbidity and mortality risk from diabetic patients. As you may recall, this product includes a hand-held device in a single patient use biosensor, so is a classic razor/razor blade type business model. We are currently providing the device at no charge with initial order of biosensors. We expect to see margins in 50% to 60% range on initial orders, and 70% to 80% on reorders. Our goal is to create a large base of clinicians using the product and regularly reordering biosensors.

The second initiative is to develop and commercialize our product pipeline. We have a 15-year history of developing technology and products that test and treat various nerve-related conditions. It is our core strength, and we believe it is unmatched in the industry. We delivered NC-stat DPNCheck to the market on time and within our cost of goods target in the fourth quarter of 2011.

We are well into development of our second diabetes-focused product which is called SENSUS. This device will be used to help manage the pain caused by DPN, which is called painful diabetic neuropathy. Other products are at early stages of development, and we will update you on those on the future.

Our third initiative expand leverage a multichannel sales and distribution network. In the third quarter of 2011, we built a direct sales team focused on the strategically important endocrinology and podiatry market. That team now consist of ten sales representatives supported by nine field-based clinical educators. They are selling the NC-stat DPNCheck device and are doing a great job. However, to accelerate adoption, we need to move into the larger markets of primary care and the reimbursement and sensitive markets of capitated managed care and retail health clinics.

Our goals in 2012 include initial progress and development of third party distribution network for primary care and advancing our direct corporate sales into managed care and retail health. Our view is that accomplishment against this three-point strategy will drive product adoption, diabetes revenue, and ultimately shareholder value.

In the fourth quarter of 2012[sic], we successfully launched NC-stat DPNCheck as evidenced by 131 device orders. This represents over 200 clinicians using the product, mostly endocrinologists and podiatrists. In addition to the device placements, we also reformed our sales approach and customer training to improve effectiveness. We have been pleased with the performance of the product. As one marker of success, we have had no device returns related to functionality. We are now beginning to see reorders from devices sold in the fourth quarter of 2012[sic]. This is encouraging however it's too early to project more from this limited data set.

Our R&D team is well along in developing SENSUS, our second diabetes-focused product. As previously mentioned this is a therapeutic device designed to help manage chronic intractable pain, such as painful diabetic neuropathy. It is an easy to use wearable device with a disposable electrode worn below the knee and provides noninvasive nerve stimulation. SENSUS provides pain relief through the well-established modality of trans-cutaneous electrical nerve stimulation. In fact, this approach was recently recommended by the American Academy of Neurology in an evidence-based review of the clinical literature. We believe the market opportunity may be at least $100 million in the US. We expect that if used in a manner consistent with coverage policy, SENSUS will be generally reimbursed by Medicare and many commercial insurance companies under the durable medical equipment benefits.

From a competitive perspective, we do not believe that existing trans-cutaneous electric nerve stimulators on the market are effective in treating painful diabetic neuropathy for a variety of technical and clinical reasons. Our development and regular timelines are targeted at commercial launch in the fourth quarter of 2012.

We recently took an important step to strengthen our balance sheet by closing a securities sale this past Monday. We sold 8.5 million units at $1 each. Each unit consists of one share of common stock and one five-year warrant to purchase a one-half share of stock at $1.15. After bankers fees and expenses net proceeds will be about $7.5 million. We recognize this financing was both heavily dilutive to both management and existing shareholders. However, after deliberation with our board of directors, we concluded it was essential to secure the resources we needed to execute on our business plan and also to broaden our shareholder base. We considered alternative strategic options and concluded that this path was most likely to build long-term shareholder value.

Looking forward into this year, our key objectives are -- one, to report quarter over quarter revenue growth in our diabetes business, two, to expand the NC-stat DPNCheck into managed care and retail medical markets, and three, to advance our clinical programs as a foundation for eventually obtaining broader NC-stat DPNCheck third party reimbursement coverage. We have several specific milestones for this year including to exceed 500 NC-stat DPNCheck devices in use and 1,000 clinicians using the product by the end of the year, SENSUS 510(k) filing in the second quarter, and commercial launch of SENSUS in the fourth quarter.

We look forward to reporting progress in our upcoming calls. I will now turn over to Tom for the financials

Thanks, Shai.

I would like to briefly review our 2011business performance followed by the financial highlights.

So a year ago, in January 2011, we announced a new strategic direction for NeuroMetrix. Business focus shifted to diabetes, specifically nerve-related complications of diabetes called diabetic neuropathy. Prior to that, we developed and marketed purpose nerve testing equipment. We felt the market opportunity in diabetes was compelling, while the market for a general purpose devices was saddled by multiple challenges. We announced that we would manage our general purpose nerve testing business, which we now refer to as neurodiagnostics or our legacy business, we would manage this to optimize cash flow.

The shift in strategy was accompanied by a company-wide restructuring. We retained those resources that were essential to the diabetes initiative plus what we minimally needed to support neurodiagnostics. As a result, we started 2011with both a new strategy and a new cost structure.

We laid out clear goals for 2011. They were --number 1, launch our first diabetes product by the middle of the year, number 2, transition our neurodiagnostic installed base to a single technology platform, our ADVANCE system, number 3, to generate a positive cash contribution from that neurodiagnostic business, and number 4, to manage our total company-wide cash consumption below $10 million.

Measured against those goals, 2011 was successful. We achieved marketing launch of NC-stat DPNCheck at the American Diabetes Association meeting in June of last year, and initiated commercial shipments in September. We made strong progress in transitioning our neurodiagnostic accounts to the ADVANCE platform. We now have reached 85% of testing on ADVANCE and that number is climbing. When we started a year ago, we were at 25%. At the end of this March, we will discontinue the predecessor system.

Neurodiagnostics produced a $1.2 million cashflow to the core business, and that was based on $10 million in revenue and measured on a bolt-on basis. For the company, we consumed 6.7 million in cash versus the $10 million target,well below that target and about half of our previous year consumption rate, which had been $13.4 million.

Funding the business, funding this business has been a continuing concern. We recognize that it will take time to make meaningful demonstrable progress in our diabetes strategy. The equity raise that we closed on Monday, two days ago, helps address this concern by extending our run rate to nearly two years at our expected rate of cash consumption.

As Shai mentioned, new funding is always a difficult decision due to its effects on pre-existing shareholders. However, we believe that the decision to better capitalize the company today within this current window of opportunity was the right decision for the company rather than placing that on uncertain future market conditions.

Turning to our financial results which accompanied the press release this morning, we reported fourth quarter revenue of $2.4 million and a $2.4 million loss. 2011 revenue was $10.4 million and net loss was slightly below $10 million. Q4 revenue of $2.4 million was down slightly from $2.6 million in the third quarter and below $3.1 million in the comparable 2010 quarter. This revenue included $85,000 from the sales of 119 NC-stat DPNCheck devices and biosensors, ASP was $714. Most sales were 50 biosensors boxes, which we list price at $1000. Included at no charge, a device with all orders, and there was a level of early purchase discounting in the fourth quarter resulting in a 40% gross margin on those sales. In biosensor reorders we expect margins in the range of 70% to 80%.

Also included in that $2.3 million, in the 2.4 million revenue[sic], was $314,000 from the sale of advanced transition packages. So these are -- these are packages that we sold to existing customers to help them update their testing from the pre-existing NC-stat system to ADVANCE. We sold those transition packages at cost or slightly above cost. In addition, in the revenue numbers, there was approximately $2 million of neurodiagnostics consumable electrode purchases.

Our Q4 gross margin was 49.1%, versus 54.8% in the third quarter, and 2% in the fourth quarter of last year. The margin rate reflected the ADVANCE transition packages which were sold at cost and about $60,000 in inventory charges. Adjusted to those two items the margin would have been 54.8% or identical to the third quarter.

Our opex expensestotaled $3.6 million. That was down a little bit from $3.8 million in the third quarter and below $4.5 million in the fourth quarter of last year. Sales and marketing accounted for the reduction in the fourth quarter. Third quarter had reflected higher new product launch costs. R&D and G&A spending were flat in the two periods, and reflect a pretty steady run rate. Q4 2010 opex spending was at the higher pre-restructuring level.

Our net loss in the fourth quarter was $2.4 million or $0.63 a share. That was identical to the third quarter,and was improved from the $4.2 million for $1.09 per share loss we reported in the fourth quarter of last year.

Turning to the balance sheet, we ended the fourth quarter with $10.3 million in cash. Our cash consumption in the quarter was $1.4 million, and for the full year it was $6.7 million. Within working capital, accounts receivable was reduced to $900,000 from $1.6 million at the start of the year. Our days sales outstanding improved to 36 days from 57 days in the fourth quarter of the prior year. Inventories were $1.8 million at year-end, versus $2.4 million at the beginning of year, and the inventory turnover rate is currently 2.5 times a year.

Those are the highlights. In 2011, we accomplished a substantial change in business direction and we start 2012 well-positioned strategically and financially. Back to you, Shai.

Thank you, Tom.

Those are our prepared comments and we'd be happy to take questions at this point.

Thank you. (Operator Instructions). Your first question comes from the line of Bob Wasserman with Dawson James. Please proceed.

Hi Shai, hi Tom.

Hi, Bob.

Congratulations on the quarter and the financing.

I guess my question's related to marketing for the DPNCheck and I know Shai you touched on that a little bit. Maybe you guys can comment what kind of marketing initiatives you're going to do this year, especially related to reimbursement and managed care.

Sure. So to date, our marketing has been mostly focused on the endocrinology and podiatry market, and that consists of largely trade shows and various forms of advertising.

We're putting together a strategy to speak with the key payers this year to explain the benefits and have them understand the benefits of doing DPNCheck tests for early detection of neuropathy. This is sort of a payer by payer strategy. We're in the process of putting the plan together right now and expect to launch it, I would say next quarter, and we'll be conduct that throughout the year. So that's just -- it's really process of speaking with the right people, decision makers, chief medical officers, medical directors and so forth at the various payers.

On the retail medical market, we're getting meetings and looking to have pilots and other collaborations with the key players in that space, which include the Walgreens, CVSs, and Wal-Mart, so forth.

So we have many initiatives underway, and I suspect that during the course of the year, we'll have some exciting updates on those fronts.

Okay. Great. Congrats again.

(Operator Instructions).

And with no further questions in the queue, I could now like to turn the conference over to Dr. Shai Gozani for closing remarks

Well, thank you for joining us this morning. We look forward to updating you as we continue to progress through the year. Thank you.

Thank you for joining today's conference. That concludes the presentation. You may now disconnect and have a wonderful day.