NeuroMetrix Inc (NURO) 2012 Q3 法說會逐字稿

Very good morning to you ladies and gentlemen and welcome to the NeuroMetrix Third Quarter 2012 Conference Call. My name is Nancy and I will be your moderator on the call.

NeuroMetrix is a medical device company focused on diabetes and treatment of neurological complications of diabetes. 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 includes words such as pleas, 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 include the factors described under the reading risk factors in the Company's prospectus under the reading risk factors filed with the SEC on February 8, 2012 and available on the Company's investor relations website at http//www.neurometrix.com and on the SEC's website at http//www.sec.gov and any updates contained in subsequent SEC filings. NeuroMetrix does not intend to or undertake 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, please proceed.

Thank you very much. I'm joined today on our call by Tom Higgins, our Chief Financial Officer. We are pleased to have the opportunity to review our business and financial highlights for the third quarter of 2012. Following our prepared remarks, we are pleased to take questions.

Our goal is to develop a high growth profitable diabetes business focused on diabetic peripheral neuropathy or DPN which is the most common complication of diabetes. DPN affects over 50% of people with diabetes and causes significant morbidity including pain, increased risk of falling in elderly and is the primary trigger for diabetic foot ulcers which may require lower extremity amputations.

In spite of its prevalence and clinical impact, DPN has been largely unaddressed by medical technology companies. We are taking advantage of this opportunity by introducing novel products for the diagnosis and treatment of DPN.

Our point-of-care diagnostic test NC-stat DPNCheck was brought to market at the end of 2011. Our SENSUS pain management device is in life-stage development and should be on the market before the end of the year.

During the past several months, we've made substantial progress in commercializing our diabetes products. From a negligible amount in 2011 we've reached $1.1 million in DPNCheck revenue through 9 months of 2012. This includes $300,000 revenue in the third quarter.

Looking forward to the full-year 2012, we are forecasting that our diabetes revenue will top $1.5 million. This revenue is entirely attributable to business that did not exist last year. It's a new line of business and a new technology that's changing medical practice. We are pleased with our progress and believe we are well positioned for further growth in 2013.

Our installed base of DPNCheck users is growing. Again it's our 2012 goal of 1,000 DPNCheck devices in this field by year end, we are making good progress. To-date, the number has reached about 800 devices. The size and growth of the installed base reflects the clinical utility of DPNCheck and the benefits of fast, accurate and quantitative DPN diagnosis. It also improves our credibility in the market and provides references for future sales.

We see the market more clearly now than we did at product launch a year ago and therefore we have focused our market strategy. The most attractive application for DPNCheck is in managed care, specifically in Medicare Advantage where we made important inroads over the past couple of quarters.

This sector is characterized by organizations [a] contact with CMS under capitated rates and thereby assume risk. They are largely insensitive to traditional fee for service reimbursement and instead focus on patient risk assessment, patient quality of life and lowering health care cost. These objectives line up well to the benefits provided by DPNCheck.

Due to the large size of providers and payers in manage care, this sector represents the fastest path the rapid revenue growth. The WellMed Medical Group account which we acquired in the second quarter plus additional managed care accounts have invested in DPNCheck or currently carrying our pilot, gives us confidence in the viability of this market.

We continue to invest in DPNCheck product development but with a narrowed emphasis on managed care. With the feedback from earlier adopters, we've issued multiple software upgrades during 2012 designed, in particular, to improve IT, electronic medical record integration and compliance reporting.

SENSUS development is also moving forward. We continue to target SENSUS launch before the end of this year. We have made positive regulatory progress. The FDA cleared the SENSUS device in August. Our 510k submission on the SENSUS biosensor now under FDA review, with shelf life testing is the only apparent remaining issue. We expect to complete this regulatory filing by early November.

We plan to launch SENSUS in two phases; first, a controlled launch in the fourth quarter followed by a full launch with distribution in the first quarter of 2013. The controlled launch will involve about 50 to 100 patients. This strategy will should go into the market quickly while delivering early patient and physician feedback that will set us up for a successful full launch in the first quarter of next year.

Last week, American Association of Family Practitioners, AAFP, annual meeting was an opportunity for us to detail positions on SENSUS and stimulate their interest. Physician interest was quite strong, and we secured a sizable number of leads which we are now qualifying.

The full launch of SENSUS in the first quarter will require DME or durable medical equipment distributors to be in place. In Q2 and Q3, we identified candidates with field sales capabilities to stimulate demand as well as fulfill orders. This list has been narrowed, and we are now in negotiations with several parties. We expect to announce several distributor agreements for the end of the year and additional ones next year.

Therefore, to repeat, our goal is to develop a high growth profitable diabetes business. We believe that our results in progress of the third quarter have moved us closer to that object.

I will now turn to Tom for a discussion of financials.

Thanks, Shai. Our financial highlights combined two operations, our emerging Diabetes business and our historical general purpose Neurodiagnostics business. Diabetes is our sole focus, the Neurodiagnostics business is a valuable asset, but it is in decline and we manage it for cash flow. It does, however, continue to contribute the majority of our revenues.

In the financial results for the third quarter, we reported revenue of a 1.8 million. This sequential quarter decline in revenue from $2.2 million in the second quarter, was anticipated in our Q2 earnings calls and was attributable to 2 large initial orders for NC-stat DPNCheck which were recorded in Q2, plus the normal seasonality of our business.

Our emerging Diabetes business contributed 306,000 revenues and we shipped 206 new devices, plus a few biosensor reorders. Our diabetes revenue progression since bringing NC-stat DPNCheck to market late last year has been encouraging.

We recorded $85,000 in launch revenue in Q4 of last year, $137,000 in the first quarter of this year, $648,000 in the second quarter which included WellMed and Wal-Mart Canada, followed by $306,000 in the third quarter.

Total diabetes revenue during 2012 to-date is $1.1 million, and as Shai indicated, we are forecasting $1.5 million for the full year which will market successful initial launch year for our product -- for our diabetes products and position us favorably going into 2013. Accumulative device shipments through September 30 totaled 778 and are about 800 today. Our 2012 goal is in installed base of a 1,000 devices by the end of the year.

The legacy Neurodiagnostics business which includes the ADVANCE system for nerve conduction testing contributed $1.5 million in the third quarter. This is down slightly from $1.6 million in the second quarter, as we continue to see erosion of customer accounts and testing.

We offered a volume-based sales promotion for ADVANCE electrodes in Q2 which increased sales by approximately $200,000 above what they would have been based on electrode usage during the quarter. This will have an adverse effect on Q4 sales, as higher customer inventory depresses electrode demand. A recent 9% price increase on ADVANCE electrodes should partially mitigate Q4 demand and testing contraction.

Our Q3 overall gross margin was 55%. That's leveled with the second quarter of this year and with Q3 of last year. Individually, the diabetes and nuerodiagnostics margin were each about 55% and we expect that marginal rate to hold through the fourth quarter.

Operating expenses in Q3 were $3.6 million. This was a reduction of $400,000 from the preceding quarter and a reduction of $300,000 from Q3 2011. The lower operating expenses in Q3 reflect reduced headcount in sales and marketing and reduced financial and personnel costs in G&A.

We forecast Q4 operating expenses to be slightly higher in the range of $3.6 million to $3.8 million reflecting Q4 trade show activity and cost associated with the launch of SENSUS. Our net loss in the third quarter was $2.6 million of $0.21 of share based on a weighted average 12.6 million shares outstanding. This is an improvement over the net loss of $2.8 million or $0.22 per share in the second quarter. In Q3 last year, we reported a net loss of $2.4 million or $0.63 a share on 3.9 million shares outstanding.

We ended Q3 with $10.9 million in cash and consumed $2.4 million in cash during the quarter. Our outlook is for working capital to increase modestly as we move towards SENSUS launch, resulting in quarterly cash usage of approximately $2.5 million to $2.8 million.

Inventory and receivables remain solid with 29-day sales outstanding currently and inventory turnover at 3.4 times per year. In contrast, in the third quarter of last year DSOs were higher by 7 days at 36-day sales outstanding and the inventory turnover rate was almost one annual term slower at 2.5 times per year.

That summarizes the financial highlights. I'd like to touch on one additional topic. We reported in September that NASDAQ had granted a 6-month extension until mid-March of 2013 of a grace period to comply with the $1 minimum bid requirement for continued listing. This extension was conditioned on our agreement to reverse split of our common stock, if that was necessary to regain compliance.

Shareholder approval is required for a reverse split. Therefore, as part of the NASDAQ process, we will be asking shareholders to give our Board of Directors the authority to order a reverse split should they conclude it as necessary.

If the bid price of our stock returns to $1, there will not be a reverse split. This is simply to make revision to plan ahead in the event we have no other option in retaining our NASDAQ listing.

The shareholder approval process takes 2 months or longer so it is important that we start this now. Shortly, we will be mailing proxy documents to all shareholders of record as of October 18, 2012. We ask your support and we'll be pleased to respond to any questions you have on us. The proxy itself changes nothing regarding our business plan and our focus on diabetes. Our goal remains to achieve appreciation of our common stock, trading price through compelling business performance.

Shai, back to you.

Thank you, Tom. Well, those are our prepared remarks, so we would be happy to take questions at this point.

Thank you.

(Operator Instructions)

We have our first question in the queue from the line of Juan Sanchez from Ladenburg. Please, go ahead.

Hi, Shai, how are you?

Good, Juan. thanks for calling in.

I only have one question about the DPNCheck pilot studies. I wonder how the process -- how the pilot -- how the pilot process work, how long will it take and then can you give us an update on the pilot study that some people studied, say, a few months ago, where they stand.

Okay, Juan. I just want to make sure I'm answering the question. So you're referring to the pilots studies that I was noting with some of the managed care, Medicare Advantage organization?

Yes, yes.

Right, so these are large organizations typically with many, many clinics and it could have anywhere between 10s and even 100,000 covered lives. So they need to evaluate how well the product operates in their environment particularly from a -- not so much a clinical perspective as more of an operational perspective, integration to their IT systems and so fort.

So we have a number of those ongoing and several of them were launched in the third quarter. Several of these organizations have actually gone to WellMed to see how they're implementing it. So we expect several pilots to come to conclusion this quarter which may lead to -- it could even lead potentially orders this quarter or we'll set us up well for early next year.

But mostly, if I understand your question, the purpose of this pilot is more to understand the integration of this technology into their operational procedures and the ability of their staff to conduct more than it is the clinical validity.

Thank you, Shai.

Sure.

Thank you for your question. We have the next question from the line of Bob Wasserman from Dawson James. Please, go ahead.

Thanks, hi. Hi, Shai. Hi, Tom. Good morning.

Hi, Bob.

Just a little more questions on the SENSUS marketing program. Is that going to be similar to what you started with DPNCheck? Are you going to target managed care? Are you going to target physician practices? Or, it sounds like next month, you're going to target a soft launch for this. Maybe you could give a little (inaudible).

That's right. That's right. So, thank you for question. The soft launch or controlled launch is through physicians that we've already either have expressed interest or with our existing customers. And as I said, it's not difficult to get 50 to 100 patients quickly to adopt -- to use the technology. So that's pretty straight forward.

And really, our purpose there is just to -- before making it widely available to get some initial experience and make any adjustments in the device or, particularly, training programs and so forth. There are some similarities to DPNCheck in that many of these patients -- many diabetic patients are in fact within managed care organization. So managed care is a natural target for the product, but generally speaking we're also targeting physicians -- physician clinics.

And the difference here is we're going through a -- and building a large distribution network, so a large network of durable medical equipment distributors. We may end up with easily in 10 or 20 or more distributors for different markets, different territories all of which have skilled sales capabilities either into physician offices, into managed care organizations and so forth, as well as the ability to hold inventory and bill insurance companies.

So it's really a distribution and a play more than anything else. And we will access various markets through these distributors. So managed care will be a focus -- again, because many of the patients that will benefit from SENSUS are within managed care, but it will go beyond managed care through the distributors.

Okay. Okay, great. And a question for Tom I guess. You commented on the NASDAQ and your 6-month extension is to March. What happens in March? Will you appeal again and try to get another 6 months of extension if you're not at $1? Or, will you have some time to do the reverse split at that point, if you've approved it?

Bob, I don't -- we likely would not be eligible for another 6-month extension at the end of this period.

Okay.

So our plan is really two-fold, it's to follow through on our NASDAQ of getting the authority now to do a reverse split should we need to.

Okay.

But, more importantly, we've got a lot of business activity in the pipeline including SENSUS that we -- that Shai just talked about and building the distribution network, getting that launched, as well as opportunities in Medicare Advantage Managed Care.

We need to keep driving the business and we believe and expect that's going to be reflected in the stock price. So it's really building up business momentum that is what we are all about. But still we need to get this authority in place in the event we should need it.

Okay, great. Thanks a lot, guys.

Thanks, Bob.

Thanks, Bob.

Thank you for your questions, Bob. We have our next from the line of Paul Nouri from Noble Equity Fund. Please, go ahead.

So I understand that you're building the distribution channels for the SENSUS, but can you talk about how you're going to build awareness among customers with somewhat limited resources?

You're referring to SENSUS, Paul, correct?

Yes.

Yes. So clearly, using the conventional approaches of trade shows, maybe limited advertising. We're not going to be doing extensive promotion from NeuroMetrix because as you know we have limited resources and that could be quite expensive.

But these durable medical equipment distributors the ones who we're partnering with -- the ones that we're talking to and serious discussions have field sales capabilities. They have sales reps, or free standing clinics, or in some fashion or another a field presence where they promote and detail the product.

So we're looking for our partners to do the heavy lifting on promotion. And there are adequate margins for both NeuroMetrix and our partners in the business model to support that. So, to be clear the heavy lifting on promotion will be done at the field level through our partners and that's how we will leverage our resources. So our focus is on getting good partners and supporting our partners.

And the detailing is focused on physicians as opposed to consumers. So it's making them aware of this product as another alternative in dealing with pain by their patients. So the very costly directed consumer campaign isn't the one that we're contemplating.

At this time, that's correct. Thank you.

Okay, thanks.

Sure.

Thank you. We have our next question from the line Bill Crawford, private investor. Please, go ahead.

Thank you. Shai, just a quick question with respect to your comments on managed care, the Medicare Advantage market for DPNCheck, how do you identify prospects in this market, and what is a typical sales process going through this?

Sure. Thanks for the question. So the Medicare Advantage market is fairly well defined. There are big players such as UnitedHealth, HUMANA, Kaiser, so you sort of know the big players and then there is fair amount of public information on who owns Medicaid Advantage [supplies]. So we have a good sense of the market.

To get at the market, we are working through a network of consultants and connections that we've established. We've been able to develop relationships with certain consultants (inaudible) in front of the right people.

So it's basically a traditional sales process, but we're using consultants and other lead generators that we've been able to identify. But it is a slow and challenging process to finally get in front of the key decision makers which are usually highly placed within these organizations. So we're usually talking about senior VPs, chief medical officers, that sort of level.

But once you get there, you can generally move the process along fairly quickly. That being said, the sell cycle usually involves obviously the presentation, the evaluation on their part, and then some level of piloting as I noted before to make sure that the product -- and the implementation is viable within their particular organization.

And each organization is different. They have different structures, different kinds of clinics, IT systems and so forth. But we're getting better at it. We're understanding their businesses better. But, we're typically talking 3 to 9 months for some of these large organizations, but at the end of that you're talking about fairly large recurring orders.

So it's a good business, we're just getting started here. We're very optimistic about where this is going to go including this quarter but in particular next year.

Thank you.

Thank you very much for your questions, Paul.

(Operator Instructions)

We have one more question in the queue from the line of [Philip Rosenwaike] from RBM Capital Group, please go ahead.

Good morning, guys. How are you?

Good morning, Phil.

Good morning.

Thank you very much for the call. Bob hit most of my questions, but I'd figured I still would -- since I'm in the queue I wanted to comment on the stock split. I understand basically that you have it covered. We're completely behind that move. I just wanted to see do you have any color on the numbers yet, what you think the reverse split would be?

No. Really, where we stand with this is that there is such a long lead time that you have in order to get authorization in place that what we'll do is we'll ask shareholders to approve a broad range. And that range will be anywhere from 2 to 1 to 6 to 1 to provide plenty of flexibility because this is an area where we need to make a decision now. It's more in the first quarter -- in the middle of the first quarter next year.

We're not focused on what the ratio might be if it ever comes to that. It's more getting the authorization in place.

And when do you think that the mailing would start on that?

Within the week.

Perfect. Do you have any guidance on SENSUS because I know with DPNCheck, you gave us a goal. Do you have any type of goal or guidance on how many SENSUS units you think will be out in 2013?

I don't yet. So that's a great question and I think once we do this controlled launch in our distribution partners lined up and understand how that looks, I think we will be in position to say something on that front early in the year, but I think it would be premature right now because we're still in the process of putting the distribution channel together.

From the numbers, I didn't get the exact numbers, but can I -- I assume that cash now is about $0.84 of share?

Well we ended the quarter with 10.9 million and we have about 12.6 million of shares outstanding. So it's about $0.87, $0.88 a share, yes.

Can you give me some sort of an update on Wal-Mart Canada?

Yes, as far as we understand, they have now adapted the technology across their 100 pharmacies in Canada. They basically started offering the test during the summer -- and of course, it's kind of at a slow time. They're ramping up their marketing programs. They're offering the test.

We don't have a lot of feedback in terms of how many tests are being done at this point. I think it's fairly a slow ramp as they figure out how to best market it and price it within the Canadian system, but we do understand they're using the product and testing patients.

So, probably by the end of the year we'll have more information on how they feel about it and what they think that the test can do for them and what kind of volume we'll get.

But, just to come back to kind of our focus, we like the retail market, like the Wal-Marts and our opportunity to pursue that they're kind of sister organizations in the US. But really, we find by far the most attractive opportunity for us is in managed care for the reasons that I outlined. So it's not that we're not focused on those other areas, but really we're putting most of our attention into managed care.

I understand that. So I can assume that we won't see the new device -- the SENSUS device also going to Wal-Mart, that's not a --

Oh, well the --

That's not natural --

No. But the reason for -- there's a somewhat different reason for what, which is SENSUS is prescription pain product so it really is prescribed by a physician and then would be provided by one of our durable medical equipment suppliers. So, in principle, a pharmacy could be a supplier but it would still be going -- it would really be just more for provision of the products. They can't sell it direct. It's a prescription product.

Understood completely. Tom, do you have any type of guidance when you will be profitable? Are you expecting in the next year in 2013?

Well, the short answer to that is, no. So we've gone much better visibility on the potential for our first diabetes product, the diagnostic NC-stat, DPNCheck. We are not in the market yet with SENSUS, our second product. SENSUS will play an important role in how rapidly we're able to grow revenue and therefore get to cash flow breakeven and profitability.

So, again, it's a great question. But I think this time next year, once we've got a year's worth of SENSUS experience under our belt, we'll be in a better position to look forward with that with a diabetes business.

Thank you very much for the call, and I wish you both nothing but success and a wonderful day.

Thank you, Phil.

Thanks, Phil.

Thank you. We have our next question from the line [Charles Lucario] from NeuroMetrix, please go ahead.

Yes, good morning gentlemen. This is Charles Lucario. Thank you for taking my call. A few of my questions have already been taken -- answered which were great, and I want to congratulate him over your products forward. The main question I have left is going with your current burn rate right now.

It looks like technically, going forward, I mean you guys probably got a run rate of about a year left with your current rate right now. Have you guys looked in any strategic options or as far as going forward about how you're going to fund this going forward after the year?

Yes, you're right. I mean, at the current cash consumption rate, we have about a year's worth of capital. And so, of course, we're looking at all the various options. So obviously, the best one is to ramp up revenue and ramp up the business. That's clearly have been our focus and get the products on the market. As we've noticed, there may be a need to raise additional capital next year. And obviously, we'd like to do that with a more attractive stock price.

We're also looking at -- and we've actively looking at strategic partners and thinking -- seeing if there are opportunities to work with other companies in the diabetes space. And potentially, that could help out with our cash needs or accelerate the market adoption of our products.

So, obviously, we're well aware -- are very focused on that and try to look at it -- and really a myriad of solutions, all of which are in consideration at this point.

All right. Thank you. And as far as your DPNCheck, I know you guys are doing a great job on that and moving forward with that. As far as the disposables and reorders, is the pricing structure still the same as far as what you guys charging [for there] reorder on them? Or, what is the status on that?

Yes, it's actually recently - in a sense we normalized our pricing, so right now the price is -- the consumable at $20 regardless of volume. So we may still get some volume discounts in certain situations, but we're finding the value proposition actually supports a slightly higher price than we initially came out with. Reorders are typically priced at list, or about list. So it's very similar to the initial order.

And particularly, we like -- again, the managed care environment we like that because once they implement the program, they would typically test some or all of their patients on an annual basis, and so we see that as having a strong reorder component.

Great. And as far as your old business, the Neurological business, I know that's going to be decreasing. Can you give any numbers like going forward next year when you expect it to completely disappear, or is that something that just degrading all as we go along?

Well, I think it's deteriorating, as you know, all along. And we really have no resources devoted to it. We obviously, hold some inventory, ship product to our customers, answer a few calls in the customer service. We don't really have a clear sense of where we'll go.

I mean, we do expect it to continue generating revenue and cash flow for several more years. But how much cash flow is really hard to tell and particularly because we're not engaged with the market. But it should generate positive cash flow for at least a couple more years.

Well, great job with everything. And, again, I hope you put your efforts into the DPNCheck, and hopefully you don't put to -- I mean, the SENSUS is a great product, but I hate to see you lose direction on where you're going. Thanks, again, for your time.

Thanks for the question.

Thank you. We have our next question from the line of [Stan Komo], private investor, please go ahead. Sorry. Stan Komo has just disconnected. I'm going to put [Tom Hastings] next from [Monmouth Holdings], please go ahead.

Shai, regarding SENSUS, since independent distributors will be the key to the launch, can you tell us a little bit more about the selection process and the interest level you're seeing among distributors?

Yes, thank you. Excellent question. So the process for us is to identify both national distributors as well as regional distributors. And the formula for us is those distributors have a particularly strong footprint in diabetes or around the general area of diabetes or at least in around the area of foot care, and have the field sales promotional and detailing capability.

Because going back to a few questions back in terms of generating demand, we're looking for our partners to be the primary demand generators as opposed to NeuroMetrix.

So, we have a profile both to the national and regional level. Again, we're looking for those that have clear and demonstrated capability to detail the product, both the physicians, various kinds of clinics and different various markets. And, of course, they have to have the ability to manage inventory and bill insurance companies. So they have to have the Medicare and appropriate commercial insurance contract.

So, we have a pretty good formula and have been out there talking to some very, very good potential partners. And I would say, the interest has been extremely high and very encouraging. Not surprisingly, there's a lot of focus on the diabetes, durable medical equipment space for a variety of reasons.

This product represents an interesting product for that space and one that's quite complementary with many of these distributors' current product portfolios. So we're optimistic that we'll start building that distribution channel this quarter.

Thank you, all the best.

Thank you very much.

Thank you for your questions, Tom. At the moment, we don't seem to have any further questions.

(Operator Instructions)

Well, it looks like we don't have any more questions. So, thank you very much, for joining us on today's conference call and we look forward to updating you as we progress with our Diabetes business. Thank you very much.

Thank you, Dr. Gozani. Thank you for your participation in today's conference, ladies and gentlemen. This concludes the presentation. You may now disconnect. Have a good day. Thank you.