NeuroMetrix Inc (NURO) 2013 Q4 法說會逐字稿

Good morning and welcome to be NeuroMetrix fourth-quarter 2013 conference call. My name is Alex and I will be your moderator on the call. NeuroMetrix is a medical device Company focused on the neurological complications of diabetes.

On this call, the Company may make statements which are not historical facts and are considered forward-looking statements 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. These refer to risks and uncertainties including the factors described under the heading risk factors and uncertainties including factors described under headings risk factors in the Company's 2012 Form 10-K filed with the SEC in February 2013 available at the Company investor relations website at a HTTP://www.neurometrix.com and the SEC's website at a HTTP://www.SEC.gov. and any updated contained subsequent SEC filings.

NeuroMetrix does not intend and undertakes no duty to update the information disclosed on the conference call.

I would now like to introduce the NeuroMetrix President and CEO, Dr. Shai Gozani. Go ahead please.

Thank you. I am joined today on our call by Tom Higgins, our Chief Financial Officer. We appreciate the opportunity to review our business highlights for the fourth quarter of 2013. Following our prepared remarks, we will be pleased to take questions.

We are a medical device company that develops and markets home use and point of care devices for the treatment and management of chronic pain, peripheral neuropathies and associated neurological disorders. We are capitalizing on our nearly two decades of research and development capabilities and broad intellectual property to build a franchise which addresses major unmet medical needs.

We are primarily focused on the most common complication of diabetes which is diabetic peripheral neuropathy or DPN. DPN affects 50% of people with diabetes which represents about 13 million people in the United States and about 150 million worldwide. If left untreated, DPN causes disabling chronic pain called painful diabetic neuropathy, triggers foot ulcers that may require amputation and increases the risk of falls in the elderly.

Patients with DPN are significantly underserved because there are few diagnostic and therapeutic options for these individuals and their physicians. We therefore believe that DPN represents a large untapped market opportunity.

Beyond DPN we believe that our therapeutic technology has brought applicability in many different forms of chronic pain such as fibromyalgia, posthypnotic neuralgia which is shingles, sciatica and other nerve-related pain syndromes. We are also uniquely suited to address sleep disorders associated with chronic pain including restless leg syndrome which may affect as much as 10% of the US population.

We have two commercial products that address DPN and similar neurological disorders. SENSUS utilizes proprietary wearable electrotherapy technology to provide non-narcotic relief from chronic pain including painful diabetic neuropathy. DPNCheck is a fast accurate and quantitative point-of-care test for DPN. We reported commercial progress with both product lines during the period.

SENSUS has been on the market for about a year. We had two primary objectives in 2013. The first was to obtain patient, physician and distributor feedback in order to refine the product and contribute to our long-term R&D planning.

The second objective was to establish the foundation for broad national distribution. As a reminder, SENSUS is sold through durable medical equipment suppliers, or DMEs, who develop market awareness by detailing physicians and fulfill demand by stocking and shipping devices to patients.

We initially entered the market via small regional DME suppliers as a bridging strategy to national distribution. Earlier this month we reported a national distribution agreement for SENSUS with the DJO Global, which is a leader in the pain management rehabilitation and orthopedic device markets. The Recovery Sciences Division includes Empi, which is a long-standing premier brand in the transcutaneous electrical euro stimulator market. They have a large direct salesforce that we recently trained. The primary focus of their sales effort will be in pain management in podiatry clinics although they will also call on endocrinology, neurology and primary care clinics.

The interest level of their sales representatives is high and they have already begun to see increased SENSUS orders. We believe that the DJO Global will substantially expand patient access to SENSUS. This agreement had been one of our top objectives during 2013.

Beyond DJO Global, we are working with select regional distributors, osteoarthritis Centers of America and others in our pipeline to build a broad DME distribution channel that ensures a high level of patient access and physician contact. The positive patient reaction to SENSUS indicates that there may be a sizable market opportunity for a differentiated over-the-counter or OTC wearable device to manage chronic pain. This product would be sold without a prescription and also does require FDA 510(k) clearance. In concept it would be sold on a cash basis in traditional retail channels such as pharmacies and e-commerce sites.

Our view has been reinforced by a large independent market survey that we recently commissioned. A successful OTC consumer product could significantly expand the overall market for our wearable pain therapy technology. Assuming that we meet our product development and regulatory milestones, we hope to launch the OTC product in 2015. As our plans evolve, we will speak more about our OTC strategy.

Our DPNCheck diagnostic test has been on the market for about two years. Initially we marketed to podiatry and endocrinology clinics using a direct salesforce. Last year we shifted focus to larger opportunities with Medicare Advantage plans that did not require the cost of a field salesforce. Year-over-year our DPNCheck revenues are about level, $1.3 million in 2013, and $1.4 million in 2012. However, the profitability of those sales is much higher in 2013 because of low direct operating costs.

We continue to see opportunities for DPNCheck growth both within the Medicare Advantage sector and internationally.

The DPNCheck value proposition resonates within Medicare Advantage where providers not only benefit from early detection of neuropathy to guide care and reduce costs but also from more accurate risk profiles of their patients which contributes to more appropriate insurance payments. This business tends to be seasonal with patient testing slanted toward the second half of the year.

As an example, our DPNCheck revenue increased to about $500,000 in the fourth quarter and that represented sequential quarter growth of nearly 60%. Gross margins on electrodes are quite attractive at well over 70%.

The growth in our Medicare Advantage business will come from our pipeline of insurance plans that are currently reviewing DPNCheck and also from screening companies that focus on this sector. In both cases, decision-making tends to be slow but account size is large. We also see longer-term opportunities in disease management particularly with a continuing trend towards outcome based healthcare payments.

Outside of the US, our DPNCheck strategy is to align ourselves with large healthcare companies ideally with complementary product lines and with strong local distribution. Omron Healthcare is a good example. It is the healthcare division of Omron Global which is a Japanese company with $6 billion in annual sales that offers both home health and professional medical products. Under our arrangement, Omron Healthcare is leading the regulatory effort in Japan with our close support and will distribute the product through its direct salesforce and other local channels.

DPNCheck complements their professional diagnostic equipment offerings in hospital and physician accounts. The regulatory process has been steady in Japan and we expect commercial launch in the second quarter of this year.

During the fourth quarter of last year, we entered a similar agreement with Omron Healthcare for the China market. We expect to receive Chinese regulatory approval in the first half of 2015 with commercialization efforts to begin thereafter including working to obtain reimbursement from the Chinese National Health System. Beyond Japan and China, we are evaluating additional international markets including India and Mexico.

Our R&D pipeline continues to be active. A second generation SENSUS device with a slimmer and more ergonomic form factor and some hardware improvements is targeted for launch later this quarter. As I mentioned previously, we are developing an OTC pain therapy brand based on the SENSUS technology that we believe has the potential to materially expand the market.

We also have early-stage projects to address restless leg syndrome and balance issues in patients with nerve diseases such as DPN.

I will now turn to Tom for a discussion of revenue and our overall financial results.

Thanks, Shai. Q4 was a positive quarter for us. We made progress topline, improved our margins, continued to tightly manage spending and improved our cash position. Here are the highlights.

We reported revenue of $1.4 million in the quarter and $5.3 million for the year. Focusing on Q4, this was our highest revenue quarter during 2013 and it marked the second consecutive quarter of sequential revenue growth. Q4 revenue of $1.4 million was up from $1.3 million in Q3 and $1.2 million in Q2. It was also slightly higher than the $1.4 million we reported in the first quarter of last year.

For SENSUS, we shipped 358 devices. This was lower than the 557 devices shipped in Q3 and it marked the fourth quarter as a transition period. Several market pilots which we had started earlier in the year were wrapping up in Q4 and the business focus shifted to DME decisions on adopting SENSUS as was the case with DJO Global, which Shai just described.

We saw a pickup in SENSUS shipments starting early this year and we have already shipped over 650 devices through mid February. Cumulatively we shipped 1268 SENSUS devices in 2013 and to date, this is through mid-February, we have shipped over 1900 devices. SENSUS revenue in the fourth quarter was $67,000.

DPNCheck Q4 revenue was slightly under $500,000, up over 50% from Q3 and up over 40% from the year-ago quarter, the fourth quarter of 2012. This gain was primarily attributable to increased testing and consumable purchases in our Medicare Advantage accounts. DPNCheck revenue accelerated dramatically in the second half of last year. In our domestic DPNCheck business alone, the majority of which is Medicare Advantage, we recorded about 85% of our 2013 business during the second half of the year.

From an annual perspective, DPNCheck contributed $1.3 million in revenue in 2013.

The legacy advance business contributed $837,000 in Q4 revenue and $3.8 million for the full year. This business continues to contract as we manage it for cash flow.

Our gross margins were strong both for the quarter and for the year. Gross profit in Q4 was $857,000 or 61.1% of sales. For the full year, our margin was 58.4%. In the fourth quarter, year-on-year margins were up 550 basis points and for all of 2013, the improvement was 300 basis points. The margin gains were primarily due to a shift in sales mix with DPNCheck contributing a larger portion of revenue than in the past.

Our operating expenses totaled $2.2 million in Q4. This was lower by about $100,000 from the third-quarter spending of $2.3 million and about $0.5 million lower than spending of $2.7 million in the fourth quarter of last year.

Comparing full-year 2013 to 2012, we lowered OpEx spending by over $3.6 million or 25%. Spending reductions were most pronounced in sales and marketing where we eliminated during 2012 our DPNCheck field salesforce and also our field clinical educators as well as reduced spending on promotion. We were further able to reduce general and administrative spending by about $0.5 million between the two years.

In the income statement, there is a charge of $2.3 million entitled change in fair value of warrant liability. This charge is non-cash and it relates to warrants issued in the 2013 equity raise which were recorded at that time as a liability and must under accounting rules be marked to market at the end of each reporting period and upon each warrant transaction. At the end of the year, the Black-Scholes warrant liability in the balance sheet was valued at about $1.9 million. So this non-cash charge was primarily the result of applying the Black-Scholes valuation method to a rising stock price.

Our net loss for the quarter was $3.7 million. Excluding the non-cash warrant charge, the adjusted loss for the quarter was $1.4 million and that was a $500,000 improvement from the fourth quarter of last year.

On an annual basis after adjusting for warrant effects, our 2013 loss was $7.7 million versus a $10 million loss in 2012. In other words, a bottom line improvement of $2.3 million.

On a per-share basis, the Q4 loss was $0.87 and the full-year loss was $3.07. The warrant effects on earnings per share were significant, they were $0.55 in the fourth quarter and $0.37 full year. So adjusted EPS -- this is after taking out the warrant charge -- Q4 EPS was a loss of $0.32 and the full-year 2013 was a loss of $2.70 per share.

The year-on-year EPS comparison is significantly affected by outstanding shares which increased during 2013 due to the Q2 equity raise. The calculation basis in EPS was based on weighted average shares in 2013 of about $4.3 million for the fourth quarter and about $2.9 million for the full year.

Turning to the balance sheet, the balance sheet is solid. Inventory and receivables turnover improved during the quarter; receivables of $390,000 reflected 32.4 days sales outstanding and inventory of $560,000 reflected a turnover rate of 3.9 times per year.

Our capital structure was simplified in the fourth quarter as a result of the voluntary conversion of all outstanding preferred shares by the preferred stockholders to the equivalent of about 1.8 million new common shares. So in other words, 1.8 million new common shares were issued in the fourth quarter and the preferred stock was fully converted. At year-end, our capital structure reflects no debt outstanding and equity consisting simply of common stock and common stock derivatives.

Also during the fourth quarter, warrant holders exercised for cash about 1.3 million warrants that were issued in last June's equity raise. This was at an exercise price of $2.00 per share. The warrant exercises added $2.6 million to our cash position and increased our outstanding shares. The combination of conversion of preferred stock during the quarter and warrant exercises resulted in year-end shares outstanding which totaled 5,945,581 shares. There remains outstanding about 1 million $2.00 warrants from the June 2013 raise.

Our cash resources improved to $9.2 million at the end of the year. This is in comparison with $7.8 million at the end of September and $8.7 million at the end of last year.

Our net cash consumption during the fourth quarter was $1.3 million. This was unusually low and reflected favorable changes in working capital. In the near term, we expect quarterly cash usage in the range of $1.5 million to $2 million. Our current cash position provides cash runway through 2014 and well into the first half of 2015.

Those are the financial highlights for the quarter. Shai, back to you.

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

(Operator Instructions). Bob Wasserman, Dawson James.

Congratulations on the year and also getting the conference call out despite the weather this morning.

Just a little question more on the detail pilot and also on the distribution agreement. It sounds like you started shipping to them last year and you have already started shipping some this year. Can you elaborate a little bit on how many devices you have out with that group? Did that have a material impact last year and also will it have an impact -- can you tell me maybe how many you have shipped already this year or has that not started yet?

Yes, I don't think we want to get quite into the specifics of exact numbers. I don't actually have them in front of me but they are a very substantial distributor for us so they are a majority player in our shipment.

But let me just kind of give you the rundown on how this played out. So we started talking with DJO early last year. That led ultimately to a pilot with a small number of sales representatives around the country that began in September -- I think it was probably 15 or 20 sales reps to just get a sense for how effectively the product would move through their channels. It was appealing to their call point and so forth. That was successful.

And then they moved a number of units, a fair number of units, not nearly as many as we have at this point. Then toward the end of the year, we decided to move to a full launch with their entire salesforce and that started really at the end of January after we trained their salesforce, what's called their Recovery Sciences division which has quite a few sales reps, several hundred. And coming out of that in late January have now been selling the products and we have had substantial shipments to DJO to support that launch.

Okay, thanks. So that was a major portion of the 650 that you shipped already this year?

Yes, they are a major portion of that absolutely.

Can you tell us a little bit more about other pilot programs you had last year you have going forward even if you can't say the names? Maybe what types (multiple speakers)?

Happy to. We announced Simplex Healthcare, which also goes by Diabetes Care Club, which is a large diabetic supply mail-order firm. That was going quite well in the fourth quarter but then they got acquired in the fourth quarter by Arriva, which is a division of Alere so that got pushed to the background until that acquisition gets absorbed by Alere. And we will come back to that when that process is complete. And so that was a successful pilot but obviously under the focus of consolidation, we are not at the top of the list right now for implementation.

We had a successful pilot with Osteoarthritis Centers of America, which is a network of clinics that implement programs for osteoarthritis but more relevant for us, peripheral neuropathy so there's probably about as many as 100 clinics that are affiliates of OA Centers of America and they implement a peripheral neuropathy treatment program in which SENSUS is being incorporated into. So the pilot was successful in a few of the clinics and now is in the process over the first half of this year being rolled out to many more of the clinics.

And then we have had a couple of pilots with some smaller mail-order DME firms as well as some other networks of independent sales representatives.

So we are trying a variety of different things and pretty much with the exception of Simplex, which was acquired, all the pilots have been successful.

Okay. Just one more question on SENSUS. It looks like you have had some of your units out there for a year or for 12 months. Can you give us an idea what the maybe annual revenue rate -- revenue run rate are for some of the units now that they are approaching their second year or what may be your target revenue per unit might be?

It is a great question. We don't have great data at this point unfortunately. The early units were placed by a lot of small regional type of DME suppliers and so we have -- I will say this, we have many patients that have been on therapy now for what is now approaching a year or past a year so that is very encouraging. But in terms of really getting a sense of what a unit goes into the field will generate from an ongoing revenue perspective as an annuity, we really don't have good data on that.

So at this point, we are more focused on the fact that we are trying to get data -- trying to get devices out there with good distributor partners that can support those units. And then I think as we get into this year, we will start to get better data on that recurring revenue stream. So unfortunately I don't really have good data to give you at this point.

Thanks and congratulations on getting to the office today.

Thank you.

(Operator Instructions). [Jennifer Lane], [Webster Core Management.]

Good morning and yes, congratulations on holding this call in this weather. Anyway, can you please provide us a little more insight into your agreements in Japan and China with Omron? Specifically, if you can give us a little more information about the regulatory process there. You mentioned the market timing but if you could tell us about what the sense of the market size is in Japan and China so we can get a little more information on the overall potential.

Sure. Just in terms of the regulatory process, we are deep into both the regulatory processes in Japan and China. Japan, we have been at it for some time in collaboration with Omron and are right on the cusp of getting Japanese regulatory approval and we actually expect a second-quarter launch assuming that we don't hit any hiccups. And Omron will be distributing the product through their direct salesforce which is I think runs in the 50 sales reps or thereabout and they also use extensive distribution as well throughout the country.

The Japanese diabetes market is -- the rate of diabetes in Japan are similar to the US. Obviously it is a smaller country so it is probably a third of the size of the US market. There is a great deal of focus. It is a very -- diabetes is a very sophisticated high-tech medical market. So we are quite encouraged by the opportunities there.

In terms of actual market size, I think it is a little early to state what that is until Omron is out there and getting a sense for rate of market adoption.

What is really interesting and I think very encouraging about the Japanese market are really two things beyond the fact that we have strong distribution with Omron. In Japan, there is good reasonable reimbursement for DPNCheck so physicians can do the procedure and get a reasonable payment.

The second is Japan is the only market in the world where there is an approved drug to treat diabetic neuropathy. That drug is called Kinedak and is marketed by Ono Pharmaceuticals. It is an aldose reductase inhibitor and so there is a nice set up there where you have reimbursement and you have a drug that to some degree would be triggered off early detection of neuropathy with DPNCheck.

So we are quite encouraged by the possibilities but I think until the product is in the market and we overcome any initial hurdles and refine the marketing message, I think it is hard to say what exactly the opportunity is but we think it is obviously significant and Omron would not be engaged in the activity if they didn't think it was significant.

In China, we are well into the regulatory process as well in collaboration with Omron Healthcare earlier in that case. We do feel optimistically that we can get Chinese regulatory approval by the first half of next year and then could launch so that would have to be on a self-pay basis because in China we do not have reimbursement so we will have to go through a multiyear reimbursement acquisition process so there can be some business in advance of that. And that means that reimbursement process may take several years.

So we might see something emerge in China next year but probably in the out years, more significant. The Chinese diabetes market is potentially expansive. There are over 100 million people in China with diabetes, a tremendous focus by the government on diabetes. So again, it is hard to put a number on it but the market opportunity appears to be quite significant if we can obviously get into the market and in particular there again, reimbursement.

Great. Thank you.

Absolutely.

(Operator Instructions). We have no further questions in the queue at this time. I would now like to turn the call over to Dr. Gozani for closing remarks.

Thank you very much for joining us on this conference call. We are encouraged by our progress in the fourth quarter of 2013 and our achievements for the full-year last year. We look forward to continuing these trends in 2014 and to reporting on our progress as we move throughout the year. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.