NeuroMetrix Inc (NURO) 2014 Q1 法說會逐字稿

Good morning and welcome to the NeuroMetrix first-quarter 2014 conference call. My name is Darren and I will be your moderator on the call. NeuroMetrix is a healthcare company that develops wearable medical technology and point-of-care tests to help patients and physicians manage chronic pain, nerve diseases, and sleep disorders.

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 the 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.

Please refer to the risks and uncertainties, including the factors described under the heading risk factors in the Company's 2013 Form 10-K, filed with the SEC in February 2014 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 the subsequent SEC filings.

NeuroMetrix does not intend to and undertakes no duty to update this information disclosed on this conference call. I'd like to advise all parties this conference is being recorded for replay purposes. (Operator Instructions)

And now I'd like to introduce the NeuroMetrix President and CEO, Dr. Shai Gozani.

Thank you very much. I am joined on the call today by Tom Higgins, our Chief Financial Officer. We appreciate this opportunity to review our business highlights for the first quarter of 2014. Following our prepared remarks, we will be pleased to take your questions.

The first quarter represented a productive start to 2014. Some of the key highlights include record SENSUS device shipments, launch of our second-generation SENSUS device, good year-over-year growth in our DPNCheck domestic business, and very strong progress towards our DPNCheck launch in Japan.

Now for some more details. SENSUS is our wearable therapeutic device used in the management of chronic pain. It is the only transcutaneous electrical nerve stimulator cleared by the FDA for use during sleep, which is a critical competitive advantage, because poor sleep is a major problem for patients with chronic pain. The device is lightweight. It can be worn under clothing while active or at night while sleeping.

SENSUS is beneficial in treating various forms of chronic pain, particularly neuropathic pain such as painful diabetic neuropathy, which affects about one-quarter of people with diabetes. In the first quarter of this year, we signed a key distribution agreement for SENSUS with DJO Global.

DJO is a leader in the pain management, rehabilitation, and orthopedic device markets. This agreement provided us access to their large US direct sales force, which is now promoting SENSUS to their call points in pain management and podiatry and also in endocrinology, neurology, and primary care.

Early feedback from DJO has been encouraging. Most of the sales representatives are pleased to be carrying the product and are encouraged by the interest they are seeing from physicians. Including DJO and other distributors, we shipped 1448 SENSUS devices in the first quarter. This was a substantial increase from 358 devices in the fourth quarter of 2013 and 145 devices in the first quarter of 2013, which was our launch quarter for SENSUS.

Our product development team completed work and we reached a milestone in the first quarter with the launch of our second-generation SENSUS device. While not substantially different in appearance, the Generation 2 device incorporates a number of hardware improvements and is thinner than the original. This makes it more convenient to wear under clothing and more comfortable during sleep.

The launch was handled smoothly with distributors, who generally hold low inventory levels in any case. We began shipping generation 2 devices in the middle of the quarter and quickly discontinued the Generation 1 device.

We were also attracted to the opportunity for a differentiated over-the-counter, or OTC, wearable therapeutic device to manage chronic pain. This product would be sold without a prescription on a cash basis in retail channels, including chain drugstores and on the Internet.

A recent independent survey that we commissioned indicated that an OTC offering could significantly expand the overall market for our wearable pain therapy technology.

Assuming that we decide to proceed in the near future, we estimate that we could complete the development process and navigate regulatory hurdles leading to an OTC product launch in the second half of 2015. Our goal is to reach a decision on this launch in the third quarter of this year.

We also had a good first quarter for DPNCheck testing and revenue in the US market. DPNCheck is our point-of-care test for screening, diagnosing, and monitoring peripheral neuropathies, such as diabetic peripheral neuropathy. Our US business is focused on Medicare Advantage, where the test plays an important clinical role in patient assessment and an important financial role in risk adjustment.

In the recent past, our Medicare Advantage business was highly seasonal. During the first quarter, this seasonality was less pronounced, with product orders running at a steady rate that was somewhat lower than the fourth quarter of 2013, but much better than the first quarter of -- was better than the fourth quarter of 2013, but much better than the first quarter of 2013.

We believe the decrease in seasonality is due to emerging overall stability in the Medicare Advantage program and a degree of testing maturity at several of our larger accounts, where DPNCheck testing has been built into their screening protocols.

Outside of the US, our most attractive DPNCheck opportunity is Japan, where launch is fast approaching. We are working closely with Omron Healthcare on multiple fronts; most importantly, a key regulatory filing was made in the first quarter. Although the commercialization timeline is contingent on regulatory approval, we believe that a second-quarter launch is feasible.

Japan is attractive to us for several reasons. The population is generally affluent and aging and health care is a priority. Physicians are reasonably compensated for nerve conduction studies, such as those performed using DPNCheck, and there is an improved pharmacological agent for treating diabetic peripheral neuropathy in the Japan market.

We, of course, have a strong partner in Omron and this is their base market, and they are highly invested in a successful launch. They also have products complementary to DPNCheck that are being sold through their direct sales force and third-party distributors. We believe that DPNCheck is one of Omron Healthcare's priority products in 2014.

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

Thanks, Shai. This was a good quarter for us and a good start to the year. We reported a strong topline and bottom line. Spending remained under control and our cash position was in line with plan.

Here are the highlights. We reported revenue of $1.3 million for the first quarter. This was only slightly below $1.4 million in the first quarter of last year and $1.4 million in the preceding fourth quarter of last year.

The strength of Q1 revenue is more apparent in the product details. Our combined new products, SENSUS and DPNCheck, produced revenue of $473,000 versus $349,000 in the year-earlier period, representing a year-on-year growth rate of about 36%. SENSUS revenue was $195,000 in Q1 compared with $34,000 in the launch quarter -- that was the first quarter of last year -- and $67,000 in the fourth quarter.

Shai, you've just reviewed the SENSUS device shipments, which are equally compelling and which mirror the revenue numbers. The DJO distribution agreement and productivity of the DJO sales force drove the device placements and the SENSUS revenue growth.

DPNCheck revenue was $278,000 in Q1. This compares with $315,000 in the first quarter of last year, which had included a large sale to a Korean distributor. Within the US market, DPNCheck revenue of $245,000 was up nearly 4 times the $63,000 revenue we recorded in the first quarter of last year.

The strength here was Medicare Advantage, where as previously cited, we saw steady testing through the first quarter, albeit at a lower rate than Q4. So seasonality is still present, but it's had a lesser effect this year.

Omron Japan is in the stages of preparing for the launch and had only a minor effect on Q1 revenue. Strong results from these new products came close to offsetting the predictable decline in our legacy ADVANCE business. ADVANCE revenue was $858,000 in Q1, mostly from electrode sales, and this constituted about 65% of our overall revenue.

Our gross profit in the quarter was $716,000 and that represented a margin rate of just under 54%. In Q1 of last year, the gross margin rate was about 59%, or higher by about five percentage points. Margin contraction reflected a mix shift to more heavily weighted low-margin SENSUS devices, where our pricing strategy is focused on building the install base.

Also, we increased production rates for SENSUS and DPNCheck in response to demand. This caused us to incur higher manufacturing costs for new headcount, training, and some inefficiencies in production. Over time, we expect margin improvement from SENSUS due to increased electrodes sales and in manufacturing with increased experience.

Our operating expenses totaled $2.5 million in the quarter. This was a reduction of $600,000 from OpEx spending of a little over $3 million in the first quarter of last year. Spending reductions were most pronounced in R&D and in sales and marketing, where current headcount is at lower levels than a year ago.

We recorded in the income statement a non-cash credit of $500,000. This credit was the effect of mark-to-market evaluation of some outstanding common stock warrants, which we do at the end of each quarter. The warrant liability in the balance sheet was $1.4 million at the end of March this year.

Our net loss for the quarter was $1.2 million. Excluding non-cash warranty credit, the adjusted loss for the quarter was $1.7 million, which was a $600,000 improvement from Q1 of a year ago.

Looking at that on a per-share basis, the Q1 loss was $0.21 per share. EPS adjusted for the warrant effects would have been $0.29, a loss of $0.29 per share versus a loss of $1.06 per share in the first quarter 2013. This comparison, however, is significantly affected by outstanding shares in the two periods. In the current quarter, weighted average shares outstanding were 5.9 million and in Q1 of 2013, they were 2.1 million.

The balance sheet remains solid. Receivables and inventory turnover were satisfactory in the quarter. Receivables of $531,000 reflected 31.1 days sales versus 35.3 days sales a year ago. And inventory of $666,000 reflected a turnover rate of 4.1 times per year versus 2.8 times a year ago. The increase in inventory of $100,000 caused the change in turnover rate, which was concentrated in SENSUS and DPNCheck.

Our cash resources were $7.6 million at the end of the quarter. Our net cash usage during the quarter was $1.6 million. In the near term, we expect quarterly cash usage in the range of $1.5 million to $2 million. Given that outlook, our current cash resources provide a cash runway through this year and well into the first half of 2015.

Those are the financial and liquidity highlights, so Shai, back to you.

Thank you, Tom. Those are our prepared comments, so we'd be happy to take any questions at this point.

(Operator Instructions) Bob Wasserman, Dawson James.

Congratulations on a good quarter. Could you perhaps give a little more color on the DJO Global revenue model? It looks like you shipped a lot of SENSUS devices in the first quarter, and I was wondering if the revenues for the first quarter came from device sales or is there an electrode package in there?

And when do you think these would get out into the field and start generating some recurring revenue?

There were, of course, electrode orders along with that, but the way that most of these units are sold, they are sold where the first month or two of electrodes are provided in the initial shipment with the device. So the electrode sales tend to occur several months after the initial placement of the device with the patient.

So we'll start to see more of the electrode sales coming in this quarter and on and on. That's why we are obviously focused on getting devices on patients. DJO, like most of our distributors, keep fairly low inventories. So most of the devices that were shipped were pretty quickly put on patients.

So we are pretty confident that distributor inventory levels are low, as we are expecting to see increased electrode sales as we go along -- and we are already seeing evidence of that. So we are encouraged by what we've seen on that front.

And then, I guess, in terms of where DJO is, they are obviously -- they have quite a few reps selling the product. They are still ramping up. We only trained their sales force at the end of January, so we are quite encouraged by what we saw in the first quarter and what we've seen thus far with the launch through their sales force.

Okay. Great. You also mentioned the second-generation SENSUS device. Is that mostly going to DJO? Or are they -- do they really dismantle them? Which one do they get?

And also maybe comment a little bit about the comparative margins with the second-generation device? And also on electrodes versus the device sales.

Sure. So the second-generation device is going to all our partners. We made a complete switchover. It's a very similar device -- what we really were focused on was making the device thinner, because what we found over the course of the first year was that patients were wearing it extensively, including at night, of course, particularly after we started marketing it for sleep when we received FDA clearance for that indication.

So it's not just DJO, but all distributors. The margins on the first- and second-generation devices are basically the same. We have a program in place to lower costs on the SENSUS device through improvements in our manufacturing processes, assembly processes, and then just volume -- volume will drive better margins.

The electrode margins are already pretty strong. They -- depending on the distributor and the circumstances there -- they are north of 50% and in some cases 60% range. So those are already strong, even at current volumes and may get a little bit better.

Okay. Just one more question -- you mentioned that you are kind of -- that you ramped up manufacturing in the first quarter. Do you think that there is more growth in DJO for SENSUS or will that really rely on getting some new partners, over the OTC model approval?

We see growth in SENSUS and that technology base -- that technology platform. In many different places. So we expect growth through DJO, growth through other distributors. And clearly once -- if we decide to proceed with the OTC product, we see tremendous growth opportunities. So we're really ramping up on all fronts.

Okay. Thanks and congratulations again.

Jennifer Lane, Webster Court Asset Management.

Hi, good morning. Very nice quarter. Congratulations. Can you talk a bit more -- you mentioned the DPNCheck and Medicare Advantage and the seasonality factor. Can you talk more about the dynamics that affected that this quarter?

Sure. Thanks for the question. The seasonality is largely due to the fact that Medicare Advantage plans have to submit their risk adjustment numbers on an annual basis. So they have a sort of December, end of year target.

So there is a natural inclination to try to get a lot of testing done before the end of the year so, just given priorities and such, the testing tends to get pushed towards the latter part of the year and that's what we saw last year.

That being said, because there seems to be more overall stability in the Medicare Advantage program, broadly speaking, the plans seem to have more confidence in what they're seeing and they are therefore moving the testing up earlier in the year. Also expanding the testing.

Maybe most importantly, they have now one or two years of experience using DPNCheck in their screening programs, so they are just more comfortable with the application of the technology in their screening and risk adjustment models.

Okay. Thank you. Now I do have another question. Can you talk a bit more about your agreement with Omron in Japan and how that's progressing with DPNCheck?

Yes.

What do you -- what might expect?

Yes, so our agreement with Omron is -- covers, actually, Japan and China. They are in the, as we have noted, in the latter stages of the regulatory process and really moving towards launch in Japan. And they are in the earlier stages in the regulatory side in China.

These are both exclusive distribution agreements with minimums. So in Japan, they -- I won't get into specific numbers, but they have targets for the first three years and I guess we could say we expect to launch here in potentially the second quarter, pending the regulatory timelines.

What's probably most important from our perspective is the amount of resources and emphasis that they have placed on DPNCheck. They have quite a large team focused on the product for the Japan launch. They have engaged their fairly sizable sales force and distribution network and everybody is geared up for the launch.

It's a very attractive market for us and for Omron, because -- some of the characteristics I noted in my prepared comments. They have a high rate of diabetes. They have a focus on controlling diabetes. Physicians who use DPNCheck will get reimbursed for the test.

And there is actually -- it's the only market in the world where there is an approved drug to treat DPN. So it's really the perfect profile for a product like DPNCheck. So we have a high degree of optimism about their ability to quickly build that market.

Okay. Thank you.

We have no further questions at this time. (Operator Instructions) I have no more questions coming through, so I'd like to turn the call over to Dr. Shai Gozani for closing remarks.

Thank you very much for joining us on this first-quarter 2014 conference call. We are encouraged by our progress thus far in the year and we look forward to keeping you updated as we progress through the balance of the year. Thank you very much.

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