NeuroMetrix Inc (NURO) 2015 Q3 法說會逐字稿

Good morning and welcome to the NeuroMetrix third-quarter 2015 conference call. My name is Sheila and I'll be your moderator for the call.

NeuroMetrix is a healthcare company that develops wearable, medical technology and point-of -care diagnostic 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 physical 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 believes, may, will, estimate, continue, anticipate, intend, expect, plan and other similar expressions are forward-looking statements, any forward-looking statements that 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 (technical difficulty) risk factors in the Company's 2014 Form 10-K filed with the SEC in February 2015 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 and undertakes no duty to update information disclosed on this conference call.

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

Thank you, Sheila. I am joined on the call today by Tom Higgins, our Chief Financial Officer. We appreciate this opportunity to review our third-quarter 2015 business highlights. And following our prepared remarks, we'd be happy to take your questions.

We have four commercial products at NeuroMetrix. Our wearable therapeutic devices are Quell and SENSUS, and our nerve diagnostic offerings include DPNCheck and ADVANCE. I will focus my comments on Quell because it is our latest product and has the strongest potential growth profile. However, first, I'll make a few remarks about our other products.

Regarding SENSUS, it continues to generate sales. However, we have downsized our sales and marketing efforts to parallel the overall decline in the DME sector, or durable medical equipment sector, mostly due to the Medicare competitive bidding process. These changes have created fundamental business challenges for DME distributors that limit their ability and interest in focusing on SENSUS.

We had a good quarter for DPNCheck sales, as Tom will detail when he speaks. Our Medicare Advantage business is generally stable, although it is difficult to project sales because of the fluid nature of the Medicare Advantage sector in general. We believe that our best prospects for DPNCheck growth are in international markets.

Omron Healthcare has relaunched DPNCheck in Japan with a revamped business model based on learning from the initial launch. We are optimistic that this revised approach will accelerate sales. We also expect to launch in China and Mexico in 2016 and may see meaningful sales in both markets.

Our DPNCheck margins are excellent, so this business line generates cash to help fund our Quell initiatives. Our legacy ADVANCE business continues to be managed for cash without any significant operational focus.

All right, moving on to Quell now, as a reminder, Quell is a wearable nerve stimulation device for treatment of chronic pain that is available over-the-counter. Quell is operating in the $20 billion chronic pain market. It is unique in offering a non-pharmacological wearable technology option for pain control. The system consists of a device, a sports band that holds the device to the user's leg, a two-week electrode, and a smart phone app. We maintain a minimum advertised price of $249 for the device and $29.95 per electrode package, which is a one-month supply.

We launched Quell in the second quarter of 2015 direct to consumer through our website and to healthcare professionals through a small dedicated sales force. During that launch quarter, we shipped about 2,600 devices and 2,700 electrode packages for an invoice value of about $600,000. Sales in that quarter included various preorder activities, including our Indiegogo campaign in March and April.

In the third quarter of 2015, we expanded our distribution channel to include Amazon and QVC. We shipped about 4,500 Quell devices and 5,500 electrode packages with an invoice value of $985,000. This was a sequential growth in devices of 73% and a twofold increase in electrode packages. The invoiced value of shipments increased by about 60%.

Some of the key learning in the quarter include the following. First and foremost, the product is working well with many customers reporting substantial pain relief and improvement in the quality of life. A key related metric is that we are currently seeing about 11% returns within a 60-day money-back period. Both of these data points are consistent with the 80% improvement in chronic pain identified in our recently completed clinical study, which, as a reminder, was presented at the Pain Week Scientific Sessions in early September.

Our long-term goal and expectation is about 20% returns, which reflects that pain management is complicated with widely varying individual results. We are working on our operational procedures to efficiently handle these expected return rates to limit the negative impact on margins.

We were encouraged by the substantial increase in electrode reorders. However, it is too early to estimate reorder rates. This is a metric that we hope to accurately quantify and start reporting within the next several quarters.

We believe that the expansion of our distribution channel to include Amazon and QVC was beneficial and generally additive to our direct to consumer efforts via our website. We will continue to monitor, optimize and expand distribution in the fourth quarter and beyond.

Now, with respect to traditional retail distribution, we engaged the retail consulting firm Advantage Healthcare to provide guidance in penetrating mass merchandisers, chain drug stores and shopping clubs. We believe that retail distribution will eventually represent our single largest distribution channel but recognize that it will take some time to achieve this goal. We hope to initiate retail distribution in 2016. Therefore, in the near term, sales will still be driven primarily by our online efforts and through the healthcare professional.

On the R&D front, we've been busy. We launched our Quell Health Cloud service which makes a customer's data available on any mobile device. We also launched our first android app. It has most of the features of the iOS app and will be brought to the same level over the next several months.

We are working on a major device software upgrade and associated app upgrade that will make the device easier to use, substantially improve battery life, and includes novel sleep monitoring technology that should be quite valuable to our customers because of the tight linkage between chronic pain and poor sleep. We expect to launch these innovations at the Consumer Electronics Show in January of next year.

We've also made progress on our restless leg syndrome, or RLS, program. As a reminder, RLS is one of the most common sleep disorders, affecting up to 15% of the population. It manifests as a strong urge to move one's legs when resting, usually at night, and is also associated with periodic leg movements while asleep that often leads to poor fragmented sleep and daytime sleepiness.

Our plan is to expand the Quell regulatory label to include treatment for RLS. We completed a pilot clinical study and are finalizing a randomized clinical trial that will form the basis of our regulatory filing --- I should say, we're planning the --- we are in the final stages of planning study and we'll be launching that next year.

In summary, we feel that we've accomplished a great deal the third quarter of 2015 and look forward to continuing to progress during the remainder of the quarter and into next year.

And with that, I'll turn it over to Tom for a discussion of the financial results.

Thanks, Shai. Q3 was a good quarter. We had a successful Quell launch in Q2 followed by meaningful growth in devices and electrodes during Q3. We opened new Quell distribution channels during the quarter, which had a direct effect on our reported results. Importantly, we are working on longer-term retail initiatives which help position us for future Quell growth.

Internally, our new production facility in Woburn, Mass. performed very well and was able to meet increasing Quell demand. This facility provides us the capability to scale up, scale down production in response to market conditions. The nameplate capacity is about 100,000 Quell devices per year using multiple shifts and we've tested it at an annual run rate of about 40,000 devices on a single shift.

Turning to the results, for Q3, we recorded revenue of $2.1 million. This reflects topline growth of 44% from $1.4 million in the third quarter of last year. On a sequential quarter basis, revenue grew by 68%. In addition, we deferred approximately $700,000 in revenue on Quell shipments where customer right of return has not yet lapsed. US GAAP requires revenue deferral under right of return where there is not sufficient experience to value the expected returns. We believe we will be in a position to recognize Quell revenue upon shipments for most distribution channels by the end of Q4 this year.

We anticipate that Quell returns will be approximately 20% over time, as Shai as just indicated. These will be accounted for as reductions in revenue.

The Quell invoiced value of shipments was $985,000 in Q3. We shipped about 4,500 Quell devices plus about 5,500 electrode packages. Cumulative Quell devices sold since our Q2 launch now exceeds 7,000 devices.

DPNCheck revenue was $621,000 in the quarter. That was up about 2% from Q3 of last year and up about 49% on a sequential quarter basis. Biosensor shipments for DPNCheck reached a three-year high of 39,500 biosensors and international sales primarily to Omron Japan were at a high for the year. As Shai also mentioned, Omron recently relaunched DPNCheck in Japan with new pricing initiatives that are designed to stimulate local demand. Effects of this initiative should be seen starting in the fourth quarter.

SENSUS revenue totaled $97,000 in the quarter with a shipment of about 465,000 devices and 3,800 electrodes. SENSUS is our prescription wearable technology for chronic pain, and sales reductions from prior quarters reflects the challenging environment for durable medical equipment suppliers in general as well as the Q2 launch of Quell.

ADVANCE revenue was $570,000 versus $653,000 in Q3 a year ago. This legacy product to which we are really not providing any marketing efforts contributed about $285,000 in cash during the quarter.

Our gross profit was $935,000 and represented a margin rate of 45.5% versus a Q3 2014 margin of 55.2%. The lower margin rate was due to increasing Quell sales, which, as we build our installed base of Quell users, are more heavily weighted to lower margin devices.

Operating expenses totaled $4.3 million. This reflects our commitment to Quell and was a spending increase of about $1.5 million over Q3 of 2014 with the increase concentrated in sales and marketing efforts. Within OpEx, R&D spending of $941,000 was about level with the prior year. Sales and marketing spending of about $2 million was up about $1.4 million from Q3 of 2014. Personnel costs, including travel, comprised about 30% of the increase, or about $430,000.

During the past year, we have added retail management and marketing experience to support Quell as well as the Quell field sales team. Total headcount increased in sales and marketing by about 12 people over the year-ago period. Incremental promotional spending and marketing costs for Quell totaled about $660,000.

G&A spending of $1.4 million was up slightly from $1.3 million in Q3 of last year. We also recorded in the income statement a non-cash credit of $152,000 for reevaluation of our existing common stock warrants to fair value.

The net loss for the quarter was $3.2 million, or $0.26 per share, and our weighted average shares outstanding total 12.1 million. We ended Q3 with $9.1 million in cash, and cash usage during the quarter was $3.5 million.

So those are the financial highlights. And Shai, back to you.

Thank you, Tom. And that completes our prepared comments. So we'd be happy to take any questions at this point.

(Operator Instructions). Anthony Vendetti, Maxim Group.

So, on Quell, I know you gave the total invoiced amount for both the device and the electrode package. I was wondering if you can give us the ASP for the device and then for the package of electrodes?

Yes, Anthony, so for -- the ASP numbers are a little bit complicated because most of the revenue that's been recognized in the quarter relates to sales of shipments that were made in the second quarter. So, as a consequence, the ASP of the devices and the electrodes reflect some incentive pricing for our Indiegogo campaign that ran in late Q1, early Q2, etc. So I think we'd rather not get into an ASP for either of those because of the lack of a link really between sales that were made so far away versus the third quarter that we are reporting on.

Another way, just to put a little content -- obviously, when we sell direct, it's at retail, which is $249. When we sell through distribution, it's going to be a transfer pricing, which is going to be at some reduction into that obviously to support the distribution channel.

Sure, sure, no, I understand, Shai. Can you give just an approximate distribution of how much you sold through the retail channel and how much you sold through the physician channel in the --

You know, roughly speaking, I would say it was 50-50-ish would probably be a fair way of looking at it. Early on, we talked about ultimately expecting about three-quarters of sales to come through various direct to consumer and retail channels and about a quarter through physicians. So, we're definitely higher than that at this point, not surprising, as we are building up retail, but that's kind of our long-term goal is about that kind of split.

Okay, makes sense. Can you talk about your expansion, because you've had a number of new outlets to sell it into? Obviously, QVC, you signed up Amazon and then recently Hammacher Schlemmer. So I was just wondering if you could talk about the timing of those agreements approximately? Which one is so far the one that is producing the most, and then sort of your planned rollout as we move through the rest of this year and into 2016 in other outlets, retail outlets?

Sure. Great. So you identified the three major ones. So, kind of working in reverse, Hammacher primarily will be something that we see through holiday sales, so we provided them with their initial stocking inventory and then that will sell through we expect this quarter.

Amazon and QVC are a little different. Amazon we launched in the beginning of September, so we had about a month of that during the quarter, and very encouraged by what we see there. It seems to be largely incremental to what we get through our website directly. But obviously it's hard to be sure but we saw an immediate step-up when we added Amazon. So we are very encouraged by what we see there and I think that will be a really nice complement to our direct, our website, cloverleaf.com.

QVC, we had our first airing in the beginning of September and we had a second one earlier this week actually. And both of those, we're pleased with both of those. The results end up being highly dependent on exactly what time of the day and where they stick you and how much time they give you and a lot of other factors, but we are definitely seeing sell-through on QVC. And we hope that we'll get some additional airings this quarter and if not this quarter, then they'll pick it up after the holiday season.

And then as far as additional channels, we don't expect anything substantive new in the fourth quarter. We'll just continue to really optimize these existing channels. And then as we get into 2016, we are looking to really focus in on expanding into traditional retail channels.

Okay, so we should look for some additional maybe big box store kind of channels in 2016?

Yes, that's what we are working towards, exactly. We are working towards the traditional retail, the chain drug, mass merchandisers and club. Now, obviously, the timelines are long and it's a pretty prolonged process and highly involved, but, yes, we are looking towards that. We don't have anything definitive at this point but are working towards that.

Sure. No, understood. The big boxers, I know they are very selective and they only do it once or twice a year in terms of adding new SKUs and so forth.

Yes.

Can you just -- the last question and then I'll hop back in the queue is can you go over your clinical study results for this product?

Yes. We did a -- there's two things we've done. So I assume you're talking about related to chronic pain versus our work in RLS. So, in chronic pain, we did a post-market study that started kind of in the late spring and into the summer and it was really designed to emulate the user experience in the real world. So we recruited subjects online, sent them the device and then we did a pre-use questionnaire and then a 30-to 60-day questionnaire. So it really reflected real world use as opposed to having them go through clinical trial sites and so forth where they get a lot of attention. We really wanted to see if somebody gets this online or through a retailer, what is their chronic pain experience using the device? We looked at, again, 30-days and 60-days. We looked at various pain related outcomes.

Sort of the primary outcome measure was what is called, PGIC, or patient global impression of change, which is the patient's or subject's overall impression of their improvement or lack thereof in their pain. That was reported on 81% of the subjects reported an improvement in their chronic pain. And then secondary outcome measures were things like pain medication use where we saw 67% report reduced use of pain medications, which we thought was really quite profound. We reported those results in abstract and poster form at the Pain Week Conference and we have a manuscript in preparation now for submission.

Okay. How many participants total?

The overall end is 94 in the subject group. It started out there were a little bit more. We obviously lost some people along the way to follow up, but the final end is 94.

Perfect. All right. Thanks very much. I'll hop back in.

I've got to say congratulations on a good quarter, and you've pretty much implemented everything we talked about on the last conference call. I have a question regarding what plans do you have on marketing the Quell product internationally like in Japan or China or mainland Europe? Any plans for that?

Thank you for the question. We do think that there are tremendous opportunities outside the US that parallel the US market. At this point, we're really just going to focus on the US market. We are starting to look at doing a little bit of market research in Japan, for example. We are working towards a CE Mark for Europe. So we are starting to put the infrastructure in place and understand the markets better. But in terms of specific initiatives, commercial initiatives, at this point, we don't have any. I suspect, as we get into 2016 and probably more in the back half of 2016, we'll start to be more aggressive about that. But at this point, we just want to make sure we're focused on the US.

Okay. How about the regulatory approval in China? I know you applied for it quite a while back. Have you gotten any updates on that?

You're referring to DPNCheck.

Yes.

Yes, exactly. Tom, do you want to give an update on that?

Yes, sure. So this is a process that is really not transparent, but we filed in China well over a year ago.

Yes, I know, it's quite a while.

And so the direct activity in the field in terms of managing that, our partner, Omron Healthcare, is handling along with a local consultant. So we are sort of at the end of the train here, but we have moved through several steps in the review process, including testing of the product, and now we have two steps remaining. One has to do with a technical review, which we understand should be relatively short but I can't tell you what relatively short is. And then finally, there is an administrative review.

So putting all that together, there really is no concrete guidance I can tell you other than Omron and we believe that, during 2016, hopefully early in 2016, we will be able to get this through the regulatory process. The bottom line is we're making progress. It's slow. It's not transparent.

Okay. One other question. Have you been approached by any medical device manufacturers about maybe partnering up or helping you promote this item, especially the Quell device?

We're actively talking with a variety of different companies in consumer healthcare, in wearable technology and so forth about ways to partner and see if there are opportunities. So definitely there is a lot of interest in Quell. So we are always interested in talking and seeing if there are ways to leverage partners.

We're really want to focus on building the Quell brand. We think that is really what will return the most value to the shareholders, is to create a very valuable premium wearable technology brand. So we don't want to do anything through partnerships that might dilute that, but, yes, we are very actively talking and looking for opportunities to partner and optimize our efforts.

Okay. Thank you very much. Have a great week. Okay. Bye-bye.

(technical difficulty). Jay, please check that your line is not on mute.

okay, I have a quick question regarding Quell. I understand it takes a long time to be on the store shelves of these major drug chains like Walgreens, CVS, Rite Aid, Walmart. Is it possible to be on the e-commerce sites, because they're starting to do a lot of business there, instead of being on the store shelf? That's one question.

And the second thing is, is it possible, in 2016, with the help of your marketing partner, to be -- gradually roll it out to these four stores at least in four major metro areas market by market with some kind of co-op TV advertising?

Yes, thanks for the questions. Yes, it is possible to get on their websites before you get on the shelves, and that is something we are looking at. We don't really feel that that's going to be dramatically -- that will dramatically drive sales compared to being on Amazon and our website. But there's not a lot of downside by any means. So that is something we have had some discussions and that may be a first step, if you will. So I would agree with that. I don't want to imply we have a specific plan to be in a specific retailer website, but that definitely could happen.

As far as getting -- we're working very hard towards being on the shelf in one or more retailers in 2016. As far as rollouts, they tend to, at least with a product like this, they tend to want to roll it out nationally because of the effort that's required, so rather than rolling it out regionally. But we're looking at all possibilities and we're looking at maybe doing smaller -- several launches in specific markets, like you outlined. But a lot of these retailers, once they buy into the concept, I think a lot of times they really want to go national, so we have to be ready to support it nationally. But those are good questions, and we are incorporating that kind of thinking into our discussions and seeing if there are smaller steps before the national rollouts.

Thank you very much. I appreciate it.

(Operator Instructions). Bill Gant.

Thank you and congratulations, gentlemen, on a great quarter. In your strategy for mass retail, what criteria are mass retailers looking for, and how does Quell match up for targets like Duane Reade, CVS, Walgreens, Target, etc.?

Well, you know, ultimately, they're looking to make money, so they're looking for products that they think will be attractive to their customer base and will have reasonable in-store turnover. So, given that, the category of chronic pain is, not surprisingly, a very attractive one. If you walk into any chain drugstore or really any retailer, you can see a lot of products related to pain.

One of the interesting data points is that the category of pain-relieving devices is the fastest growing in consumer healthcare. So the retailers are very tuned in to the concept of non-pharmacologic pain relief. Now, most of the devices that are available -- all of the devices that are available are really for local pain relief, temporary relief of muscle soreness, things like that, whereas we are targeting chronic pain, so we're not competitive with those devices by any means. But the retailers have clearly identified the segment as something that they are focused on. So, we are in the power alley.

Wearable technology is another area that even the chain drugstores are getting involved with. I think we meet all of the criteria in that the customers are looking for these technologies. We have a unique solution. And I think now it's a matter of identifying the best partners and operationalizing that.

Great. Thank you so much.

(Operator Instructions). There are no more questions. I would now like to turn the call over to Dr. Shai Gozani for closing remarks.

I want to thank you for joining us on our third-quarter 2015 conference call. We look forward to updating you next quarter and into 2016. Thank you very much.

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