NeuroMetrix Inc (NURO) 2016 Q2 法說會逐字稿

Good morning and welcome to the NeuroMetrix second-quarter 2016 earnings call. My name is Abigail, and I will be your moderator on the call.

NeuroMetrix is an innovative healthcare company that develops wearable medical technology and point-of-care tests that help patients and physicians better manage chronic pain, nerve diseases, and sleep disorders. The Company is located in Waltham, Massachusetts.

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 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 the 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 today's -- I'm sorry. Please refer to the risks and uncertainties included in the factors described under the heading risk factors in the Company's periodic filings with the SEC, available on the Company's investor relations website at neurometrix.com and on the SEC's website at SEC -- I'm sorry at sec.gov. NeuroMetrix does not intend to and undertakes no duty to update the information disclosed on this conference call.

I'd now like to introduce the NeuroMetrix Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Please go ahead.

Thank you. Thanks, Abigail. I'm joined on the call by Dr. Shai Gozani, our President and Chief Executive Officer. And we appreciate this opportunity to review our Q2 financial highlights.

In our two markets, wearable therapeutic technology and point-of-care diagnostic tests, our primary products are Quell and DPNCheck. Quell is an over-the-counter wearable neuro-stim device for treating chronic pain, and DPNCheck is a point-of-care diagnostic primarily used in screening for diabetic peripheral neuropathy or DPN.

Earlier this morning we reported our Q2 results. Total revenue was $2.6 million, over 2X the year-ago quarter. Quell shipments totaled 11,201 devices and 9,676 electrode reorder packages, with a total invoiced value of $2.53 million. This was a sequential-quarter increase of 38% in volume and 48% in invoice value. We consider these metrics of device placements and total invoice value as important leading indicators of the health of the business.

Invoice value of shipments will often precede GAAP revenue for two reasons: the first is our sales into distribution, where the retailer has contractual rights of return for unsold product, results in the deferral of revenue recognition until that product is sold through to the ultimate customer. Product return rights such as these are a common feature of retail contracts.

And, second, where Quell sales include a 60-day risk-free, right-of-return incentive, revenue recognition is deferred until the return period has lapsed or there is sufficient channel experience to estimate returns. As a consequence, application of GAAP can delay revenue recognition and cause a buildup of deferred revenue in a growing business, and we experienced this with Quell.

Turning to the GAAP financial results that we reported this morning, total revenue of $2.6 million was an increase of 116% year on year and 16% sequentially. Quell was a growth driver, contributing $1.6 million in revenue, up 35% sequentially. It contributed 62% of our total revenue.

Deferred revenue recorded in the balance sheet that we anticipate will be recognized in future quarters was $734,000, up from $410,000 at the end of the first quarter this year. The growth in deferred revenue was influenced by shipments to new retailers carrying Quell and building their product pipeline. The majority of the shipments have not yet sold through to the ultimate customers.

DPNCheck contributed $0.5 million or 17% of total revenue. This was a growth rate of 9% year on year and a decline of 6% sequential quarters. Almost all DPNCheck revenue came from the domestic Medicare Advantage business, which continues to show attractive growth.

OUS, DPNCheck revenue drivers derives primarily from a distribution partnership we have with Omron Healthcare. Omron is selling down an overstocked inventory position in Japan, resulting in few orders for us this year. Further, Omron announced in June and the sale of its Omron Collins subsidiary, which handles our product. This will likely have an unfavorable destabilizing effect, at least in the short term.

In China DPNCheck is achieved product regulatory clearance and is in the final stages of approval of our manufacturing site. We are working with Omron China on a marketing plan which contemplates launch of DPNCheck in China in the fourth quarter this year or early next year.

In Mexico our expanded presence in the important governmental healthcare sector grew with a Q2 order from the second of six major governmental departments. The order ships after the end of the quarter in the first quarter -- in the third quarter of this year.

Our legacy products, SENSUS and ADVANCE, which we manage for cash flow and not growth, contributed revenue of $600,000 or 21% of the total.

Gross margin was $1.1 million or 40.6% of revenue. This was a reduction from the Q2 of 2015 margin rate of 51% and reflects the shift in product mix to lower-margin Quell devices as we build our installed user base. We anticipate margin improvement over time, with growing electrode sales and positive effects of volume on both manufacturing utilization and on component costs.

Total OpEx spending was $5.3 million, increased from $4.0 million in the second quarter of last year. R&D spending of $1.1 million was up slightly, with efforts directed toward the next generation of Quell. Sales and marketing spending of $2.8 million increased from $1.8 million in the second quarter of last year. Broader TV promotion is now supporting our retail expansion and contributed to this growth. G&A spending of $1.3 million was flat with the sequential quarter -- with the prior-year quarter.

Our warrant valuation adjustment was a $77,000 non-cash credit in the second quarter, and this is simply revaluation of liability classified warrants at market value. In the comparable period of 2015, there was a larger $2.1 million credit. These have no effect on operations.

Our net loss for the quarter was $4.1 million compared with $1.2 million in the second quarter of 2015. On an apples-to-apples basis and excluding these warrant revaluation effects from both periods, the current-quarter net loss was about $800,000 higher than the second quarter of 2015.

Our net loss per common share was $5.37, and this included a deemed dividend charge from an equity offering that we completed during the quarter. Excluding the offering effect, net loss per common share was $0.92. Our cash usage in the quarter was $4.2 million, and we ended the quarter with $11.3 million in cash.

In the fourth quarter since Quell launched -- in the second quarter of last year -- our total revenue has averaged 83% year on year growth. This growth trend and the start we've made with Quell causes us to believe that we are on a path to profitability. Our modeling indicates that in the annual revenue range of $45 million to $50 million, we may cross over to profitability. This could occur in the next several years.

The modeling also indicates that our capital needs to reach crossover may be in the range of $20 million to $25 million, depending on many variables and assumptions. Of course, there are risks associated with this outlook, and it is highly uncertain.

To address our capital needs, we foresee several potential sources. There will likely be an equity component, which would include a new offering or for-cash exercise of outstanding warrants or both. Also, there may be an opportunity to monetize nonstrategic assets, including our DPNCheck business and/or our legacy products. These generated a combined $1 million in high-margin revenue in the second quarter. In the case of DPNCheck, there are meaningful growth opportunities, both domestically and outside the US, and the business is separable from our operations.

Those are the financial highlights for the quarter. And, now, Dr. Gozani for a review of our business and strategy.

Thank you, Tom. I will be focusing my comments on Quell, which is our primary growth driver. We believe that Quell is well positioned to address unmet needs in the $20 billion global market for devices and drugs that treat chronic pain. In the US alone, there are over 100 million people with chronic pain, of which our market research indicates about 1/5 or 20 million people are an ideal target for Quell.

I will address the following aspects of our Quell effort. First, TV promotion; second, development of our retail channel; third, international expansion; and -- actually, I'll address four areas -- and the fourth is our innovation and clinical program.

First, with respect to TV promotion: we believe that the most effective way to reach our core audience to both drive near-term sales and build long-term brand awareness is through TV advertising. Therefore, starting the most recently completed quarter, we have been investing heavily in TV promotion. We are constantly optimizing our approach in terms of specific channels, commercial spot length, time of day, and other factors. For the most part, we have focused on shorter spots on national cable news channels, including CNN, FOX News, and CNBC. We expect to continue a similar level of TV promotion through the balance of the year.

With respect to our retail channel, we believe the availability of Quell in top retail outlets is essential to continued growth and expansion of the brand. Our market research indicates that many consumers with chronic pain are most comfortable learning about and purchasing chronic pain treatments in and around the pharmacy, where they are obtaining their prescription medication and other over-the-counter healthcare products.

Therefore, our goal for 2016 has been to make substantial progress towards widespread availability of Quell in pharmacy affiliated retail settings. Quell is now available in 1,500 retail stores, approximately evenly distributed among Target, CVS, and Walgreens. A primary objective of this initial rollout is to understand how to most effectively position and market Quell for success in the over-the-counter section of these leading retailers.

We are generally pleased with our initial retail results, though it is very early in the process. Ultimately, we are looking to position Quell for the next phase of retail expansion, which we believe will take place in 2017.

In addition to pharmacy-centric retailers, we also believe there are attractive opportunities for Quell with specialty and electronic retailers. We are currently working on several such opportunities and may be in a position to announce one or more such pilots later this year.

On the topic of international expansion, our commercial focus has been and will continue to be the North American markets. In particular, the US consumer healthcare market is the largest in the world, and we intend to directly build Quell into a premium high-value consumer brand under NeuroMetrix ownership. At the same time, we see large opportunities for Quell outside the US. We're starting to put the pieces in place to tap into these opportunities.

Our initial effort is directed at the EU market, where we recently announced that we filed an application for a Quell CE mark. While we cannot be certain about the timing, we believe that we could receive a CE mark in the fourth quarter of this year. In connection with that event, we're starting to put our EU launch plan together. It is our expectation that our efforts in Europe will be some combination of direct-to-consumer sales, such as via Amazon, and partnerships with one or more consumer healthcare focused companies. We will provide more details as we approach the Europe launch, where we hope to see sales starting in the first half of 2017.

Regarding our innovation in clinical program: one of the core strengths in NeuroMetrix is our R&D sophistication and ability to rapidly innovate. I believe that we of the most advanced engineering team and capabilities than the wearable neuro-stimulation sector. Over half of our technical team holds PhDs, MDs, or Masters degrees.

Our Quell product roadmap is exciting, with important product enhancements and launches planned for the next several years. As a general matter, we will not preannounce details of upcoming products. However, as a guideline, we typically target major product launches for the Consumer Electronics Show in January and other major consumer health and/or wearable technology events.

We are also ramping up our clinical program. We announced last quarter that we are sponsoring a study of Quell for chronic cancer pain at the Scripps Translational Science Institute. In this randomized double-blinded, sham-controlled study, Scripps investigators will be evaluating the ability of Quell to reduce prescription opioid use and provide pain relief in patients with cancer pain. This form of chronic pain is one of the most challenging of all types of chronic pain. The study is now underway, with initial subjects enrolled.

This study and the partnership with one of the leading scientific and clinical institutions in the country reflects our expectations for the Quell clinical program. We hope to launch several additional studies in the second half of this year.

2016 is an important and exciting year for Quell and NeuroMetrix. We look forward to keeping you informed as we proceed through the balance of the year. And with that, that is our prepared remarks. We will now be happy to take questions.

(Operator Instructions) Yi Chen, Rodman and Renshaw.

My first question is: can you talk about the potential commercial expansion, retail expansion, in 2017 in terms of scale? Do you plan to cover, expand it to more stores? Or do you plan to have collaboration with more brand-name chain stores?

Yes, thank you for the question. So the general thinking right now is that we are in -- we have initial pilots, if you will, in three of the major retailers: Target, CVS, and Walgreens. So the expansion would be primarily increasing the number of stores carrying Quell.

So, for example, CVS: we are in approximately 500 stores. Nationally CVS has something on the order of 8,000 stores. So you can see, there's a tremendous opportunity to go beyond where we are today. Currently with, for example, CVS, we're just in Florida. We basically have covered Florida, almost the entirety. And we would take it from there to additional states or even national. So it's really expanding in the existing retailers that we're presently piloting.

Okay, got it. Second question: when can we expect to see the results from the trial run by Scripps Translational Science Institute?

I would expect that to be -- initial results, probably in the form of submitted abstracts, would be probably potentially as early as late this year or early 2017. It's a -- each subject is tracked for approximately 10 to 12 weeks, and enrollment is going pretty well. So we probably will be fully enrolled fairly quickly. And we hope to see results, again, late this year. And if not, then in the first quarter of next year -- at least an abstract, submission of abstracts.

Okay, thank you. My third question is on the financial side. So can we expect the sales and marketing expenses and the June expenses to remain relatively stable for the rest of the year? And also, how many shares of common stock were outstanding at the end of the second quarter?

Sure. So with regard to your first question, sales and marketing spending, which was about $2.8 million in the second quarter, our expectation is that it will remain relatively stable in the third and fourth quarter -- so through the end of the year -- with the mix shifting a little bit more toward television and away from some other more structural spending programs.

The same with G&A. G&A should be pretty constant, in that range of $1.2 million to $1.4 million. It was $1.3 million in the second quarter. And R&D also should be pretty stable.

Share count.

Oh, in terms of the share count at the end of the year, it was about -- sorry, at the end of the quarter, it was just about 5.1 million common shares outstanding.

Okay, got it.

We'll be -- our intention is to file our 10-Q later today. And so you can get the precise count and the breakdown when that's filed.

Okay, got it. Just a follow-up. Do you plan to provide -- in future quarters, do you plan to provide a revenue guidance?

So at the moment the answer to that question is, no, we don't in the short-term. We're still gaining experience with Quell. And what is particularly challenging and looking forward with Quell is GAAP revenue as opposed to shipments and the invoice value of shipments. So I think we need a little bit more experience before we can with some confidence provide meaningful guidance.

Okay, got it. Thank you very much.

Jared Cohen, JM Cohen & Company.

Just have a few questions. One, I was wondering about what has been -- it's early on yet, but your reorder rate with maybe people who have had the Quell for a quarter or two?

Yes, we're seeing, on an average basis, across all customers going back, we're seeing about one per quarter. And we would like that to be higher. What we don't have a good sense is the distribution of different types of uses. So, for example, there are people who are using it episodically. One example would be low back pain. You typically will have that for three to four months. It might get better; you might put the device on the shelf and then pick it up again three or four months later, when you have an aggravation.

So averaged out across the entire customer base is about one per quarter. We would like to see that go up to the vicinity of 1.5 quarter. And I think we've got programs in place to push it in that direction.

Okay. And same thing with your return rate. I know you have it averaging around 20%. Are you still seeing that?

Yes, that's been very, very consistent, in the vicinity of 20% to 25%. It varies by channel. As you might expect -- for example, in online purchases, where the consumer can do some research and really make sure it makes sense for them, we have lower returns. If it's a direct response TV, when they are making more snap decisions, it tends to be a higher rate of return, because the reason for purchase may not be well aligned to the benefits of Quell. But overall, we are in that -- it's been very consistent in that 20% to 25% range.

Okay. And in terms of marketing and consumer awareness, do you think it -- what gets the consumer -- talking to people with chronic pain, does it come from TV, Seen It on TV? Or does it come from a physician recommendation? Because -- is this a Quell, do you think a last-resort thing from people who have either taken pills and/or gotten steroid shots or anything, and they're just looking for something that's a last resort because they've tried everything else? Or what's your feedback so far from people?

We do have some strong efforts to educate healthcare professionals. And as I think you know, we actually sell through healthcare professionals, and actually had a good quarter with respect to that. So that's still a relatively small driver of sales, though we'd like to make that a larger component.

You know, I think early on it was more desperate -- early on in the launch of Quell, before TV, it was people who are out of options, as you described -- you know, looking on the Web really in a desperate attempt for sort of a last-ditch effort to control their pain. I think with TV, we're getting to people earlier. And I think that's a good thing. So I think we're probably seeing a transition away towards more maybe less severe, more common forms of chronic pain with TV promotion.

But I think it's a mix. I mean, we're getting people who are searching online; we're getting people through TV; we're getting people through healthcare professionals. And increasingly we're getting people through word-of-mouth. So it's really all of them together. But I do think on the whole, we're seeing -- we're catching people earlier in the process with less desperation. And that's primarily driven by TV.

Okay. I guess the last question -- and I know you -- that paper was very good you put out. But since you are in Target and CVS and so forth, how do you think you differentiate your device from some of the other devices people see in those stores?

There's really very little difficulty doing that. So we are the only wearable therapeutic device that you can use for chronic pain. Most of these devices -- and they are really good for what they do, which is provide short pain relief on a localized basis. So a very simple way to think about it is, you know, those devices are good if you have a -- you know, if your shoulder hurts, or you just have a little bit of back pain, or your knee hurts, you put the device on those locations for a short period of time and get some pain relief, hopefully.

If you have chronic pain, and particularly most people with chronic pain have multisite pain, meaning multiple parts of the body, they need a device that's going to provide widespread pain relief or, in a way, systemic pain relief. And they need it for many, many hours a day. Our average user has the device on for 8 to 10 hours a day.

So we are much more along the lines of comparing ourselves to internal analgesics, you know, pills, which provide you with a prolonged and consistent pain relief. Another differentiator is we are the only device cleared by the FDA for use overnight. So really on -- and then, finally, of course, we're the only -- you know, really only have enhanced -- digital health enhanced device.

So really we've had very little difficulty differentiating ourselves, either on the retail shelf or generally in the marketplace. I think we are really targeting different parts of the market than some of the lower cost TENS devices.

Oh, okay. So you think the people in the stores understand that in terms of showing that, explaining that to the customers or potential customers?

Yes, I mean, there's always potential for some confusion. But through the retail packaging and some of the retail promotion efforts and, of course, the TV promotion and then, more broadly, our digital content we have online, I think we're doing that. The individuals are pretty -- they have a pretty good sense of what they need. And I think they -- we haven't seen that as a particularly big challenge.

I think, in general, the growth in focus on nonpharmacologic approaches to the pain therapy is evidenced by the expansion of these various kinds of devices at retail is good one. It's driven by large consumer healthcare companies like Sanofi and Bayer. And I think that brings a lot of attention to the space.

So on the whole, I think it's positive. And I think there's enough chronic pain to go around. There's enough pain to go around for everybody to both help patients and to do well financially.

Okay, thank you very much.

Sure thing.

(Operator Instructions) Sherry Grisewood, Dawson James Securities.

Great results. I just wanted to follow up on your comments concerning DPN in China. Are you intending to do a launch in China with the product? And if so, what's your strategy and pricing there?

It's a little bit early to talk about the strategy directly, but we have an agreement with Omron China where they will act as our distributor. And Omron has a pretty healthy presence in China to begin with. We've been working with them through the product regulatory process and now the plant qualification process. And so, we are in the process now of working with Omron on that launch plan.

Most likely it will be regionally, a regional plan rather than a broad countrywide plan, primarily because of the payment structure that exists, where the structure is more favorable to diagnostic tests like this in the principal cities -- of course Shanghai and Beijing are top of the list. So broadly speaking, we would be starting this with Omron. And it would be in those cities, and we would see how it goes and expand it from then. Issues such as pricing are yet to be determined. And again, we are working on those, Sherry.

Just one thing to add -- sorry, let me just add one thing. We noted the sale of Omron Collin. And I just wanted to reinforce that that -- Omron Collin is focused exclusively on Japan. And Omron Healthcare as a corporate entity continues to man -- and that's our relationship, is with Omron Healthcare. More broadly, they continue to manage the China business as well as other international markets.

Okay. With regard to the manufacturing -- when you've gone through -- when you go through the regulatory process in China, the next step is that manufacturing license that typically used to give you a five-year exclusivity in their terms. So when you receive the manufacturing license, will you also get that time marketing exclusivity for this particular product?

Just to be clear, the regulatory process typically -- my understanding -- in China typically doesn't involve a second step to approve the plant where the product will be produced. In our case, where this has spanned several years, and we moved our production within Massachusetts from one site to another, that necessitated us going back, notifying the regulators, and then going through a re-review, if you will. But I'm not familiar with that granting us rights of exclusivity.

I think you answered my question. I thought you were talking about manufacturing in China. So you're going to be manufacturing in Massachusetts and exporting to China.

That's correct. Yes, that's correct.

Okay, got it. Okay, that's a little different. Thank you.

Thank you. I'm showing no further questions at this time. Like to turn the call back to Shai Gozani for closing remarks.

Well, thank you very much for joining us on today's conference call. We are very encouraged by the continued strong response to Quell and the early results from our retail efforts. And we look forward to updating you on our progress with Quell and our other business activities during the balance of the year. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.