NeuroMetrix Inc (NURO) 2016 Q3 法說會逐字稿

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

NeuroMetrix is a commercial stage innovation driven healthcare company combining bioelectrical and digital medicine to address chronic health conditions, including chronic pain, sleep disorders, and diabetes. 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 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 periodic filings with the SEC available on the Company's Investor Relations website at NeuroMetrix.com, and on the SEC's website, SEC.gov. NeuroMetrix does not intend and undertakes no duty to update the information disclosed on this conference call.

I would now like to introduce the NeuroMetrix Senior Vice President and Chief Financial Officer, Mr. Thomas Higgins. Mr. Higgins?

Thank you Brian. I'm joined on the call by Dr. Shai Gozani, our President and CEO, and we both appreciate your participation in this Q3 review.

A couple of background observations before getting into the financials. As you probably know, we operate in two markets, wearable therapeutics and point of care diagnostics. Our platform technologies in both markets are based on deep expertise in precision neural stimulation to achieve a therapeutic or a diagnostic result. We have two lead products, Quell and DPNCheck. Both address large market opportunities. Quell is an over-the-counter wearable device for chronic pain, and DPNCheck, a test for diabetic nerve disease, addresses a condition of about half of patients with diabetes, or about 5% of the US population. We are in early stages of Quell commercialization.

Internally, we focus on two primary metrics of business health: devices placed, which is a proxy for growth in the user base and eventual electro-reorders; and invoice shipments, which is an indicator of overall commercial activity. These metrics point to another successful Quell quarter. Device shipments totaled 12,086, up 8% from the preceding quarter. The invoiced value of Quell shipments totaled $2.9 million, up 15% from the preceding quarter. Over the six quarters from launch, both metrics have consistently tracked growth.

The Q3 metrics indicate that we are currently shipping devices at an annual rate just under 50,000 devices with a $12 million invoiced value. And this is after 16 months in the marketplace.

So now the financial highlights. We reported total revenue of $3.4 million, an increase of 65% year-on-year and 28% sequentially. Within that, Quell GAAP revenue was $2.1 million, up 28% sequentially, and Quell contributed 62% of the total revenue.

Quell deferred revenue recorded in the balance sheet that we anticipate will be recognized in future income was about $760,000 versus $734,000 in the second quarter. Deferred revenue reflects shipments to retail distributors not yet sold through to ultimate customers, and net of estimated returns. Our sales returns vary depending on sales channel and have run in the range of approximately 25% of shipments.

DPNCheck was $800,000 in revenue or 23% of the total this quarter. This represented 26% year-on-year growth. It was also the strongest sales quarter in the product's history.

There were several positive DPNCheck developments in Q3. The US Medicare Advantage business was steady and continues to show attractive growth. It is the foundation of this product line.

Our OUS business, which was up about 65% in the quarter, was quite strong, reflecting a large shipment to our Mexico distributor for sell-through to a new account. This new account, which is the second of six major governmental departments which are now using DPNCheck to screen employees for diabetic neuropathy.

Our DPNCheck Asia business is also showing promise. Omron Healthcare has continued to reduce its overstocked inventory position in Japan, and we now expect biosensor shipments to resume in the fourth quarter after a hiatus since last December.

Our China efforts over the past three years are showing progress. A China patent was issued on the core DPNCheck technology in September. And also in September, we received regulatory clearance from the China FDA to market DPNCheck in that market. We will this week be introducing prominent Chinese medical practitioners to DPNCheck at a China-focused conference sponsored by the University of Sheffield in the UK.

Planning for China launch is well underway. Omron Beijing will lead a limited launch focused on high-value hospitals in the fourth quarter, and this will be followed by a broader rollout in early 2017.

Our legacy product census in advanced contributed revenue of about $500,000, or 15% of the total.

Our gross margin in the quarter was $1.4 million, or 40.1% of revenue, and that's consistent with the last several quarters. It's lower than our historical and target mid-50s% margins because it reflects the shift in product mix to lower margin Quell devices as we build our user base in that business. We should see margin improvement over time with growing electrode sales and the positive effects of volume.

OpEx, $5.3 million, was up about $1 million from Q3 of 2015. The largest contributor to this change was the $1 million increase in sales and marketing spending due to Quell TV promotion and other marketing efforts.

Our net loss was $3.9 million compared to $3.2 million in Q3 of the prior year. Net loss per share was $0.76, reflecting a weighted average of 5.1 million shares outstanding in the quarter. This compares with a net loss per share of $1.06 in Q3 of last year on approximately 3 million weighted average shares outstanding.

Our cash consumption in the quarter was $3.8 million. This was a sequential quarter improvement from $4.2 million in cash usage in Q2 2016. We ended the quarter with $7.6 million in cash.

And so, to summarize the quarter, we posted good, positive growth in Quell and in overall revenue. We've got new growth opportunities for DPNCheck, particularly outside the US in China and Mexico, and a reduction of about 10% in cash usage from our peak $4.2 million cash usage in the second quarter of the year. So those are the financial highlights and now Dr. Gozani for a review of our business and strategy.

Thank you Tom. I will focus 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, are ideal targets for Quell.

I will address the following aspects of our Quell efforts -- TV promotion, development of our retail channel, international expansion and our innovation in clinical program. Starting first with 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 in the second quarter, we have been investing in TV promotion. We are constantly optimizing our approach in terms of the specific channels, commercial spot length, time of day, and other factors such as, at the present time, managing through the election cycle. For the most part, we have been focused on shorter spots on national cable news channels, including CNN and FOX News. We expect to continue a similar level of TV promotion through the balance of this year.

With respect to the retail channel, we believe that the availability of Quell in top retail outlets is important to have 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 pending prescription medications and other OTC over-the-counter healthcare products. Therefore, our goal for 2016 has been to make substantial progress towards 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 priority objective of this initial rollout is to understand how to most effectively position and market Quell for success in the OTC section of these leading retailers. We believe that the retailers are generally satisfied with these initial results.

Ultimately, we are looking to position Quell for the next phase of retail expansion. As a result, we are looking for significant additional retail expansion in the 2017 timeframe.

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 pilots later this year or more likely early in 2017.

In terms of international expansion, our commercial focus has been and will continue to be the North America market. The US consumer health market is the largest in the world and we intend to directly build Quell to a premium high-value consumer brand under NeuroMetrix ownership.

At the same time, we see large opportunities for Quell outside the US. We are starting to put the pieces in place to tap into these opportunities.

Our initial effort is directed at the EU market. We believe that we will receive a CEMark in the fourth quarter. In connection with that event, we are 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 health focused companies. We will provide more details as we approach our Europe launch where we hope to start seeing sales in the first half of 2017.

With respect to our innovation and clinical program, one of the core strengths in NeuroMetrix is our R&D sophistication and ability to rapidly innovate. I believe that we have the most advanced engineering team and capabilities in the wearable nerve stimulation sector. Over half of our technical team holds MDs, PhDs or master's degrees in engineering or scientific disciplines.

Our Quell product roadmap is exciting with several 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 will typically target major product launches for the Consumer Electronics show in January, and other major consumer health and wearable technology events.

We are also ramping up our clinical program. We announced in the second quarter that we are sponsoring a study of Quell for chronic cancer pain at the Scripps Translational Science Institute in San Diego. In this randomized double blinded sham-controlled study, the Scripps investigators are evaluating the ability of Quell to reduce prescription opioid use and provide pain relief for patients with cancer pain. This form of chronic pain is among the most challenging of all types of chronic pain. The study is about 1/3 enrolled at this point.

We also recently announced a clinical study by Brigham and Women's Hospital in Boston, which is a Harvard Medical School teaching hospital, that will assess the utility of Quell technology in patients with chronic lower back pain. In this study, subjects will be randomized to treatment with Quell or treatment as usual, meaning standard treatment. We expect the study to start enrolling in November with initial read on results in late 2017. We also expect to launch additional studies in 2017 and we will report those to you as they proceed.

Those are our prepared comments. We would be happy to take questions at this point.

(Operator Instructions). Yi Chen, Rodman & Renshaw.

Thank you for taking my questions. My first question is what kind of revenue impact can we expect from DPNCheck for China?

Good morning and thanks for being on the call. This is Tom. So obviously, before we are in the market, it's difficult to provide guidance, but we would say a few things. One is that not only is this a large market in terms of population, but this is a population that has one of the largest incidents of diabetes in the world, and a growing incidence of diabetes. So we wanted to be in the market for a while.

A second thing I would say is that we have chosen well in terms of how to get into the market. Of course, we here don't really -- we don't know the Chinese market, and we need a partner. And Omron's China subsidiary, Omron Beijing, is well entrenched in that country. So, we think we've chosen a partner well.

In terms of the growth of sales, and this is really just speculation, I think what you will see is, during the fourth quarter and the first quarter of 2017, relatively modest DPNCheck sales as we support pipeline building in China for the launch. I think, beyond that, there will be progressive growth as we expand from our principal -- two principal markets, which are the Shanghai region and the Beijing region, out beyond as we expand beyond there. But it really is just too early a point to provide any specific guidance in terms of units or value. I will say we are very excited to be getting into the market, though.

Thanks. My second question is regarding the European market. Are you already in talks with potential partners to distribute Quell in that market? And when -- about roughly what time frame in 2017 can we expect commercial launch? If it's CEMarked?

We do expect a CEMark this quarter, so we're pretty confident about that. This is Shai. We are starting discussions. We have not gone deeply into those discussions yet as we are trying to -- A, we have been focused on the US market, and B, we wanted to get the timing down for the CEMark. So those will accelerate this quarter. We have opportunities to get into -- because we will get CEMark with essentially the equivalent of an over-the-counter labeling, so we can go direct to European consumers. So, we have options to get the consumers through various Amazon divisions into various countries, and we will probably do that to get some initial traction. I would look for major -- sort of major adoption within Europe to start in the middle of 2017 after several quarters of kind of understanding the market and getting initial reads, so probably the back half of 2017 and looking for it to pretty strong in Europe. It's relatively modest sales in Europe at the beginning here this quarter, and in the next couple of quarters.

Thank you. Final question, regarding the -- for the US market, regarding the potential expansion in 2017, in terms of the size of expansion, how many more stores will be carrying Quell? Can you give us any additional color on that?

That -- it's hard to put a number on that because we obviously don't have the direction yet from the retailers. But we will be looking for a pretty substantial increase in the number of stores carrying Quell. I can't say a specific multiple of the current number of 1,500, but a significant increase from that number. Of course, this will depend on what the individual retailers want to do and how they want to roll it out, and there are still a lot of unknowns there, but we do expect to see a significant uptick in the number of stores.

Thank you. One additional question. Is the return rate of Quell remaining the same historically -- as it was historically? And also at which point do you plan to give some financial guidance regarding revenue? Thank you.

The return rate is holding very steady, very much tracking the history of the product since launch, as well as the clinical data we have.

As far as giving forward guidance, we are still, I think we are still a ways away from that, but we revisit that every quarter. I don't expect we will do that next quarter, but as soon as we feel we have enough understanding of the various channels and can look forward and give some reliable information, we would consider that, but I still think we are several quarters away from doing that.

All right. Thank you very much.

(Operator Instructions).

This is Tom. I have one question that was sent in by email from Sherry Grisewood at Dawson James, who was unable to make the call, so let me read that out now. So her question is what was the feedback from the recent NCADS show, and can we expect any further announcements on marketing partners?

So, NACDS is the large retailer/mass merchandiser show. We had a very good show in partnership with Advantage Healthcare, our retail distributor and broker and partner. We had a very good meeting, very good meetings, probably 15 to 20 such meetings. We had identified a number of additional opportunities as well as followed up on some existing conversations. And we do think that will lead some additional retail expansion probably in the early 2017 time frame, again as some of these retailers go through their store resets.

(Operator Instructions). I'm showing no follow-up questions, so, at this time, I would like to hand the call back over to Dr. Shai Gozani for closing comments and remarks.

Thank you. Thank you for joining us on this conference call today. We are encouraged by the continued strong response to Quell and the new opportunities with DPNCheck in China. We look forward to updating you on our progress through the fourth quarter of 2016, and talk to you soon. Thank you very much.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody have a wonderful day.