NeuroMetrix Inc (NURO) 2018 Q1 法說會逐字稿

Good morning, and welcome to the NeuroMetrix First Quarter 2018 Earnings Call. My name is Candice, and I will be your moderator on the call. 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 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. Mr. Higgins?

Thank you. Candice. I'm joined on the call by Dr. Shai Gozani, our President and CEO. NeuroMetrix, as you may know, is a health technology company. We have proprietary neurostimulation technology that we apply to chronic pain, sleep disorders and diabetes. Our commercial products are Quell, an over-the-counter wearable device for managing chronic pain; DPNCheck, a point-of-care test for diabetic peripheral neuropathy or DPN; and ADVANCE, a general purpose neurotesting device.

Our business strategy is to maintain disciplined growth led by Quell. We intend to do this within our present cost structure and while continuing to deliver product innovation. This is our pathway to profitability. Our marketing focus is on the United States. We have partnerships with several global companies to promote our products outside the U.S.

In the first quarter, we entered into an agreement with GlaxoSmithKline, transferring Quell international rights in exchange for payments of up to $26.5 million. We retain all rights to the U.S. market. We collaborate with Fukuda Denshi on DPNCheck sales in Japan, and with Omron Healthcare, in China. We directly handle all DPNCheck sales in the U.S. Our Q1 results reflect continuing revenue growth plus the initial benefits of the GSK collaboration.

Turning to the results that we released earlier this morning. Total revenues of $4.9 million represent growth of 15% from $4.3 million in Q1 2017. Quell revenue was $3.5 million and accounted for 70% of the top line. This was an increase of 13% from $3.1 million in 2017. We distribute Quell through 3 main channels: These are E-commerce, retail stores and TV home shopping. Replacement consumables are mostly sold through e-commerce.

We use TV and digital marketing to build awareness and to generate sales. DPNCheck revenue was $1.2 million. This was up 43% from about $800,000 in Q1 of last year. It contributed 23% of total revenue and was a new quarterly high. DPNCheck is a professional diagnostic technology sold in the U.S., to health care providers mostly within the Medicare Advantage system. OUS sales by our distribution partners are to health care providers such as hospitals and clinics often with a diabetes focus. Our Q1 sales growth was in the U.S. Medicare Advantage business where order volume increased nearly 70% year-on-year.

Our legacy products primarily, ADVANCE, contributed the remaining $300,000 in revenue. Gross profit was $2 million, up about $400,000 or 24% from Q1 last year. Gross profit benefited from revenue growth, but importantly also posted margin expansion. Gross margin rate in Q1 this year improved to 40.2% from 37.4% last year, a gain of 280 basis points. Margins improved for both Quell and DPNCheck, partially offset by higher overhead costs and the effects of a legacy business that is in decline.

OpEx spending in Q1 was $5.6 million, up $670,000 or 14%. Two factors were responsible for this growth. About $375,000 in costs were due to higher Quell product development spending and about $300,000 in costs related to noncash employee stock option awards. Quell advertising spending was $100,000 lower in the quarter and will be further reduced in Q2 and Q3 as we retain spending capacity for later in the year to support the launch of our next-generation Quell.

Under other income, collaboration income is a new item in the P&L. The amount of $4.8 million reflects the $5 million proceeds from the GSK agreement, net of banking and legal fees. Collaboration income will recur in future P&Ls from time-to-time as we achieve predefined milestones. I would like to emphasize the phrase, time-to-time, because these milestones will not be steady and predictable. As such they will result in swings of our -- in our quarterly results.

During 2018, we anticipate a total of approximately $12 million in collaboration income, including the $4.8 million recorded here. Our bottom line net income was -- net was $1.2 million in comparison with a net loss of $3.2 million in Q1 2017. This crossover to profitability resulted from the GSK collaboration.

Our cash position was $6.1 million at March 31, an improvement of about $2.1 million from the beginning of the year. Our capital structure remains simple, equity-only and debt-free.

Fully diluted equity is 14.8 million common shares comprised of common shares trading of 7.3 million, preferred shares on as converted to common basis 6.6 million and a combination of options and warrants of 900,000. The options in warrants are each about 400,000 shares. The warrants are inconsequential with an exercise price of $40 and only 2 years remaining.

We do not pursue material change in our capital structure. And given the expected collaboration income, do not anticipate a need for equity funding during 2018. Dr. Gozani will now address our overall strategy.

Thank you, Tom. My comments today will touch on 3 points: They will be the third-generation Quell, a little bit more about our GSK collaboration and then a few thoughts about our longer-term vision. So starting with the third-generation Quell device. For the past couple of years, our R&D resources have been focused on development of this third-generation Quell device, and we are planning to launch it later this year. It is a critical element in both our near and long-term business strategy. We believe that the third-generation device and its accompanying digital health tools, which include the Quell App and Quell Health Cloud will improve on their already impressive usability and clinical performance of the current Quell device.

The third-generation device has been designed from the ground-up to have lower cost and improved manufacturability. We've accomplished this without sacrificing and in fact, we believe we've enhanced the premium features of Quell compared to alternative, over-the-counter pain relief devices.

We believe that this will drive substantial margin growth for Quell and the entire business into a range exceeding 60% once we have optimized its supply chain.

Our collaboration with GSK is built around third-generation technology. First, early milestones, as Tom mentioned, are related to product development. Second, a key part of our collaboration agreement with GSK is to co-fund further development of the Quell platform with a 50-50 split starting in 2019. In addition to offsetting R&D costs, this will allow us to tap into the tremendous scientific, clinical and marketing resources of GSK.

Moving on to a little bit more detail about the GSK collaboration. As we've already touched on several elements, I'm just going to add a few points here. First about big picture. It is gratified that this collaboration will make Quell technology available to the many millions of chronic pain sufferers outside the U.S. The chronic pain epidemic is a worldwide problem that affects 1.5 billion people. We are very encouraged that GSK feels that our technology is worthy of being commercialized under their highly regarded consumer brand. From a practical point of view, the GSK collaboration is central to our near and long-term business strategy. First, it provides us with a reasonably predictable source of income that may offset our operating losses until we achieve profitability.

We believe this may allow us to turn the corner on probability without any further dilutive financing. Second, GSK is one of the largest consumer health businesses in the world. In pain, they have several of the top international brands, including Voltaren, Panadol and Excedrin. They have deep market knowledge and capabilities. Due to this collaboration, we are tapping into some of those resources and feel that they will benefit us in the U.S. business. And third, as I mentioned earlier, we will collaborate on future Quell R&D, which allow us to ship some of our R&D spending to new products that could represent additional revenue streams in the future.

Finally, a few words about our long-term vision. As we have stated over the past several earning calls, our core focus is to move NeuroMetrix towards profitability over the next 2 to 3 years. We believe we can achieve this, while also showing attractive top line growth and investing in R&D. Some outcomes of this strategy include the following: First, our TV advertising strategy will be rational. This means that we will spend -- we'll time spending to when it's most cost-efficient and generates the greatest return. As a consequence, we may see quarter-to-quarter variability as we adjust inherent fluctuations in TV advertising costs. On a related note, we will focus our spending on the fourth quarter, which is inherently the most efficient and should coincide with the launch of our new Quell product. We also rationalized the distribution strategy to the most productive and cost effective channels. As a practical matter, this means that we will limit Quell availability to certain retailers as opposed to targeting a specific number of storefronts. And finally and importantly, we will not cut back on R&D and clinical work. We believe it is essential that we continue and in fact accelerate innovation to secure our significant competitive advantages and to create future revenue opportunities.

On the clinical front, we are committed to a strong and public clinical program that enhances recognition, understanding and value of our products. And that concludes our prepared comments. We'd be happy to take questions at this point.

(Operator Instructions) And our first question comes from [Joseph Lemo], private investor.

Hello. I have a question regarding and you possibly have answered it, the amount of co-funding that might be anticipated in 2019, and apparently there is going to be a 50-50 split in that. Do you have an estimate of the funding that might be necessary at that time? And then another question is, have either Glaxo or your company considered having the Quell covered by insurance?

Let me handle the first question and Shai could handle the second. With regard to co-funding R&D expenses on Quell in 2019 and beyond, we've set up with GSK an organizational structure where teams from both sides will decide on the spending program and the projects that we are going to undertake for enhancing Quell in the future. And so as you can imagine at this early point, we haven't decided on the program for next year. But if it's indicative, our spending rate in R&D has been approximately $4 million over the last several years, and we intend to work broadly within that range. Most of our spending in R&D has been on Quell. So one might imagine that if we continued at the same pace, roughly half of that $4 million spending would be supported by GSK. But of course, it depends on the two parties getting together and deciding on the priorities for next year.

Taking your second question. I can't speak to GSK's commercial plans vis-à-vis reimbursement in their markets. In terms of our view in the U.S., our current thinking and efforts are not directed towards third-party reimbursement for Quell in the U.S. market. We continually look at that and review that and part of the clinical effort that we have underway and it has resulted in a number of publications and we'll continue to put out more clinical publications. We think over time we may get to the point where we have enough of sort of a clinical story to potentially approach third-party payers under some circumstances. So that's something we might look at in the future, but I would say for the next several years we don't see third-party reimbursement as being substantive.

Can I add one more question and that would be, is there consideration for possibly increasing future guidance?

Sure. That's a good question. One that we get asked often. We haven't provided forward guidance in any detail to-date because of the early commercial stage of our principal product and its unpredictability. As we go through 2018 and particularly after we launch our next-generation Quell, we're going to revisit that issue and decide for 2019 whether or not specific guidance is something that could be meaningful. Obviously, it wouldn't be meaningful if the numbers don't seem relatively predictable and under control. So, the short answer is, it's on our mind and we will consider it for next year.

I'd like just also say that having no debt is phenomenal and your company deserves a lot of credit for that.

And our next question comes from Jared (sic) [Joseph] Cohen of JM Cohen & Co.

Just a few questions. One, I know you mentioned in the past, but where there any sales or do you have any marketing for your QVC this quarter or not?

Yes, we had. In fact, we had quite a busy QVC quarter. As you will probably recall that QVC's philosophy has been that health products like ours are probably not best for their audience in the fourth quarter. But after the first of the year, in the first quarter, when people start returning towards health, they are. So we actually had a strong quarter with QVC, strong first quarter.

Okay. Second, I know you talked about it in the past, but -- and probably it hasn't changed. But in terms of reordering of electrodes from your existing user base?

It's been pretty consistent, Jared. I mean, we are seeing in our active base about 1 electrode on average -- about 1 package of electrodes per quarter per customer. It's been pretty stable.

Okay. So that hasn't changed, so you haven't seen that increase in terms of the reordering.

We have not. One -- we actually have, under Frank McGillin's guidance, his team has as many initiatives in play -- to -- we believe to improve that, and we hope to start to see the benefits of those over the course of this year. So it's very much something that is on our mind and as we are at the point now where we have a sizable base of customers, it's natural to start putting more and more marketing focus on the recurring sales as opposed to just the new sales.

Okay. And then, in terms of marketing, have you thought about -- we've talked about it. In terms of -- because sometimes awareness to people in terms of the physical therapy market, in terms of people after to let them know that the product exists in terms of -- that they can recommend it to whoever they are dealing, to their customer base because I know they -- I'm just saying that they don't even know that it exists.

Yes. We have not -- we have had some efforts to promote or even distribute the product through health care professionals. For the most part, those efforts have been directed at physicians, pain medicine physicians, podiatrists and to a lesser degree, physical therapists. We still have those efforts, particularly as they pertain to physicians because it's important for the creditability -- clinical creditability of the technology. We don't have an active effort right now with physical therapy. I think we have some outreach there, but we really have been focusing our energy on the direct-to-consumer. But we're always revisiting the various channels and that might be something that at certain point makes sense, but at this point we've not put a lot of energy specifically in the physical therapy market. And just one reason for that is this is not entirely completely the case. But typically, physical therapists are more dealing with acute pain and rehabilitation from injuries as opposed to chronic pain. There are exceptions to this. And whereas, Quell is really a chronic pain tool. So the overlap there is not perfect.

No. Absolutely. You are absolutely, right. It's just sometimes -- just someone was mentioning to me 2 people as examples who said that it has helped them out. And then, I guess what within -- after 12 weeks if your pain hasn't gone away, I guess, does that crossover from being acute to chronic in some cases? And then you need something else to help you out?

Yes, that's correct. I mean essentially, well, it's somewhat of an arbitrary distinction, but 3 months is typically the cutoff between acute and chronic pain, but that's more of a -- just a definition as opposed to physiologic. But at 3 months it typically is considered chronic pain.

Right. So that's why I brought it up. And lastly, in terms of -- because I know there was -- you brought up the whole change of accounting, Tom. And this goes into seasonality because I wonder you would -- had expected whether sales will actually going to be up a little bit this quarter relatively speaking just because of the change of sales recognition or so forth?

Yes. That's a good question and a longer question. The short answer is that, we did implement the new revenue recognition rules in this first quarter. And as part of that, we no longer book revenue on a sell-through basis, but rather when we ship the product or the product is received by the customer net of expected returns. And in fact, as it worked out this quarter, it was just about the same as it would have been under the prior accounting treatment. But that won't always be true in the future, and we'll disclose the effect, but this quarter it was about the same.

And our next question comes from Manish Israni of Telebrand.

So our business is -- we're leaders in direct-to-consumer advertising and retail distribution. And my question has to do with the type of advertising that you invest in. And you have a high price point product. And I've seen that primarily the commercials that you advertise direct-to-consumer are 60 seconds, 2 minutes, 30 seconds. But what we've seen in direct-to-response -- direct-to-consumer advertising is that products that have a high price tag such as yours typically need a long form type of advertising, which is the 30-minute infomercial. I wanted to know if you have any plans to invest in the long form advertising, which typically works well with products that are of a higher price tags?

We don't at this time, but I would suggest on a topic like this please reach out to us directly, we would be happy to have an off-line discussion on that.

And our next question comes from [Walter Schaffner] of (inaudible) Partners.

Just 2 to make sure I understand the GSK agreement. They are buying ownership of the international rights to the technology for $26.5 million, I think that was it. After -- beyond those payments, there is or is not a royalty is the first question? And secondly, since you are expecting significant additional milestone payments this year, the milestones are both technology and sales driven or multiple different criteria as opposed to just sales driven? Those are the 2 questions.

Yes. The answer is, there is no royalty structure associated with the agreement. So this is the -- the $26.5 million is the complete value of the transaction. In addition, of course, there is the R&D collaboration that we talked about previously. And then the -- sorry, second question was?

Milestone criteria?

Sorry. The milestones are both -- there are both -- technology product development-type milestones and then there are commercialization milestones, are both types of milestones.

Our next question comes from [Annette Flowers], private investor.

I'm not clear in terms of GSK (inaudible) about royalty. So have you just literally sold international rights to the product internationally? You won't be receiving any royalties. You'll just be receiving the $26 million and milestone payments. Is that it?

That is correct. So the value of the collaboration is $26.5 million. There are no royalties for this generation technology.

All right. My second question is, I understand that your net private target clinicians are looking to insurance and insurance reimbursements as part of your sales methodology of Quell. I want to understand why that is, given a time in which chronic pain has become one of the leading issues in United States, and the treatment of it, and the interest in moving people away from drugs as a methodology for treatment?

Yes. Well, I would say, we would be delighted if it was possible in the near term to engage third-party payers with Quell and to get near-term coverage. But just from a practical perspective that's not the case. As I said in response to the other question earlier, we do believe there may be a longer-term opportunity to get third-party payers to look at the technology and to find opportunities for them to reimburse or otherwise offset the cost, but it's just a longer-term effort. And so in the near term in terms of building the business and making the technology available to chronic pain sufferers, the best approach is direct-to-consumer over-the-counter. We are actually -- and have been quite active in engaging physicians, as I mentioned pain medicine physicians, neurologists and others in the technology, making them aware of it. And just in the last couple of weeks, we have announced presentations at major medical conferences. We are presenting the technologies scientifically. Sometimes, we are also exhibiting. We have quite a few physicians who are either directly distributing the device or prescribing it, I shouldn't say prescribing, are informing their patients about it, but it's not at this point the primary driver for availability of the technology or growth of the business. But I completely agree with you on the importance of engaging the health care system and the criticality of the opioid crisis and such. So it's very much on our minds, but we're just from a practical perspective we have to view it as a longer-term strategy versus a near-term strategy.

And keeping with your strategy, I didn't hear anything about chiropractors, who, of course, are in the business of using nonprescription methodology for treatment of chronic pain?

Yes. They're in the mix. We have a distributor who calls on chiropractors. And we've been to some of their -- to some of their conferences. So yes, they're a part of it. We tend to focus mostly on the physicians at this point because I think that will establish the strongest credibility for longer term -- in terms of the third-party payers in the long term, but chiropractors, physical therapists and anybody who is around the pain management of the patient with pain is relevant to us.

And our next question comes from Robert (inaudible) Asset Management.

I have a couple of questions. So stop me, if I go on beyond my reasonably allotted time. You spoke a little bit about the kind of arbitrary distinction between chronic pain and acute pain. And I am wondering about -- to try to get my head around how Quell works, obviously, not being an expert. Why can't it be used for acute pain? And I'm thinking like along the lines if somebody is anticipating acute pain like for instance if a women knows she's going to be going into labor, why she couldn't use the product in anticipation of that, to ease, for instance, the pain of delivery, for instance, just as an example? Can you speak to that at all?

Yes. I mean, the broader umbrella methodology of transcutaneous electrical nerve stimulation or stimulating nerves to evoke pain relief is applicable to acute pain by all means. We have designed the product, particularly with the chronic pain patient in mind or chronic pain sufferer in mind. It doesn't mean it's not relevant for the acute pain case, but there -- it's not necessarily -- its strengths lie in chronic pain. The issues with chronic pain are, particularly you're going to be in chronic pain for prolong periods of time. You have it for often most of the day. So almost continuous or near-continuous stimulation for very, very long periods of time, 6 to 12 hours a day for months or years is really what's necessary. And that is how Quell is designed, it really works optimized in terms of benefit. So it's not that it's not relevant in acute pain, and -- but it's not necessarily at its strongest. Its benefits are more aligned to chronic pain.

Okay. Then the next question I had pertain just to manufacturing capacity. If I understand it right, you guys manufacture it -- basically assemble it from parts that you order and what is that look like? I mean, are there any bottlenecks or anything?

No. I think we are in good shape there. We assemble this product at a small facility that's about 10 miles from Boston -- 10 or 15 miles from Boston. And that facility has a capacity well in excess of 200,000 units per year at full staffing. And so we are far below that level.

Okay. And then, along those lines, if I'm looking at the revenue number right, I think I heard you say that from a seasonality standpoint that on QVC that the quarter, the first quarter, I guess, the March quarter is normally better than the one perhaps because of holiday sales or something. But it looks like the Quell sales were actually down sequentially? Am I looking at that right or can you speak to that at all?

Yes. That's precisely the case. So the fourth quarter, the holiday season, excluding QVC is the strongest quarter for us and maybe the strongest quarter for medical devices generally. And so you are correct. The first quarter tends -- things tend to let up a little bit, but it's just the opposite with QVC where during the fourth quarter they are promoting other consumable present-type products. And in the first quarter, they turn more to health care. So for us the fourth quarter in the 3 years that we have now been in this consumer-related business, the fourth quarter is our strongest quarter.

Okay. But that's outside of the QVC?

Correct, yes, more than compensates for it.

And our next question comes from Jared Cohen of JM Cowen & Co. (Operator Instructions)

I'm showing no further questions at this time. I would like to turn the conference over to Dr. Gozani for any closing remarks.

Well, thank you for joining on this conference call. Excellent questions. We look forward to updating you on our Quell strategy, and results over the balance of the year.

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