NeuroMetrix Inc (NURO) 2018 Q3 法說會逐字稿

Good morning, and welcome to the NeuroMetrix Third Quarter 2018 Earnings Call. My name is Amanda, and I'll 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 meanings 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 and the company's periodic filings with the SEC available on the company's Investor Relations website at www.neurometrix.com or on the SEC's website at sec.gov. NeuroMetrix does not intend and undertakes no duty to update the information disclosed on the conference call.

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

Thank you, Amanda. I'm joined on the call by Dr. Shai Gozani, our President and CEO. NeuroMetrix, as you know, is a health technology company. We have proprietary neurostimulation technology that we apply to chronic pain, sleep disorders and diabetes. Our principal commercial products are Quell, an over-the-counter wearable device for managing chronic pain, and DPNCheck, a point-of-care test for diabetic peripheral neuropathy. We also supply aftermarket products for our advanced general purpose nerve testing system and for SENSUS, our older prescription wearable for chronic pain. Our business objectives are profitable growth while delivering meaningful innovation and while operating within our existing cost structure.

The financial results for Q3 showed evidence of progress. There were several key highlights: top line growth, gross margin expansion, reduced OpEx spending and a positive bottom line. Most importantly, we launched Quell 2.0 during the quarter. This next-generation Quell positions us for future revenue growth and margin improvement.

Turning to the Q3 financial highlights. Total revenue was $3.7 million, up from $3.5 million in the year ago quarter. Within total revenue, Quell revenue was $2.2 million and contributed 60% of the total. In contrast, Quell revenue in the third quarter last year was $2.6 million. Quell revenue in Q3 and year-to-date reflects lower ad spending in anticipation of our new product launch. DPNCheck revenue was $1.1 million, a gain of 76% from $600,000 reported in Q3 2017. It contributed 31% of the total. International sales were particularly strong, offsetting a modest decline in our U.S. Medicare Advantage business. OUS strength was seen primarily in Mexico and in Japan. Our legacy products, ADVANCE and SENSUS, contributed about $300,000 in revenue and comprised the remaining 9% of the total.

Gross profit was $1.8 million, up $300,000 or 23% from $1.5 million in Q3 of 2017. Due to -- in terms of gross margin rate, the Q3 2018 gross margin was 50.3% versus 42.5% year ago. This was a quarter-on-quarter gain of 7.8 percentage points or 18%. Both of our lead products contributed. Viewed individually, the high-margin DPNCheck business weighed heavily in Q3 '18 revenue and had a positive margin effect of 8.8 percentage points. Quell margins improved with distribution efficiency, contributing 3.8 percentage points. Our legacy products and miscellaneous cost of goods were the balance of the margin rate change. The margin rate reflects continuous improvement over the past two years. Year-to-date, our 2018 margins were 45.6% and this is in contrast with 39.3% year-to-date margins in the first 9 months of last year.

Our OpEx spending totaled $4.5 million, a reduction of about $0.5 million quarter-on-quarter. R&D spending increased $300,000 with higher personnel costs and consulting engineering services in connection with the Quell 2.0 product and to support our GSK collaboration. Sales and marketing was lower by $600,000, almost exclusively due to scaled back advertising promotion. And G&A expense was reduced by $200,000 in the quarter, reflecting lower spending on professional services.

Within other income, collaboration income was $3.75 million. This was earned upon achievement of the second GSK development milestone. The payment raised 2018 collaboration to a total of $12.3 million.

In terms of cash, we ended the quarter with $7.5 million cash on hand. Our capital structure was unchanged in the quarter. It remained simple, equity-only and debt free. Our fully diluted share count is 14.9 million shares.

Dr. Gozani will now address our overall strategy.

Thank you, Tom. My comments today will address three topics: first, our overall business strategy; second, I'll provide an update on the launch of Quell 2.0, which is our next-generation Quell product; and then a review of our GSK collaboration.

First, from -- the business strategy. As we have noted over the past year, our primary business objective is to become consistently profitable on an operating basis in 2020. We believe we can achieve this while showing good top line growth and investing in R&D. Some outcomes of this strategy includes that our Quell TV advertising will strive for cost effectiveness. This means that we will time our spending to when it's most efficient and generates the greatest return. Consequently, we will experience quarter-to-quarter advertising and as a result sales variability as we adjust to fluctuations in TV advertising costs. This was evident in our reduced spending in the second and third quarters of this year. This year, we are channeling our spending into the fourth quarter, which is our most efficient period and also coincides with the launch of Quell 2.0.

We're also rationalizing our Quell distribution strategy to the most productive and cost-effective channels. As a practical matter, this means that we will limit Quell 2.0, the new product, to e-commerce while continuing to offer the original Quell at retail. Both of our core product lines, DPNCheck and Quell, are structured as an initial device sale followed by an aftermarket consumables business. In the most recent quarter, 54% of our revenue was in consumables. Our DPNCheck business is almost entirely consumables. And as a result, it has 75% gross margin and operating margins over 60%. The Quell business is at an earlier stage, and therefore, is more weighted to initial device revenue. Although we have built a profitable Quell aftermarket business, it is not growing as fast as we expect based on the clinical outcomes Quell delivers. We believe that we have identified several key user engagement steps that we need take to accelerate this part of the business and are in the process of implementation and hope to see improved performance in 2019.

We expect to maintain our current level of investment in R&D and clinical. We believe that it's essential that we continue to innovate to secure our significant competitive advantage in both the DPNCheck and Quell product lines and to create future revenue opportunities. On the clinical front, we're committed to a strong clinical program that enhances the recognition, understanding and value of our products. Two Quell clinical studies were recently published in peer-reviewed journals as evidence of that strategy.

Now moving on to Quell 2.0. For the past several years, our R&D resources have been focused on development of a third-generation Quell device, which we launched in September as Quell 2.0. This product is a critical element in our near and long-term business strategy. We believe that Quell 2.0 and its accompanying digital help tools, which include the Quell app and the Quell Health Cloud, will improve on their already impressive usability and clinical performance of the original Quell device. Quell 2.0 is 50% smaller than the original Quell device, has increased simulation power and incorporates new automation technology that enhances usability. Moreover, we have planned a rich set of additional innovations that we will deliver to existing and new Quell 2.0 users over the next couple of years. Quell 2.0 has been designed from the ground up to have lower cost and improved manufacturability. We have accomplished this without sacrificing and, in fact, have 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 the supply chain.

Our collaboration with GSK is built around the Quell 2.0 technology. First, early milestones are related to product development. Second, a key part of our collaboration agreement is to co-fund further development for this Quell platform with a 50-50 split starting in 2019. Continuing on with the GSK collaboration, it is gratifying that our collaboration with GSK will make Quell technology available to the many millions of chronic pain suffers outside the U.S. The chronic pain epidemic is a worldwide problem affecting 1.5 billion people. We are encouraged that GSK feels that our technology is worthy of being commercialized under their highly regarded brand.

From a practical point of view, the GSK collaboration is central to our near and long-term business strategies. First, it provides us with a reasonably predictable source of income that may offset our operating losses until we achieve profitability. We do caution that we cannot control the timing of the milestones, and therefore, there may need to be a bridge -- short-term bridge financing at various times. 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. And through this collaboration, we're tapping into some of these resources and feel that will benefit us in our U.S. business. And third, as I mentioned earlier, we will collaborate on future Quell R&D, which allows us to shift some of our R&D spending to future products that could represent additional revenue streams.

And with that, I'll conclude our prepared comments, and we'd be happy to take questions at this point.

(Operator Instructions) And the first question comes from the line of Robert [Blumuser] of [Blumuser Asset Management].

Congratulations on the launch of the third-generation Quell.

Thank you.

Thank you.

I just had a few questions. You can cut me off if I go past my allotted privileges here. But the first one was regarding the second generation. Are you guys still manufacturing and marketing that now?

We are in a decreasing -- at a decreasing level, and eventually, we'll complete transition to the third-generation product, but there'll be a transitionary period.

Okay. And how many quarters do you expect that transitionary period to be?

Well, by -- we would definitely complete the transition by the end of next year. It depends on demand and how the channel structure evolves. But by the end of next year, it should be complete, if not earlier.

Okay. I did -- look, I haven't used either of the products fortunately, I don't have a need for either one. But looking at them and the clear advantages of Quell 2.0 over Quell, I cannot imagine why anyone would buy the second generation. Can you speak to that at all?

Generally, we would agree with you. There is a few aspects of the second-generation products that are attractive to some customers. So first of all, it does not require a mobile app or a smartphone to use. So for those individuals that don't have or don't want to use a smartphone, it offers an option. It's also a bigger device with a bigger battery, so for a small number of people that need or want very, very long battery life, so I'm talking here somewhere between 1 and 2 weeks in between charging. It offers that as an option. So it's a -- it's -- you're correct in your assessment, but there are a small number of customers I still think benefit from it. And as I mentioned, we're really limiting Quell 2.0 to the most profitable channels for us, which are e-commerce, which is primarily our website and Amazon and continuing to offer the older products through the retail channel. So that also offers us a little bit of an expanded distribution option.

Okay. As far as the electrodes are concerned, it looks they both use the same electrode. Are you guys planning any upgrades to those in the foreseeable future or not necessarily?

You're correct. They do both use the same electrodes. We -- we're always looking at developing new electrodes that have various benefits to our customers, but no specific announced plans at this time.

Okay. And then you had mentioned in the prepared remarks that you look forward to tapping into resources from a marketing standpoint, I guess, with GSK. Can you talk about what that might look like at all?

I apologize. Robert, I -- you broke up. I didn't exactly hear the question.

Okay. I'll repeat it. I said that you mentioned during your prepared remarks that you were looking forward to tapping into marketing resources in relation to the GSK collaboration. And I'm wondering if you could talk a little bit about what that might look like?

Yes. So to be clear, it's really more tapping into their expertise. So we have exclusive ownership of the U.S. market and GlaxoSmithKline has exclusive ownership of the outside the U.S. markets. So there's no marketing overlap in terms of distribution or commercialization. But through the interactions with their various commercialization teams, clinical teams, quality teams and others, we're tapping into a very deep well of expertise that, I think, improves and educates us on various aspects of large-scale commercialization that are beneficial.

Okay. And can you comment at all as to whether GSK has begun actual sales and marketing of any Quell-related products outside the U.S.?

I can't comment on GSK commercialization. That would be -- it's confidential information.

(Operator Instructions) And at this time, I'm showing no further questions. I'd like to turn the conference back over to Dr. Gozani for any closing remarks.

Thank you very much for joining us on our conference call this year, and we look forward to updating you early in 2019. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.